Lines of Credit for People With No Credit History

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Lines of credit for people with no credit history can be more difficult to come by.
Lines of credit for people with no credit history can be more difficult to come by. (Image: credit 3d sign image by onlinebewerbung.de from Fotolia.com)

When you apply for a credit card or a line of credit, the lender will check your credit score. However, if you do not have existing credit already, there will be no credit score for it to check. This can make it difficult to get a line of credit for the first time; in fact, it can be almost as hard to get a card or line of credit with no credit history as it is with a bad credit history. Fortunately, there are some options.

Effects

Your credit score is based on five factors, two of the most important of which are payment history (which accounts for 35 percent of your score) and your average age of accounts (which accounts for 15 percent of your score). Without a credit history, you won't have any data for either of these two factors. You also won't have a debt-to-income ratio (which makes up 30 percent of your score) and you won't have a variety of different types of credit (which makes up 10 percent). As a result, the lenders have nothing to base your three-digit credit score on. This usually results in you being at the low end of the scale (which runs from 300 to 850) or having no number at all. Lenders therefore have no ability to determine whether you will be a good borrower or a bad one. This can make it much harder for you to get a line of credit.

Solution

Fortunately, there is a way to build credit and to qualify for a line of credit. You have several options available to you in order to get a line of credit for the first time. The right choice depends on the type of credit you are looking for, and the stage of your life that you are in. If, for example, you are trying to qualify for credit to buy a house (mortgage), then you can look for a lender with traditional underwriting standards, which means the lender does a review of your income and a number of other related factors to determine whether you are a good or bad lending risk. You can also ask someone to co-sign a loan for you. This means that this person guarantees the loan along with you, so her credit score is used to help you get credit. Finally, you can consider certain types of credit or credit cards that may be appropriate to help someone build credit.

Types

If you decide to get a credit card on your own to build credit, you have several types of lines of credit or credit cards available to you depending on your situation. First, you may be able to qualify for a store credit card. The standards associated with applying for a store credit card can be less stringent than applying for a major credit card. You can also apply for a secured credit card. This means you put up cash as collateral, and the credit limit is equal to the amount of cash you put into the collateral account. So, for example, if you apply for a secured credit card, you may have to put $500 into a special account held with the creditor and then you will receive a credit card with a $500 line of credit. Alternatively, if you are a student, you may be able to qualify for special student cards.

Warnings

Lines of credit in the form of secured cards, student cards and store cards may have some downsides. For example, many of these cards charge an annual fee. Secured credit cards especially can be high in fees: you may have to pay an origination fee for the card and a monthly fee for having it as well. Generally, these types of cards also have a very high interest rate so you may end up paying a lot in interest if you carry a balance. Finally, some secured cards don't even report to the credit bureaus, so this will not help you build credit. Before you apply for a line of credit for a person with no credit history, make sure that the lender reports the credit card and your record of payments to the three major credit bureaus (Equifax, Experian and TransUnion).

Misconceptions

Some people believe that you have to carry a balance in order to build credit. This isn't true. Making a small charge on a credit card account and paying the card off in full each month is sufficient to help you build credit.

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