No Credit Hurts

Having no credit means that potential creditors have no way of predicting whether or not you are capable or likely to pay them back, whatever they lend you. Although there is a big difference between having no credit and having bad credit, both will hurt you in one way or another.

The good news is that it is easier to improve your credit when starting with none, than it is to move from bad credit to good credit.

What’s the Real Difference Between Bad Credit and No Credit?

You might think that all you need for financial lenders such as banks to give you the loan you need is to have a reliable source of income that shows you can pay back the debt. The problem is that even if you earn well over $100,000 a year but you have no credit history, lenders will still consider you a bit of a risk because they have no way of knowing that you have the discipline it takes to pay back whatever they lend you. So what is the real difference between bad credit and no credit?

Bad Credit

improving credit

Your credit score ranges between 300 – 850 points. You are considered to have bad credit when you score anything below 630 on that scale. You get a bad credit score when you make some mistakes such as:

  • Late payment of bills or loans
  • Use more than 30% of your credit limit
  • File for bankruptcy
  • You let one of your accounts go to collections

What bad credit means is that potential lenders have a record of your borrowing habits and what that record is telling them is that you have issues paying back what you owe or at least you had issues paying back what you owed in the past. As such, they will be reluctant to lend you any money.

No Credit

Having no credit means that there is no record of you borrowing and paying back any money in the past (at least the last six months). This means that you do not have an established credit history or records with any one of the reporting agencies. You are essentially “credit invisible”. According to the Consumer Financial Protection Bureau at least one in every ten adults falls into this category. The report goes on to say that at least 8% have insufficient credit histories.

How No Credit Can Hurt You?

Logic would dictate that having no credit means that you are starting from a clean slate from which you can build up excellent credit if you are responsible enough. While that is true, credit is the embodiment of that old “which came first, the chicken or the egg” quandary or the classic catch-22. No one is really willing to extend you any credit if you do not already have a proven credit history.

There are some serious ways that having no credit can hurt you. Five of the most concerning ways include:

  • You will get turned down for loans: if you are just starting out and want a mortgage or other type of credit, most banks will not even consider your case unless you have good credit and that means having a stellar credit history; this doesn’t work for people with no credit.
  • You will get loans at a higher rate: those financial institutions willing to give you a chance will do so at a much higher rate because you technically qualify as a high-risk.
  • You will have to pay higher utility deposits: because you have no credit, you are considered a high risk individual and as such most companies will look to ensure that they are covered. This means that you pay higher deposits for utilities.
  • Fewer options in case of emergencies: should you find yourself in an emergency or in a situation where you need cash urgently, you have fewer options at your disposal and most of them come at a much higher interest rate.
  • You will have a problem finding a place to live: landlords look at your credit history to ensure that you have no problem paying your rent or that you had no issues paying your last landlord. With no credit, you will find that many landlords may not be as open to renting to you because they just do not know whether or not you can be trusted. Those who will rent to you will ask for more upfront payments than they do from the other tenants.

These are just some of the problems you will face when you have no credit. But as we have already mentioned, having no credit is not as difficult to manage as having bad credit.

What You Should Do to Fix Your No Credit Problem

bad credit

Fixing your no credit problem is fairly simple if you go about it the right way. Here are some tips that will help you get on the right side of the tracks:

  • A secured credit card: these are easier to get since you have to secure them with a deposit.
  • Credit-builder loans: these help you establish a credit history without necessarily having to pay a deposit.
  • College student credit cards: these are often easier to qualify for even with no credit.
  • A co-signer: although this is risky for the other person, if you can find someone who you trust and who trusts you then you can have them co-sign a loan or a credit card with you. You will be responsible for the repayments and it is both your credit scores that will suffer should you default. However, should you be diligent in your payments then your credit history will be established with time.

Having no credit can literally bring your financial life to a grinding halt. Do not let that happen when you can simply use these tips to remedy that situation.



Posted in Finance