Whenever an application for credit is made, a prospective lender is basically looking to ensure (as much as they can) that any money they loan is going to be repaid on time. A key component in their final decision is the applicant's previous history of borrowing and making payments on time. But how does a typical lender view a consumer with little or no credit history, compared to someone with negative information recorded against them?

Of course lenders are often as different and individual as the customers they serve, so while one might be happy to accept someone with a history of chequered payments or a complete blank canvass, another might be very reluctant to lend to either. As lenders never make their criteria known, the only way to find out is by applying, but knowing what is held about you, and how you’re likely to be viewed is vital.

For the best way to find out how you appear to lenders, you can try checkmyfile free for 30 days and then for just £14.99 a month, which you can cancel at any time. It’s the UK’s most detailed Credit Report, with information from 3 credit reference agencies, not just 1, which lets you see what lenders see.

The issues with having a poor credit history

Having a poor credit history generally means that payments haven’t been made on time in the past. Accounts may be characterised by late payments, arrears and in the more severe cases, defaults. This is when the original credit agreement is considered broken by the lender and the borrower becomes a debtor as opposed to a customer. In serious cases there may be court information present in the form of an insolvency or CCJ.

Getting a loan with a bad credit history

The problem with having negative information recorded on your Credit Report is that most lenders will assume that history will repeat itself and you won’t make repayments on time, ultimately leaving them out-of-pocket. This is a fundamental part of credit scoring and has been proven to be highly accurate in predicting future behaviour.

If there is adverse information on your Credit Report, and depending on the severity, it will likely be harder to get a loan or other forms of finance from certain lenders until it is removed automatically. Where you are able to get credit, it’s likely to come at a much higher APR, to reflect the increased ‘risk’ that the lender is taking.

Negative payment information will remain on your Credit Report for six years from the date that the marker was created, and should then be removed automatically. As long as further adverse information hasn’t been recorded, you may find that lenders are then more willing to accept your application. The exact impact that each entry has on your ability to get credit will vary depending on the other information your Credit Report contains, which is why knowing what is held about you is so important.

The issues with having little credit history

If someone has a limited credit history – usually because they’ve not held credit agreements in the past – it gives prospective lenders very little information on which to base their decision, and in most cases, they will err on the side of caution and decline the application. Whilst there might not be any adverse information to speak of, this sort of applicant is an unknown quantity and therefore more of a risk than someone with a proven record of managing credit.

This is typically the case with young adults but can also be widely seen in other age groups if purchases have always made using cash or from a debit account rather than on credit cards. The same applies where someone has always used a sim-only or Pay As You Go mobile phone rather than a contract one – the former won’t appear on your Credit Report.

Even if you are inherently wealthy, if you haven’t got a history of borrowing, you’re likely to face the same problem.

If you have a limited payment history, while we don’t advise obtaining credit solely for the purpose of increasing your score, it can make a lot of sense to take out a credit card (there are a number of providers that specialise in customers with a limited credit history) and simply use it for every-day purchases before clearing the balance in full each month. As long as repayments are made on time (a Direct Debit is best) then you’ll be able to establish the foundations of a good credit rating relatively quickly, and over time, open up access to wider (and cheaper) forms of borrowing.

Getting a loan with no credit history

If you’re prepared to spend a bit of time working towards it, you can build up the information on your Credit Report well in advance of needing to apply for large forms of borrowing, such as a mortgage.

Even if you haven’t held credit accounts in the past, there is other information contained on your Credit Report that lenders will look at when they assess any application that you need to ensure is correct. Your Electoral Roll listing and any Court Information are both included as ‘public’ elements of your Report, and it’s important that everything is correct.

What they both have in common

What the two situations have in common is that neither of them are permanent: no matter what your circumstances are, with time you can improve your creditworthiness in the eyes of a lender. If you have no previous credit agreements and are starting from scratch, by taking out a simple credit card and making all payments on time you will find your credit rating soon begins to improve.

If there are negative markers on your Credit Report (such as missed payments or defaults), these will only appear on your Credit Report for six years from the date they were issued and so once this time is up lenders will no longer see them. Additionally, the impact of negative information lessens over time for many lenders, which means even before the information has dropped off, you might find more lenders are willing to extend you credit.

Similarly, specialist products aimed at people with either a less-than-perfect or very limited credit history are both likely to come at a much higher rate of interest – the best deals are reserved for people with a strong credit rating.

How to make the most of either situation

Regardless of whether you’ve got a poor credit history or you’ve never taken out a loan in your life, before you apply for anything it’s important to check your Credit Report yourself so that you know exactly where you stand.

Without checking, there’s no way of knowing whether the information on your Report is correct, or what a typical lender will be using to assess your application.

If you haven’t already, you can try checkmyfile free for 30 days and then for just £14.99 a month afterwards, which you can cancel at any time.