What is No Credit & Why Does it Worry Lenders?

How to Deal With Lenders That Treat No Credit Like Bad Credit

Oct 1, 2009 Carol Finch

Some consumers have never had any money problems but still end up being tarred with the bad credit brush. What is no credit and why do lenders see it as a problem?

Getting a lender to agree to give credit to a consumer may not always be that easy, especially if they are held to have "no credit." Lenders do need to check their risks here and will generally look at a consumer's credit history to do this. They like people, for example, whose record shows responsible financial management. Those with a few financial products on their record that they have always paid in time will generally be seen as a good risk.

On the other hand, those who have made late payments, defaulted on agreements or who have a specific debt issue listed on their record are seen as a bad risk. But, these aren't the only people who may be given a bad credit label. People with no credit may also look risky to lenders and this can affect their ability to borrow money and to be approved for credit-based agreements.

What is No Credit?

A person with no credit will essentially have hardly any or often no financial products at all listed on their credit history. If they, for example, have no mortgage, have never taken out a loan, use a PAYG mobile and have no credit card then they will have virtually nothing to show on their record.

So, when a lender goes to check them out, if they do decide to apply for a financial product, the lack of records here make it hard for the company to assess their own risk. The individual may be perfectly financially stable and may even have been in the lucky position of never having needed to borrow money before. But, to the lender, they may be as a big a risk as someone who had an impaired credit history.

Why is No Credit Treated so Negatively?

Generally, a lender's credit search will have the aim of working out an individual's credit score. Lenders give marks for financial management and behaviour patterns to come up with a score for the individual that is being rated. Each lender will use this scoring system to see what kind of risk they would take on when they lend money.

The problem is that having no credit history means that the individual cannot earn positive points. So, their score may be lower than the lender likes. This could see them being turned down for loans and other lines of credit. The lender has nothing to go on here and therefore can't do a standard risk assessment. So, in many cases, no credit equals bad credit.

Who Could Have a No Credit Rating?

This is actually quite a common situation for many people. It occurs, for example, with:

Consumers that have never needed to borrow money/use credit products before.
College students starting out in adult life on their own.
People relocating to new countries.

This is no reflection on the individual but that is scant consolation if they cannot get credit when they need it. So, is there a solution?

Building Credit Can Make Things Easier

Lenders seem unlikely to change their ways when it comes to dealing with no credit. Most people in this situation will simply have to look to change their own records over time by building up their credit so that they look more attractive in the future.

In some cases, a sympathetic company may agree to issue standard lending products but may up their interest rates to cover their perceived risk. In others, the individual may have to look at taking out specialist no credit/bad credit loans or credit cards if there are no other alternatives. These products will, once again, often come with increased interest rates so it is worth shopping around and using credit card comparison sites to try and find the best deals.

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