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Loan Basics

How to Qualify for a Loan When You’re New to Credit

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Being new to credit may make it more difficult to get approved for a loan or credit card, but it's not impossible.

There are, however, some possible restrictions to keep in mind when you're new to borrowing, such as limited options, cosigner requirements and higher interest rates. But with the right strategy, you can get the financing you need without paying an arm and a leg.

Can You Get a Loan With No Credit?

There's a difference between having no credit history and having bad credit, and lenders understand this.

With no credit history, lenders may view you as a risky borrower simply because there's no information in a credit file about how you've handled debt. That uncertainty probably won't hurt your chances as much as a credit history marred by late payments, default or bankruptcy, however.

In other words, just because you're new to credit doesn't mean you have poor credit.

If you are new to credit, the most important thing is to know where to look when you're trying to find a loan. Big national banks typically don't have a lot of options for people with a thin credit file. Expand your search to include your local credit unions and online lenders.

Many lenders offer prequalification, which allows you to get an idea of whether you'd get approved and what your interest rate and other terms might be before you apply. This process typically involves a soft credit check, which doesn't impact your credit scores.

Before you accept a loan, make sure you're clear on its terms and your ability to repay it. Getting off on the wrong foot with a loan you can't repay can make it challenging to get on the right path later, and make it harder to borrow in the future.

Check Your Credit Before Applying for a Loan

Even if you've never taken out a loan before, it's still a good idea to check your credit score and your credit report before you apply. If someone has stolen your personal information and opened fraudulent accounts in your name, you may need to deal with that before you try to borrow money.

If all is well, though, you may simply get a message that you don't have enough credit report information to calculate a credit score, and you can start to address that.

Ideally, you'll have some lead time before you need to borrow, which will give you more runway to establish your credit. As you work to build your credit over time, regularly check your credit score before you apply to ensure that you're making progress, and take note of how it lines up with the lender's requirements.

Loan Options for Those New to Credit

It's possible to qualify for a wide variety of loans if you're new to credit even without taking the time to establish your credit history. In general, though, you'll typically need a cosigner—a loved one with a solid credit history—to apply with you.

Cosigners agree to make payments on the loan if you can't, so they reduce the risk you pose to the lender as someone with no credit experience. That reduced risk improves your chances of getting approved and could open the door to a favorable interest rate to boot.

If you don't have a cosigner, however, here are your best options.

Secured Credit Cards

Secured credit cards function the same as traditional credit cards, but with one key difference: You have to pay a security deposit—usually equal to your credit limit—to get approved. Depending on the card, you may get this money back after you close your account or possibly even sooner.

Secured cards can be an excellent way to build credit as long as you make every monthly payment on time and avoid running up a high balance. Plus, if you pay your balance in full each month, you'll never pay interest on your purchases. Pay less than the full amount, though, and you could be on the hook for interest rates upwards of 20%.

A good secured card to consider first is the Discover it® Secured, which offers 2% cash back at gas stations and restaurants on up to $1,000 in purchases each quarter and 1% cash back on all other purchases. The card requires a minimum security deposit of $200, but Discover may choose to review your account and transition you to an unsecured card after as little as eight months.

Some unsecured credit cards are even designed specifically for people who are new to credit. One example is the Petal® Visa® Credit Card, which can compete with some of the best cards on the market in terms of rewards and fees. So that may be a good card to try first, then consider secured cards if you can't get approved.

Credit-Builder Loans

Credit-builder loans operate a little differently than most loans. Instead of giving you the loan funds upfront, the lender deposits the money into a secured savings account while you make payments.

The lender reports your payments to the three national credit reporting agencies (Experian, TransUnion and Equifax), then releases the loan amount to you once you've completed your repayment term.

It's not possible to avoid interest charges with credit-builder loans like you can with credit cards. But these loans typically charge lower interest rates than what you'd get with bad credit personal loans.

Loan Options for Those With Bad Credit

Whether your credit history is limited or well established, negative marks can stifle your ability to get approved for affordable credit.

While payday loans and auto title loans can be easy to get, they charge sky-high interest rates and usually have extremely short repayment terms. These two elements make it harder for borrowers to pay back their loans on time, which may force them to borrow again and again or else face default and potential legal action.

As such, it's best to avoid those options altogether. Here are some cheaper alternatives.

No-Credit-Check Personal Loans

Some online lenders and other financial institutions are willing to offer personal loans without a hard credit check. They may even use alternative data, such as your bank account history, to determine your creditworthiness.

It's important to note, however, that some of these lenders charge triple-digit interest rates, which is very high—though still not as high the interest on payday and auto title loans.

These are still a worthy option to pursue as long as you take your time to research your options and compare terms.

Payday Alternative Loans

Payday alternative loans (PALs) are short-term loans offered through select credit unions that offer much lower rates and more generous repayment terms than you'd get from a payday loan.

Loan amounts typically range from $200 to $1,000, with a repayment term of one to six months and an annual percentage rate (APR) that maxes out at 28%. The caveat is that you have to be a member of the credit union for one month to qualify, which doesn't help if you need cash now.

In 2019, the National Credit Union Administration added another loan option called PALs II. This new category of payday alternative loans offers up to $2,000, with repayment terms ranging from one to 12 months. There's also no waiting period after you join a credit union before you can apply.

Check with your local credit unions to see if they offer PALs and what you need to do to be eligible for one.

Consider Building Credit Before Applying for a Loan

If you're new to credit, you may feel like you're stuck in a Catch-22—you can't get a loan without credit, but you can't build credit without a loan.

Fortunately, there are other ways to get credit for the first time.

The easiest way is to become an authorized user on a loved one's credit card account. Once you've been added, the account's entire history will be added to your credit report, so it's important to do it only if you know the account has a positive history and a low balance relative to its credit limit.

Alternatively, consider a secured credit card or an unsecured card for limited credit, like the Petal® Visa® Credit Card or Discover it® Secured mentioned above. Before you open a credit card to build your credit, make sure the card issuer reports monthly payments to all three credit bureaus.

Over time, check your credit report and credit scores regularly to view your progress and make adjustments as needed. Making all your payments on time and keeping your balance low will maximize the positive impact a credit card has on your credit scores.

Building your credit file and improving your credit score will open up more opportunities to get approved for a loan at a reasonable rate.

Don't Stop Monitoring Your Credit

Even if you don't plan on borrowing money anytime soon, it's a good idea to keep track of your credit. Experian's credit monitoring service gives you free access to your FICO® Score powered by Experian data, plus real-time alerts with each new inquiry and account.

The service not only makes it easier to watch your credit score grow and see which factors are influencing it, but it can also help you spot and remove potentially fraudulent or inaccurate information.

As you prioritize building and maintaining a good credit history, you'll benefit both now and in the future through lower interest rates and better terms every time you borrow money.