Worried about if you can pass a credit check with no credit history? Don’t worry! The concept of “passing” a credit check simply means accessing a credit report with your financial history. Even if you have absolutely no Credit history at all, you can still access a credit report and go through a credit check.
However, just because anyone can access free credit scores doesn’t mean that all scores are created equal. If you have no credit history, chances are you have a credit score on the lower side, even though you may practice responsible personal finance habits.
But what exactly is a credit check, and how does one accumulate positive credit history? CreditNinja has all the answers you’re looking for right here!
What Is a Credit Report?
Credit reporting is a practice done by major credit bureaus that give lenders and other financial institutions an inside look at an individual’s financial history and habits. The main types of credit reports sought after by most lenders are:
- Experian credit report.
- TransUnion credit report.
- Equifax credit report.
When you apply for loans or other types of credit accounts, lenders request a copy of your most recent credit report to help them determine if you are an appropriate lending risk or not.
How Does Credit Score Calculation Work?
There have been several credit scoring models throughout the financial history of credit reports. A credit scoring model is a system used to create someone’s credit profile, which contains important data and behaviors pertaining to their financial situation. Currently, credit reporting agencies consider five main categories when crediting an individual’s credit file. Below is more information about those five major credit scoring categories.
The most influential factor contributing to your credit checks is your payment history. Payment history contributes to approximately 35% of your credit score. This category indicates how often you make payments for your due bills on time. Consumers who make their loan and bill payments on or before their due date have a positive payment history. Alternatively, those who miss payments or make them late have delinquencies on their payment history. Unfortunately, delinquent payments can negatively affect your payment history for up to seven years.
After payment history, credit utilization is the next highest influencing factor of your credit score. Your credit utilization refers to your debt-to-income ratio and makes up about 30% of your credit score. Usually, credit bureaus like to see that consumers have more available credit over the amount of debt they owe. Your debt-to-income ratio is how much you earn from your job and how much you have available on credit cards compared to how much you owe on loans and balances.
The different types of credit accounts you have make up approximately 10% of your credit score. Credit bureaus care about how much good debt vs. bad debt you have. Good debt is expenses that have a lasting positive effect on your finances, while bad debt is expenses that don’t contribute positively to your financial situation. Good debt is loans like student loans that result in your education or home loans that result in you owning a home. Bad debt is loans like instant payday loans online that don’t really contribute to your overall well-being and usually result in more debt.
Length of Credit History
How long you’ve had active credit accounts open accounts for about 15% of your credit score. Usually, the longer someone has had active financial accounts, the more established they are financially in the eyes of credit bureaus.
Number of Hard Inquiries
How many hard credit inquiries you have on file makes up about 10% of your credit score. Hard inquiries are a formal request of your credit report and are usually requested by most lenders and financial institutions before extending credit.
You can perform a soft credit check if you want to request a credit report without affecting your overall score. A soft credit check is an informal request of your credit report that you can usually access via your online bank account or credit card account.
How Does My Credit History Affect My Credit Limit?
Typically, those with established credit and a positive credit history have an easier time finding approval on loans. Furthermore, those with better credit scores also have a better chance of being approved for loans with high funding amounts, a more competitive interest rate, and even extended payback terms.
If you have bad credit, lenders may view you as a potential lending risk and may only approve you for a minimum loan amount. Over time, you can work to establish credit and eventually have an easier time finding approvals and higher credit limits.
Can You Get a Loan With No Credit History?
If you have ever applied for credit cards, auto loans, or any other type of traditional financial product, you may know how difficult it is to find approval when you don’t have good credit.
Some types of funding, like a credit builder loan, are easily accessible to people with poor credit, no credit, or even past bankruptcy. These loans are accessible to people from a wide range of credit histories and have the ability to help people boost their credit.
Some loans that may be available when you need to borrow money with no credit history are:
- Installment loans from a direct lender, also known as a private lender (these loans are known for being convenient and are quite popular).
- Loans from credit unions (keep in mind that credit union loans may come with strict requirements).
- Car title loans (this type of funding requires a free-and-clear vehicle title).
Ways To Establish and Build Credit
Building credit is essential to anyone who wants to get approved for loans or other financial products in the future. To build a strong credit score, you can do things like:
- Get a secured credit card.
- Make payments on time.
- Prioritize paying off debt.
- Check your credit score often.
- Limit hard credit inquiries.
- Try credit boosting programs.
Below are more details about what you can do when you want to establish good credit.
Make Payments on Time
When you pay bills or other debt obligations, it is essential that you make timely payments. The payment status of your bills and expenses makes up your payment history, which, as you know, is the most influential factor contributing to credit scores.
Making on-time payments is not only a way to potentially boost your credit score, but it is also a surefire way to make sure you eventually pay off all your debts.
Get a Secured Credit Card
A secured card is a type of traditional credit card that requires a deposit from the account owner. To get a secured credit card account, you must provide a cash deposit, which the card issuer will hold onto. Credit card companies issue secured cards to balance out their lending risk in case a borrower cannot pay back their balance. If you have a less than perfect credit score, you may find that a secured card is easier to acquire than an unsecured credit card.
When you have your own card and pay off your balances on time, this behavior will positively reflect on your future credit reports.
Check Your Credit Score Often
Being familiar with your current credit score is a great way to tell if you need to make changes to any financial habits. Consumers can usually access a free credit report online through their bank account or credit card whenever they want. A Soft credit check has no impact on your overall credit score, so you can pull multiple as often as you like.
Accessing your credit reports can keep you in tune with how your financial behaviors affect your credit score. If you’re spending money in a way that is hurting your credit score, you can catch the problem early and rectify it before it becomes a larger issue.
Limit Hard Credit Inquiries
The lender or financial institution will perform a Hard credit check whenever you apply for a car loan, store credit card, or other financial products. Credit bureaus track how many hard credit inquiries are associated with your file. Unfortunately, lenders may be wary of extending credit to you if you have too many hard inquiries. Having many hard inquiries on your file means you often apply for credit, which may indicate to lenders that you are an irresponsible borrower. To avoid damage to your score, try to limit the amount of hard credit inquiries you accumulate.
Paying off debt is a big part of fixing poor credit. Try making larger payments than just your minimum amount due each month to pay off debt faster. By paying more, you are effectively lowering the amount of debt you owe and saving more on interest rate charges along the way.
Try Credit Score Rewards Programs
Usually, your credit reports only track payment history for a major credit account like home loans or student loans. To make sure all your payment history is tracked, consider signing up for credit score rewards programs. For example, Experian has a system called Experian Boost that tracks other payments like utility bills or subscriptions. That way, you can earn rewards for every single payment you make on time!