Is Having No Credit Worse Than Bad Credit?
Credit scores play a significant role in people’s financial lives. As a result, those without much in their credit history may worry that they’ll struggle to access the financing they need. Many people wonder, “Is no credit good credit or bad? And if it’s bad, is it worse than having a low credit score?” If you’re asking questions like that, here’s what you need to know.
What It Means to No Credit or Bad Credit
A person has no credit when their credit report doesn’t show any previous activity. Everyone starts their lives with no credit, and it remains that way until the person’s identifying information is used to acquire forms of financing, such as student loans, credit cards, or auto loans.
Now, this doesn’t mean there isn’t a credit record, as information beyond your borrowing activities does show on reports. As a result, you have a credit profile; it just doesn’t show any information in the borrowing history section.
With bad credit, there is a credit history. In most cases, the reports contain negative remarks regarding the person’s past credit-related actions. For example, there may be missed payments, defaults, or similar issues listed on the report. That brings their credit score into “poor” territory, making it hard for them to secure additional financing or get lower interest rates.
Is No Credit Worse Than Bad Credit?
While borrowers with no credit and bad credit are both considered riskier than those with good credit, no credit is less impactful than bad credit. Typically, when you have no credit, you won’t qualify for the best interest rates as the lender doesn’t know how you’ll perform.
However, if you have solid income and are otherwise qualified, you can access most types of consumer lending products with no credit, including personal loans, credit cards, student loans, and, in many cases, auto loans, though you may have to work with lenders who are open to your type of profile. Mortgages are typically more challenging if you don’t have credit, but you can pull it off if you choose the right lender.
Additionally, those with no credit can often rent apartments or qualify for jobs where credit scores are part of the equation. Even though you don’t have a score, it’s simply due to a lack of history. As a result, many landlords and employers are willing to consider you if you otherwise qualify.
With bad credit, the situation is far more difficult to navigate. The odds of being denied access to lending products are incredibly high, and those that do may see interest rates far above the average. The lending conditions might also be stricter with companies willing to work with borrowers with poor credit scores, which may become problematic depending on what’s involved.
Bad credit may also preclude you from qualifying for apartments or certain jobs. Your credit history shows financial struggles, and that makes you riskier than some landlords or employers are willing to accept.
How to Get Started with or Improve Your Credit
If you have no credit, you’ll stay that way until you become a borrower. Consider signing up for a low-limit credit card or a small personal loan. Use credit cards responsibly, ideally paying the balance off in full every month. For personal loans, repay them in a timely manner, either on time or early, depending on whether there’s a prepayment penalty.
For people with bad credit, it’s important to manage the accounts you have correctly. Avoid acquiring high balances on your credit cards, and pay down high balances as quickly as possible. Make all of your payments on time, as late payments significantly impact your score. By managing credit wisely moving forward, your score will recover in time, allowing you to qualify for additional lending products, rentals, and jobs in the future.
Did you find that having no credit was more difficult than bad credit, or was dealing with bad credit harder? Do you have any tips that can help people get their credit scores moving in the right direction? Share your thoughts in the comments below.
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Tamila McDonald has worked as a Financial Advisor for the military for past 13 years. She has taught Personal Financial classes on every subject from credit, to life insurance, as well as all other aspects of financial management. Mrs. McDonald is an AFCPE Accredited Financial Counselor and has helped her clients to meet their short-term and long-term financial goals.