One of the most basic rules of lending is that you need credit to get credit.
When you apply for a loan, the first thing a lender will do is check your credit profile to get an idea of what your credit history is like. If you have a functional mix of borrowing and repaying money while avoiding debt, you’re more likely to get approved without any issues.
If you’ve fallen into some financial pitfalls, or you have a poor credit rating, it can be tough to find anyone willing to grant you a credit card, mortgage or car loan -- and virtually impossible if you have zero credit whatsoever.
You could just go on with your life and live without credit altogether, but that won’t serve you well in the long run. Instead, try following some of these tips. Even if you have poor credit or none at all, you can get the loan you want and rebuild your credit standing at the same time.
Pursue financing from a credit union
A large bank, financing company or major lender may deny you a loan if you have bad credit, since the abundance of credit applications they receive may get you lost in the shuffle. But a credit union may be more open to working with a customer with low or no credit. Credit unions are nonprofits that tend to be smaller in scale, and because they rely strongly on their members to keep business strong, you may be able to obtain financing for a mortgage or auto loan if you’re declined by another financial provider.
Seek out a cosigner
Asking someone with a good credit score and history to cosign a loan may increase your chances of getting approved for a loan. Having a cosigner allows you to get a loan based on their credit standing, plus the opportunity to build your credit so you can get approved for future credit without the need for a cosigner.
Before asking a relative, friend or someone close to you to cosign, remember the risks. If you miss too many payments or default on your loan, you can damage both your credit and your cosigner’s. Your cosigner will also be responsible for paying the loan, so if they agree to help, make sure you can pay off your own debt first before asking them to endorse you.
Get a personal or P2P loan
One alternative to asking someone to cosign for you is to inquire if they can give you a personal loan. You’d be omitting the pressure of involving a third-party lender and arranging a lending agreement directly with someone you trust, especially if they’re aware that you’ll be financially responsible and repay the loan. By putting the terms, agreements and interest rate in writing, it makes the loan official, keeps you accountable, and gives you the chance to borrow money if your lack of credit might get you turned down elsewhere.
If you don’t know anyone to ask, try the peer-to-peer, or P2P, lending route. Sites like GoFundMe, Prosper and LendingTree have all become popular outlets for people looking to pay down student loan debt, finance a big purchase or goal, or even save for retirement. It could mean joining a lending circle, where members take turns sharing pooled finances, or finding an investor to lend you the money. Remember that while interest rates may be lower than through a traditional lender, there may be associated fees with a P2P loan that you’ll need to take into consideration.
Look for an FHA mortgage
If you’re in the market for a home but you can’t qualify for a mortgage, you may be able to find some government assistance through the Federal Housing Administration (FHA). FHA loans come with less restrictive lending requirements and are generally easier to qualify for than a conventional mortgage. If you can prove a consistent payment history, like your rent, utilities or other revolving expenses, you’ll be better positioned for FHA approval even if you have no credit, or you’ve endured a bankruptcy or foreclosure in the past.
FHA loan holders often have the benefit of paying lower fees and interest rates, though keep in mind that new government standards require applicants to have a FICO score of at least 580 to qualify for a 3.5 percent down payment.
Produce a larger down payment
Tapping into a low down payment can be easy on your finances, but sometimes, the one deciding factor between being approved or denied for a loan is how much money you put out of pocket.
I was once required to make a larger down payment to qualify for an auto loan; though I’d paid off a car loan previously, it had been a few years and I had no credit cards or other accounts to demonstrate any recent credit activity. Asking for more cash up front ultimately reduced the amount of money my lender needed to part ways with -- and sent the message that I was ready to make an extra effort.
It may not have seemed fair at the time, but the lesson I learned was to keep a mix of both installment and revolving credit, which can reflect positively to lenders and on your credit score. By making the sacrifice, a lender may be willing to set up an alternate financing plan, or grant a lower interest rate.
Take steps to build your credit
Even if you successfully find financing using one of the tips outlined above, try some of these suggestions to build your credit, improving your ability to get approved for financing in the future:
Get a secured credit card. Secured credit cards are geared towards consumers with little or no credit history who may not qualify for a regular credit card. They are secured by a cash down payment that acts as your credit limit, protecting the card issuer in case you don’t pay. The best part is that your card activity is reported to the three credit bureaus responsible for compiling and calculating your credit score. Keep your spending low and pay off your balance by the due date, and your credit score will reflect it, qualifying you for better credit cards and loans.
Become an authorized user. An alternative to having your own credit card is requesting to become an authorized user on someone else’s card. You might ask a parent or relative if you can be added to their credit card account, and in turn, you receive your own card to use. It’s similar to cosigning in that you’re basically borrowing someone else’s good credit, but remember not to exploit it, since how you spend on the card will reflect on both your credit scores.
Get your rent payments reported. Another credit builder on the way to home ownership is to arrange for your monthly rent payment to be reported to the credit bureaus. Rent payments don’t normally count towards your credit, but asking your landlord or property manager to report them for you can show timely, responsible payment of a major monthly expense if you have no other credit or loan accounts in your name. You can also sign up for one of many rental reporting agencies, like Rental Kharma or Rent Track.
Check your credit report. You don’t need years and years of credit history to start checking your credit report. According to the Consumer Financial Protection Bureau, it takes six months for a new credit account to appear on a credit report and affect your credit score. For the alternate VantageScore, it may take just a month or two. You’re entitled to one free credit report per year, but you can also use an app like Credit Karma to frequently check how your score is evolving, and to monitor the important accounts listed on your credit report. Staying aware of your own credit profile in tandem with good credit building behaviors makes it easier and easier to secure the loans you want at the terms you deserve.