What is a credit history and why is it important?
Your credit history is a record of your financial history over the previous six years. It’s collected into a credit report and summed up by an overall credit score. The lender will look at this data and decide whether you’re someone they want to lend money to.
Your credit history includes information such as:
- credit applications
- payment history (including missed or late payments)
- negative markers (such as defaults and CCJs)
Lenders check your credit history when you apply for credit with them, to see whether you’re a responsible borrower. This can influence whether they accept your application.
If you have a thin credit history or no history at all, they won’t be able to tell if you’re a reliable borrower, so they may think it’s too much of a risk to lend to you at that time. However, each lender uses its own criteria, so you may get declined by one and accepted by another.
How do I check my credit history?
You can check your credit history online for free through the three main credit reference agencies in the UK: Experian, Equifax and TransUnion. You can check your Equifax report for free (for life) using CredAbility.
They’ll ask you to fill out some details, like your address history and employment details, so they can access your credit report. Generally speaking, the better your credit history is the higher your credit should be as a result.
Why do I have no credit history?
There are a few reasons why you may have no credit history:
You’ve just turned 18 years old
Your credit history starts when you turn 18. Chances are, you’ve not had the time to build it up yet. You may struggle to find a loan at this age, but there are lenders who specialise in loans for young people. So, it may be a case of doing extra research to find a suitable deal.
You only deal in cash
Credit histories are built up when you open accounts and take out credit using financial companies, like banks and building societies. This is because lenders report to the credit reference agencies each time you make a payment (or miss a payment), so they can update your credit file with this information.
This means if you get paid in cash or don’t have a bank account, it’s likely that you won’t have much of a credit history.
You’ve borrowed in the past – but not recently
If you’ve not borrowed any credit recently, your credit history will be thin because your credit report only shows activity that’s taken place over the previous six years. Even if you borrowed in the past, loan providers may be wary about lending to you if they can’t see how good you are at managing money at present.
You’ve just moved to the UK
Moving to the UK from overseas means you’ll have to start your credit history off afresh. Unfortunately, if you have an established credit history in the country you lived in previously, this won’t transfer across to the UK. This is because data protection laws vary from country to country.
Can you get a loan with no credit history?
Yes, it may be possible for you to get a loan with no credit history if you:
- find a specialist provider – these are companies that specialise in lending to people with a thin credit history. Just be aware that you might not be able to access the best rates or have access to many options. There’s no guarantee of approval
- check your eligibility before you apply – many lenders have eligibility checkers on their websites which you can use to see how likely it is that you’ll be accepted for a loan - before applying. This stops you from potentially damaging your credit score by making multiple applications, or applying for loans that you’re unlikely to be approved for
Here are the different types of loans for people with no credit that you may want to consider:
Bad credit loan
A bad credit loan is specially designed for people with no credit history or a low credit score. You can get one from a specialist provider or through some banks and building societies. Just be aware that the interest rates can be higher compared to mainstream loans, due to the risk involved from the lender’s point of view.
Secured loans are less risky from the lender’s perspective because they use an asset of yours (like a house or car) as collateral. So, in the event you can’t afford the repayments, the lender could sell your asset to claw back owed funds – this is usually only as a last resort. You might find it easier to get accepted for a secured loan because of this.
Remember, you need to make sure you can afford the repayments – both now and in the future – so you don’t put your property at risk.
Credit unions are co-operatives where members pool their money together and allow each other to borrow money when needed. However, they can be tricky to join; you need something in common with the other members, like location or a profession. The eligibility criteria depends on which union you’re looking at.
With a guarantor loan, somebody you trust, like a family member or close friend, acts as the guarantor. They formally agree to guarantee the repayments if the borrower can’t (or won’t) pay. This means that if the borrower stops making repayments, the lender can chase the guarantor for the full amount.
If you’re considering this option, you should make sure both you and the guarantor fully understand the risks involved. If you stop repaying the loan, they may have to make payments on your behalf. This could damage not only your finances but your relationship.
Loan from family or friends
Family or friends may be able to lend you the money informally if you’re struggling to get a loan from a financial company. Be careful with this because if you don’t pay the money back your relationship with them could be ruined. It might be worth getting a solicitor to draw up a payment plan if you’re willing to pay extra costs.
Can I get a mortgage with no credit history?
It’s difficult to get a mortgage with no credit history, as lenders are likely to see you as high risk. They do a credit check as part of the application process, and they’ll be less likely to lend to you if they can’t find evidence that you’re a responsible borrower.
There are mortgage options out there for people with a low credit score, but you won’t be able to access the lowest interest rates. So, it might be work building up your credit history before applying for a mortgage, if you aren’t in a rush.
How to build credit with no credit history
If you have no credit and need a loan, follow these six steps to establish your credit history and improve your chances of approval in the future:
1. Sign up to the electoral roll
Joining the electoral roll not only enables you to vote in the UK - but it also boosts your credit score. Plus, lenders review it as part of their identity checks, to make sure you are who you say you are.
2. Open a bank account
Having a bank account means that there’s a record of your income and outgoings. This gives loan providers a clearer idea of how much spare cash you have for repayments on a loan.
3. Add your name to household bills
Putting household bills in your name means every time you make a payment it will show on your credit report. This will help to build up your credit history gradually, as long as you always pay on time.
3. Always pay on time
As mentioned above, paying on time shows that you’re less of a risk to lend to because you’ve proven yourself to be reliable financially. It shows lenders that you’re a reliable borrower.
4. Set up direct debits
Setting up direct debits can also help build up your credit score, as it helps to avoid missing payment deadlines. Make sure you have the money in your account to pay for these because if the money bounces it’ll leave a negative footprint on your credit history.
5. Sign up to The Rental Exchange Initiative
The Rental Exchange Initiative allows people who rent to build up their credit history by paying their rent on time each month - the same way homeowners get recognition for paying their mortgages.
6. Consider getting a credit builder card
A credit builder card (also known as a ‘bad credit’ credit card) is designed to help people build up their credit history. These generally come with a lower and more manageable credit limit. They do tend to have a higher interest rate than mainstream products, to balance out the risk of lending.
However, by repaying your balance on time each month and staying within your credit limit, you will improve your credit score over time. This means you should then get access to credit products with better interest rates.
Plus, you won’t have to pay any interest or late fees if you pay off the full balance of the card each month.
7. Consider getting a prepaid card with a credit-builder option
With a prepaid card, you load money onto it as and when you need to. Then you can spend the money in your account using your plastic card, instead of carrying cash around with you. These cards don’t usually require credit checks - but can help you build your score if you get one with a credit-builder option.
Remember, it could take a few months to see your efforts pay off in the form of a good credit score or improved credit history.