When you have no credit history, a credit card issuer has nothing to judge you upon to see if you are a credit risk. That makes qualifying for starter credit cards difficult and higher credit limits impossible. But through some techniques, such as using secured credit cards or personal loans, you can build credit or even qualify for cards with no credit. Check out our tips and tricks for qualifying for a credit card with no credit.
Credit is a vital part of modern society today. But everyone starts in the same place with no credit.
So how do you get your first credit card when you have no credit at all?
No credit versus bad credit
One important thing to understand when starting your credit history is that while it can be difficult to access credit when you have no credit, it is much harder when you have bad credit. No credit and bad credit are two very different situations.
Of the two, No credit is better as you are literally starting off with a clean slate. No good and no bad. This means that you can move towards good credit much faster than when you have bad credit. You can get to higher credit limits faster too.
The three major credit bureaus gather your entire credit history: Equifax, Experian, and TransUnion. They have the information that Fair Isaac (FICO) and other companies use to calculate your credit score. When you have no credit, you have little to no information on file with these companies. However, when you have bad credit, there are details about your poor payment history at the credit bureaus. While FICO is the most important one, we all have multiple credit scores. Some industries, like most mortgage lenders, use FICO. Others use Vantage Score. Some use Beacon. But all of them analyze and calculate your credit score based on the data at the three major credit bureaus.
Think of it like this. Your credit history is like watching a movie, while your credit score is a snapshot of one moment in time. So your credit score only answers one question:
How risky is it to lend you money and give you credit, right now, today?
When you think of it this way, it’s sensible that the single biggest factor in your credit score is your recent payment history. Your recent pay history is 35% of your credit score, according to Experian.
How to get your first credit card
Now that we understand that we are starting from zero, how do you get approved for your first credit card so you can start building good credit? If you’ve had credit before, have a limited credit history, or have bad credit now, check out our resource on getting approved for a credit card. But if you have no credit, then keep reading.
We are going to go over 4 different techniques that can help you get that first-time credit card approval. The techniques are:
- Get a cosigner
- Get a secured credit card
- The passbook method and a personal loan
- Get a personal loan that uses unconventional credit scoring methods
Work with a cosigner
A cosigner is someone who is going to own the account jointly with you. They are, in essence, lending their credit to you. Obviously, this is someone close to you, like a spouse or family member. When they have good credit, you will get approved for a joint card and account based on the strength of your cosigner’s credit history.
The good news is it’s easy to qualify if the cosigner has good credit. Here are some credit cards that accept cosigners.
The bad news is that you need someone VERY close to you who is willing to co-sign. If you don’t pay that bill, your cosigner has to pay it, or their credit score suffers too.
Get a secured credit card
A secured credit card is a credit card where you make a security deposit. The security deposit could be a portion or up to 100% of your credit limit. For example, you deposit $500, and your credit limit on the card is $500. Or maybe you find a card where you can deposit $500 and get a credit limit of $1000.
The good news is that aggressive smaller, newer banks and fintech firms involved in banking services are now in the market. That means there are many more good secured card options than there were just a few years ago. For instance, one neo-bank has a credit builder card they offer. So if you have an account and maintain a balance with them, you can use that balance to qualify for a secured credit card. It doesn’t get any easier than that.
The bad news is there are still relatively few options compared to unsecured credit cards. And while there are exceptions like the credit builder card, you often pay higher interest rates and annual fees for the secured credit card too.
The passbook method and the personal loan
This method is a little old school, but it still works if you find the right bank. The purpose here is to get a collateralized personal loan from a bank. The collateral you use is the savings you deposit at that bank to reduce their risk. Personal loans will be your way of accessing credit, which will then help you get that first credit card.
Here’s how it works.
Small, local, and banks aggressive in lending could have an interest in this. Thanks to the growth of marketplace lending in the last 5-10 years, personal loans are back on banks’ radar. Instead of getting a secured credit card, you will be trying to get a secured personal loan. This will typically be reported to the 3 major credit bureaus, meaning you will be building credit with this option.
So what do you do? Here’s what you are going to do in order:
- Find out if the bank offers personal loans
- Tell them you intend to apply for one after you open an account there
- Open an account and deposit some money
- Use that deposit to get approved for a secured loan with the bank
Find out if the bank offers personal loans
Ask the bank if they do personal loans. Many don’t, but some do. More do them than 5 years ago when almost no one did. Your best bet is a local community bank or a fintech or tech-driven small bank.
Tell them you intend to apply for one after opening an account there
You tell them you want to open an account and apply for a personal loan. Tell them you have no credit history. Be forthright. They will find out anyway when they run your credit score.
Open an account and deposit some money
After finding out that the bank does offer personal loans, you open up a savings account and deposit a minimum of $2000. In fact, $5000 would be better.
Even better than a savings account, buy a CD that locks your funds in with the bank for a year. Again, it’s important this account NOT be a checking account.
The idea that you can have your money there for a few days and then move it somewhere else with a check or ACH defeats the purpose of providing the collateral on deposit in the first place.
Make sure you will be able to get the loan before you lock your money there. After some time when this technique was ineffective, it’s available now again thanks to the growth of personal lending.
Use that deposit to get approved for a secured loan with the bank
You get that secured loan with the bank where you have deposited your money into a savings account or a CD. Then the bank will report your loan to the credit bureaus so you can start to build credit. Another benefit is that some of the interest you earn on the CD offsets some of the interest you have to pay on the loan. It won’t offset completely, but it helps.
The good news is that this method is back after being dormant for a while, and aggressive banks will be interested in doing personal loans while increasing their deposits.
The bad news is you may have to search for lots of banks and fintechs to find one who will do it.
By the way, you can do all this and ask if they offer secured credit cards too. The credit card will be easier to qualify for at most banks, but some want to grow their personal loan volume and would rather do that. You only find out if you ask. Remember, neither you nor the bank is risking this money as it’s on deposit with them as collateral to secure the loan.
Get a personal loan that uses unconventional credit scoring methods
Marketplace lending has been excellent for increasing access to credit for ordinary people. People can get personal loans instead of only credit cards or home equity loans as ways of accessing credit. The biggest platforms like Lending Club, Prosper, and Marcus require good credit scores. You won’t be able to qualify for those when you have no credit. However, they are not the only lenders, and there is an entire personal loan ecosystem now. And in that ecosystem are lenders of all kinds like lenders for poor credit or lenders for specific loan types like college or car loans.
And for you, there is a special type of lender. There are lenders who use their own scoring models. They score things like the length and quality of your employment and other social non-financial factors to decide who to lend to. Upstart is an example of one of these lenders that uses social credit scoring. Some of these lenders don’t even pull a credit report to see that you have no credit history.
The good news here is that there are some lenders who could approve you.
The bad news here is you will have to hunt around to find them and possibly be denied a couple of times first.
BONUS: You can also use one of these personal loan options and then take some of that money and open a secured credit card account. Then you would be building credit from two new accounts instead of one, allowing you to build good credit faster if you continue your on-time payments.
Follow these techniques along with our tips and strategies on Getting Approved for a credit card, and your chances of getting that first credit card go way up.
Are there unsecured credit cards for those with no credit history?
Do unsecured credit cards exist for those of you who have no credit? Are they available?
Yes, they are available. The cards below do not require a credit history, but most are secured credit cards. The truth is your chances of approval are low with no credit history. So you can take a stab at it, but it’s unlikely you will be able to build credit this way. Having provable high income and extra cash flow helps, but even then you might not get approved. If you do get approved for one, then that’s awesome. Just make the payments.
Building credit once you have a credit card
Once you’ve been approved for a credit card, you have one goal: Pay it each month. Goal 1a is not to spend too much on the card.
As someone with no credit history, you will be paying a higher annual fee, and interest rate with smaller credit limits than those with good credit and long credit histories pay. This means when you pay the minimum balance and let the interest accumulate, you could be paying 20% per year or more in interest charges.
Do not fall into this credit trap. Use the card conservatively and pay off as much of the balance as you can. The second biggest factor in your credit score after recent pay history is credit utilization. It’s how much credit you are using and accounts for 30% of your credit score. So guess what? Pay down more of the balance each month, and you are using less of your credit. As a result, your available credit is higher, and your score increases.
But remember, as we said above, a credit score is a snapshot in time. So when you pay your credit card on time, that largest part of calculating your score, the recent payment history, is perfect, and your score increases.
Following two simple strategies, such as don’t spend too much, pay what you are spending, and make those monthly payments, and you already have 65% of your credit score working in your favor. So keep it up, and your score will increase, giving you more opportunities for good interest rates on unsecured credit cards, auto loans, and mortgages down the line.
Everyone starts at zero, but you can jumpstart your credit history by trying one of these methods to get your first credit card or loan. It’s the first of many steps in building a long, strong credit history that you can use to your advantage now and in the future. Click here to apply for one of our favored secure credit cards.
- Think like the bank or credit card issuer. When you have no credit, your risk to them is unknown. So think about the ways you can lower that risk.
- Techniques such as secured credit cards, using cosigners, taking advantage of personal loans, or other credit techniques will help you get approved more easily.
- Collateral and income are important. Show you have both, and you will get approved more quickly.
- Make your monthly payments on time and more than the minimum to satisfy the two most important factors in your credit score: payment history and credit utilization.
- Don’t be afraid to get creative to show the bank or card issuer how you will reduce their risk.
Article Sources & Recommended Reading
- Experian Credit Bureau on What Impacts Credit Score — Experian.com
- Best Credit Cards for Bad Credit — SuperMoney
- Best Secured Credit Cards -SuperMoney
- 5 Best Secured Credit Cards for Building Credit– SuperMoney
- How to Get Approved When You Apply for a Credit Card– SuperMoney
Stu Lustman has been writing about specialty finance topics, fintech, and cryptocurrency since 2013 at his blog P2PLendingExpert.com. After working all his career in finance once he completed his MBA from Loyola University Maryland, Stu started writing on the side and has been doing financial writing full-time ever since.