bad Credit

Is No Credit Better Than Bad Credit? – Forbes Advisor

Is No Credit Better Than Bad Credit?
Written by Publishing Team

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Not having a credit card or bad credit can complicate your financial life. In general, having no credit is better than having a bad credit card. But either unestablished credit or a negative credit report can make it difficult to qualify for loans or credit cards. If you are able to secure financing with either credit issue, you may receive higher interest rate offers or less attractive borrowing terms.

Although the consequences are similar, no credit and bad credit are two different problems. As such, you may need to follow a slightly different strategy depending on which of the two credit hurdles you are trying to fix.

No credit and what does it mean

No credit means that you have not applied for a loan, credit card, or other financing before. You do not have a credit history with the major credit reporting agencies – Equifax, TransUnion, and Experian. The Consumer Financial Protection Bureau (CFPB) describes you as “invisible credit.” And there are about 26 million consumers in the United States who fit you in this category.

With no credit history, you will not meet the minimum requirements for a FICO or VantageScore credit score.

Minimum Credit Score Requirements:

  • FICO: Your credit report needs at least one account that is at least six months old and one account that has been reported to credit bureaus in the past six months.
  • VantageScore: Your credit report needs at least one account with no minimum age.

In addition to “invisible” consumers, the CFPB says another 19 million people have credit reports but do not qualify for a credit score based on the above requirements. If you are in this situation, lenders may still consider you a “no credit” borrower. About 45 million Americans have no credit, either due to a lack of credit history or scores.

Credit reports and scores help lenders judge the risks of doing business with you. (Credit scores predict the probability of paying a credit commitment 90 days (or worse) late over the next 24 months.) When you have no credit history or scores, your credit eligibility is a mystery. Until credit is established, some lenders may reject your applications due to an unknown risk factor.

Bad credit and what it means

Bad credit means that you have made mistakes in credit management in the past. Your credit reports may display a history of late payments, debits, collections, bankruptcies, or other offensive items. Most likely, your credit score will also be poor – it will fall at the lower end of the scale from 300 to 850.

Credit Score Ranges:

A FICO score of over 670 is preferable when applying for funding. According to Experian, FICO scores below 670 are rated as follows.

  • Fair: 580-669
  • Very weak: 300-579

VantageScore credit scores are rated slightly differently.

  • Fair: 601-660
  • Weak: 500-600
  • Very weak: 300-499

Many people suffer from bad credit. About 33% of consumers have a FICO score of less than 670. Meanwhile, nearly 40% of consumers have a VantageScore of 660 or less.

Ultimately it is up to each individual lender to decide what they consider good or bad credit and how much risk they are willing to take. So, while a FICO score of 620 may be high enough to qualify for a loan from one lender, that score may not satisfy the other.

Why is bad credit worse than no credit

As mentioned, both no credit and bad credit can hold you back when applying for financing. However, bad credit is usually worse than no credit in the eyes of the lender.

More lenders may be willing to do business with unknown credit versus someone who already has a checkered past. This is the main reason why no credit is better than bad credit. The consequences of bad credit can be more serious. For example, some lenders may be willing to offer you a mortgage without credit. However, it may be impossible to find a loan to buy a home with credit scales below the maximum limit set by the lender.

6 ways to establish credit

Finding someone to take a chance as a credit beginner isn’t always easy. Fortunately, there are some lenders and credit card issuers that offer products to people who do not have stable credit.

If you are building credit from scratch, the following options may be a good place to start.

Secured credit cards

A secured credit card is a special type of account. The issuing bank requires a deposit when it is opened. Generally, the amount you put is equal to the credit limit that the card issuer will allocate to you. The security deposit greatly reduces the risks of the card issuer. Therefore, it is usually easier to qualify for secured credit cards than for unsecured cards, even without a stable credit history.

Before applying for a secured credit card, make sure that the card issuer reports to all three major credit bureaus. (Most card issuers do, but some local banks and credit unions may offer limited credit reports.) It’s also critical to manage your new card responsibly to avoid credit problems in the future. Paying off on time is a must, and it’s best to pay your balance in full every month to avoid high credit usage and interest charges.

Unsecured credit cards without credit

If you’re not crazy about making a deposit to a credit card, you may want to consider an unsecured credit card instead. It can be difficult to qualify for unlocked cards without a stable credit history. But some lenders offer entry-level credit cards for students or others looking to build credit for the first time.

Of course, interest rates on unsecured entry-level credit cards may be higher. Less attractive annual fees and terms may also come with these types of accounts. As with any account, you need to commit to managing your unsecured card well in order for it to benefit your balance in the long run.

authorized user

Another way to get credit is to use a family member’s credit card. When a friend or relative adds you to an existing credit card as an authorized user, there is a chance that it will boost your personal credit score.

In order for the authorized user strategy to work as effectively as possible, some puzzle pieces need to be put into place.

  • The account must only have a positive payment history. A credit card with a history of late payments may result in poor credit scores for you.
  • It’s best if you are an authorized user of a card with a low to balance ratio (also known as credit usage).
  • Old credit cards may benefit you more because credit scoring forms pay attention to the age of the accounts on your credit report.
  • The card issuer must report the account history to the credit bureaus of authorized users as well as the primary account holder. (This does not always happen.)

Credit Generator Loans

Credit building loans represent a unique way to borrow money and build credit. With this type of financing, the lender keeps the money you borrow (usually around $1,000) rather than cashing out the money for you right away. You make payments to the lender for the principal amount plus interest based on your repayment terms (usually 6 to 12 months).

After your final payment, the lender will release your money. If you paid on time, you should have several months of positive payment history showing on your credit reports. (Be sure to confirm that the lender will report the account to all three credit bureaus before applying.)

This type of loan is an expensive way to build credit and is not likely to be the best option.

student loans

It is not wise to take on educational debt for the sole purpose of building credit. But, if you plan to borrow money to fund your college education anyway, student loans may help you build credit as a side effect. As always, it is essential to make each payment on time, just as with other accounts. However, if your loan is in a confirmed deferral or bearing period, these paused payments should not damage your credit scores.

Credit increase

If you have paid your cell phone, utility, or streaming service bills regularly and on time, you may benefit from Experian’s Credit Boost. This free service pulls data from your bank accounts and can help establish a credit history with Experian. Although it will not solve the problem of lack of credit data in the other two offices, since the service is free, it is worth a try.

Raise your FICO® score instantly with Experian Boost™

Experian can help raise your FICO® score based on paying bills such as your phone, utilities, and popular streaming services. Results may vary. See the website for more details.

4 Steps to Fix Previous Credit Mistakes

Rebuilding credit is different from starting from scratch. When you have bad credit, creating positive accounts alone generally won’t be enough to turn a bad credit score into a good one. You also need to identify and resolve your current credit issues – either now or in the future.

  1. Start by reviewing your three credit reports. Visit AnnualCreditReport.com to claim a free report from each credit bureau once every 12 months. Until April 2021, you can download a free credit report from each office once a week, as a result of the coronavirus crisis. Remember, checking your personal balance never hurts your credit score.
  2. Objection to errors in credit reports. A study by the Federal Trade Commission found that one in four consumers had errors in their credit reports. Credit reporting errors can damage your credit score and hurt you when you apply for financing in the future. If you find incorrect or questionable information on your credit report, you have the right to contest these errors with the appropriate credit reporting agency.
  3. Create new credit, if necessary. Consider the five options above (secured credit cards, unlocked cards, authorized user status, etc.) if you have few or no positive accounts on your credit report.
  4. Adopt smart credit management habits. As you wait for the old (but subtle) negative items to fall off your credit report, it pays to start managing your current credit wisely. (The most accurate negative items on your credit report fall out of your report after 7 to 10 years.) A good payment history and low credit card balances (compared to your credit limits) are key. It can also be helpful to understand the components of your credit score to ensure that you are doing everything possible to put yourself in a better credit position in the future.

Next steps

It’s easy to get impatient when you’re working on building or rebuilding your balance. However, improving credit takes time.

Once you create your first credit account with the lender who reports to the credit bureaus, it takes six months to qualify for the FICO score. (Tip: Verified user accounts may help speed up this time frame.) And qualifying for a credit score doesn’t mean you’ll earn a great score right away. If you are working on past credit errors, this process also takes time.

However, as long as you follow good credit habits, you should start reaping the rewards of your hard work little by little. In the long run, you’ll be rewarded as long as you consistently follow smart credit management habits. After all, the lifetime value of a good credit score can easily be in the tens of thousands of dollars.

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