I’m a firm believer that information is the key to financial freedom. On the Stilt Blog, I write about the complex topics — like finance, immigration, and technology — to help immigrants make the most of their lives in the U.S. Our content and brand have been featured in Forbes, TechCrunch, VentureBeat, and more.
See all posts Frank GogolIs No Credit Better than Bad Credit?
Updated on April 9, 2024
Written by
Written by
You hear all the time that bad credit will affect your ability to take out
What Is Credit?
Credit refers to your credit score and credit history. Basically, when you open an account and use it, there are certain things that show up on the credit history. For instance, the details will include the amount of debt that you carry, how much you owe in debt, whether you paid your debt on time or not, and so on.
There are three credit bureaus in the U.S. that keep track of someone’s credit. These are Experian, TransUnion, and Equifax. As they look at your credit history, these credit bureaus are able to calculate what is known as the credit score. Composed of three digits, the number will pretty much influence future financial actions that you are trying to make, such as taking out a loan.
When calculating your credit score, the bureaus will consider the amount of debt you owe, timeliness of the payments, your type of debt, any potential new
Credit scores range from poor to very good. The lowest score you could have is 300, and the highest one is 850.
Why Is Credit Important?
Credit is very important in people’s lives. In general, a financial institution will want to find out your creditworthiness, and that could happen only by checking your credit score.
Because of that, if you have a bad credit score, you will be considered too risky and may have fewer benefits. Those with a good or very good credit score are the most privileged because they are more responsible with their finances. So, if you have bad credit, it would be very difficult for you to get a credit card or loan approval.
Aside from that, it could also affect insurance premiums. You may have to pay more in insurance premiums if your credit score is bad, which is not very convenient. The same goes for interest rates – they are affected by your credit score too. The worse your credit score is, the more your interest rate will increase, because you are considered too risky.
Also, a financial institution will look at a mortgage applicant’s credit history as well. Landlords are doing the same thing. In case you have bad credit, then you will be offered a smaller amount of money for your mortgage. Sometimes, you may be granted no amount at all, depending on how bad the credit is and how the lender operates. Conversely, a bad credit score will cause a landlord to refuse your rental application.
Difference Between No Credit and Bad Credit
Having no credit and having bad credit are two different things. It’s important to understand both of these situations before you go and apply for a loan. Here is what each one of them means.
What Is No Credit?
If you have no credit, it means that in the past, you’ve never taken out a credit card or a loan. As such, there is no consumer credit record on your name. Your credit history will begin the moment you get a credit card or borrow some cash from a financial institution. The company that grants you the benefits will make sure to report your activity to the major credit reporting agencies, or at least one of them.
What Is Bad Credit?
Bad credit is different from having no credit. If your credit is bad, it means that you probably did something wrong in the past or you’ve been financially irresponsible. For instance, you might be someone with debt, and maybe you didn’t pay your debt on time. This debt could be a loan that you’ve taken in the past. You might have also paid your bills late, which again, affects your credit score.
What’s the Difference?
As mentioned, no credit and bad credit are different. With no credit whatsoever, a lender couldn’t tell whether you’re risky or trustworthy. After all, you don’t have any history backing you up. You didn’t do anything wrong, so you didn’t show any signs of irresponsibility. At the same time, you didn’t prove your responsibility either.
On the other hand, with bad credit, the lender knows that you are a risk as you certainly had bad financial behavior in the past. You will have to work hard on building good credit if you want a lender to trust you. It is harder than it would’ve been with no credit at all.
Is No Credit Better than Bad Credit?
To a certain extent, having no credit can be much better than having bad credit. This is because with no credit, at least you have a clean status and it’s easier to start building a good credit history and score. You get a shot at handling things responsibly and making things good for yourself. If you do apply for a loan or credit card with no credit, then lenders may be a little skeptical at first.
Meanwhile, with bad credit, it will be much harder to fix it and turn it into good credit. Also, it will still allow lenders to see that you had bad behavior in the past.
How Having Bad Credit or No Credit Can Affect You
Having no credit history will make a lender uncertain of what type of borrower you’ll be, as you’re pretty much a mystery. It’s hard to tell how responsible of a person you are going to be. With bad credit, the lender may not want to take any risk with you, depending on how bad the credit actually is.
Both of these options can affect you and limit your options when taking out a loan or trying to obtain various financial benefits.
If you have good credit instead, it will allow you to save money and you’ll have more opportunities.
How to Establish Credit
Are you lacking credit? Don’t worry – there are a few ways through which you can create one, and start working towards good credit.
For instance, you can open a secured credit card. This card will require you to make a security deposit. For instance, you can deposit $500, which will give you a $500 limit on your secured credit card. If you don’t make payments on time, then the lender can take the security deposit to pay the debt. As long as you are responsible when using it, this credit card will help you build a credit score.
You can also become a credit card’s authorized user to establish credit. If one of your family members already has a credit card, you could ask them to add you as an authorized user. As such, you will receive benefits from the main cardholder’s credit history. Of course, you should make sure this person knows how to manage their debt. If they don’t, then they may drag you down in terms of credit.
Taking out a loan may help you as well, as it will establish your credit history. You can take the loan and use the cash for various needs, like buying a house or a car, for instance. Keep in mind, though – you may need a co-signer since the lender cannot see a credit from you to determine your responsibility.
How to Rebuild Credit
If you have bad credit, don’t worry – it can still be fixed. One of the things that will help you is paying your bills on time. Since missing payments will decrease your score, paying them on time will actually help it.
If you somehow have unsettled collection accounts, you can pay them off. Although it will not be possible to get rid of the evidence of where your debt went, you can pay it out and help your case. Another thing that will help you rebuild your credit is keeping your balances low. One of the things that affect your credit score is how much credit you’re using. You need to keep the credit card debt below 30%. You may consider adding some more credit cards to your portfolio. As such, it will help you keep the lines open, while cards can be used responsibly, which will help with your credit score.
Conclusion
Is no credit better than bad credit? Having no credit may feel like a better idea, but in some cases, you cannot obtain certain benefits without having established credit. However, with no credit, you have a chance of building a good credit much easier, while with bad credit, it may take longer to fix it. Having said that, we hope that our post will help you establish or rebuild your credit, so you can use all benefits that come with a good credit score.
Frank Gogol
I’m a firm believer that information is the key to financial freedom. On the Stilt Blog, I write about the complex topics — like finance, immigration, and technology — to help immigrants make the most of their lives in the U.S. Our content and brand have been featured in Forbes, TechCrunch, VentureBeat, and more.