No credit history and bad credit seem pretty similar, don’t they? In either case, you don’t have good credit. That much is true; however, there are vast differences between the two. Generally, no credit is worse than bad credit, but it depends on the circumstances. For example, are you a new grad just starting out in life? It might make sense that you don’t have any credit yet. A lender might be willing to give you a chance if you have the resources to make the payments. If you are in your 30s, though, and have no credit, a lender might wonder what your story is all about. You might pose a more serious risk, much as the person with a bad credit history who has already proven that he is not a good risk.
The Differences Between the Two
Let’s take a look at how bad credit and no credit history differ.
Bad Credit – When you have bad credit, it means you were trusted with certain financial responsibilities and you failed. Maybe you made your credit card payments late or you stopped paying your car payments so your car was repossessed. These are just a few examples. Bad credit could mean anything from a few late payments to bankruptcies and foreclosures plaguing your credit report. Either way, the result is a bad credit score. This usually means lenders don’t want to lend to you.
No Credit – When you don’t have any credit, you have not had a chance to prove yourself yet. You might be a good credit risk and you might not. The lender has no way to tell how financially responsible you are. This makes it hard to determine if they should lend you money or not.
Is No Credit History Better?
Generally, lenders like to see some type of credit, even if it is bad credit. This gives them a chance to talk to you about those hard times and to see how things are different now. For example, let’s say you hit hard times a few years ago. You lost your job because your company closed. Without your income, it became impossible to pay your mortgage. This resulted in you losing your home. Your credit score took a really hard hit during this entire process. After six months or so you were able to secure a new job. Once you worked there for about a year, you were able to completely pay off all of your old debts and have a decent amount of savings now. You feel like it is time to start again, what will lenders think?
In this situation, many lenders would be willing to give you a second chance. They can see your bad credit history and how you suffered, but they know why. You provided ample explanation for the scenario and also proved that you could pick up the pieces and move forward. You didn’t let the negative credit event define you – instead, you learned from it and moved on. As long as you have some new trade lines reporting positive news about your financial history, many lenders will take a chance on you.
If you don’t have any type of credit history, though, there is no way for a lender to see what you are up to. Did you fall on hard times? Did you pick up the pieces? How much money do you pay each month in bills? If nothing reports under your name, the lender has no way to obtain any of these answers. This wishy-washiness makes it hard to determine if you are worthy of a new loan or not.
Fixing Your Credit
Whether you have bad credit or no credit history, the resolutions are about the same. You need to build up a positive credit history. This can be done in several ways:
- Apply for a secured credit card. This type of credit card is often easier to obtain even with no credit or bad credit. You have to put a security deposit down. This money becomes your credit line. For example, if you put down $500, your credit line would be $500. This way you have the credit to use, but if you don’t make your payments the credit card issuer has your deposit to fall back on. These credit cards are usually easier to obtain than unsecured credit cards.
- Apply for a small loan. Talk to your local bank about taking out a small loan. Even if you don’t need the money, you can take out the loan and make the monthly payments on time. This way you can start to build up a positive credit history.
- Ask for credit reporting. If you pay any other bills on a regular basis, check with the entity to see if they report to the credit bureaus. Not every company reports, but it is to your benefit to find those that do. Typically, the larger companies are the ones who report. Try sticking with those companies for large purchases and use their financing. Purchasing things like furniture or appliances this way is a great way to build your credit.
The bottom line is you need some type of credit. Some lenders do accept alternative credit lines, meaning those who do not report to the credit bureaus, but it is not the same as an actual credit score. Your best bet is to figure out a way to get credit reporting in your name. If you already have the credit and it is “bad,” start working on fixing it. Your efforts will be recognized shortly after you begin the process. This way you can show lenders you turned your financial life around. You may find many lenders willing to work with you once you start the process. Alternative or subprime lenders are popping up everywhere lately because of the large market of people out there needing financing that cannot get it the traditional way. Shop around and find the best deal for you whether you have bad credit or no credit history.