Your First Loan: How to Borrow with Little or No Credit

Are you ready to borrow but don't have a strong credit history? Whether you're just getting started in life, recently moved to the U.S., or are rebuilding after a long credit break, applying for your first loan can feel intimidating, especially if your credit file is thin or nonexistent. The good news? You have more options than you think.

In this blog, we'll walk through the basics of credit, smart borrowing strategies, and American Heritage Credit Union resources designed to help you build credit and borrow with confidence.

You Need to Build Credit

But how can you start if you have no credit history? Most lenders will look at your credit score, which is an assessment of your responsibility and accountability when borrowing money. Credit scores are calculated based on your credit activity, including things like:

• How much you owe
• How often you pay bills on time
• How long you've used credit
• The types of credit you use
• How often you apply for new credit

If you’re starting from scratch, your credit report may be blank, or nearly so. That doesn’t mean you’re out of luck. It just means you’ll need to start with credit-building tools and alternative data, like the examples described below.

What Lenders Look For (Besides a Credit Score)

When you don't have a credit history, lenders may evaluate your application based on other financial factors, like:

• Employment history: A steady job with consistent income shows you can repay your loan.

• Debt-to-income ratio: A lower ratio means less of your income goes toward debt and more is available to repay a new loan.

• Bank account activity: Responsible management of checking or savings accounts can build trust.

• Rental and utility payment history: Some lenders may consider alternative credit data, like on-time rent or phone payments, if they can be verified.

Be prepared to show recent pay stubs, bank statements, or even a letter from your employer when applying for your first loan.

Your Best First-Time Borrowing Options

These tools can help you qualify for financing and build a positive credit history:

Secured Credit Card

Secured credit cards require a refundable deposit that becomes your credit limit. They are great for building credit with responsible use. American Heritage’s Platinum Secured Mastercard® is a smart option, with low fees and a potential upgrade path to an unsecured card.

Auto Loans

A car loan may be easier to qualify for than a personal loan if you have steady income or a cosigner. American Heritage offers auto loans with competitive rates, low monthly payments, and terms up to 84 months. Plus, members can enjoy Liberty Mutual discounts on vehicle protection.

Cosigners or Authorized User Status

A creditworthy cosigner can help you qualify for loans or cards. With a cosigner, you’re allowing access to your credit line to another authorized user. Becoming an authorized user on someone else’s card may help you build credit, too; just make sure the primary cardholder uses the card responsibly.

Credit Builder Loans

Borrow a small amount that is held in a secure account until you’ve repaid it. When you finish, the funds are released, and your on-time payments are reported to credit bureaus.

Tips for Building Strong Credit From Day One

Want to make a great first impression on your credit report? Keep these habits in mind:

• Always pay on time: Even one late payment can hurt your score.

• Start small: Only borrow what you know you can repay.

• Keep balances low: Using less than 30% of your available credit shows lenders you’re responsible.

• Don’t apply for too many loans or cards at once: Multiple applications can hurt your score.

• Check your credit report regularly: Review your report and dispute any errors. 

How to Spot, and Avoid, Predatory Lenders

When you're new to borrowing, some lenders may offer "easy approval" loans with high fees or hidden terms. Here's how to protect yourself:

• Watch out for sky-high interest rates and vague repayment terms.
• Avoid loans with large upfront fees or "guaranteed approval" claims.
• Read the fine print, so you always know what you're agreeing to before signing.
• Stick with trusted institutions, like American Heritage, that have your best interest at heart.

Also, look out for Buy Now, Pay Later offerings, This is when you put a down payment on a purchase, under the agreement that you will make additional payments to cover the balance. These plans may sound attractive at first, but the consequences can be steep if you miss or make a late payment.

And always remember, if something sounds too good to be true, it probably is.