Understanding No Credit vs. Bad Credit

By  //  August 25, 2020

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Your credit status will significantly affect your chances of getting a loan, a credit card, or a mortgage. Hence, you need to keep track of where your credit stands, which includes your credit score, credit history, and credit report.

Your credit status will significantly affect your chances of getting a loan, a credit card, or a mortgage. Hence, you need to keep track of where your credit stands, which includes your credit score, credit history, and credit report.

In case you have no credit history or have a bad credit score, you might want to know the difference between the two to help assess your current situation.

The Difference Between No Credit and Bad Credit

No credit means you don’t have any credit score, credit history, and credit report to declare. You will usually be defined as having no credit when you have not borrowed anything for the last seven years.

Furthermore, there is a considerable possibility that lenders will hesitate to help you borrow money because there is no valid evidence to show how well you do in making repayments. 

On the other hand, bad credit means you have a credit history but with major negative marks. This is often due to delayed payments, defaulted loans, an account that went to debt collections, using more than your credit limit, past bankruptcy, etc. 

Most of the time, if your credit score is poor, it will be challenging for you to qualify for loans with good interest rates and reduce your chances of getting good deals with other offers involving credit. Moreover, bad credit is usually defined as below 630 on the FICO scale.

FICO SCALE
Credit Score Rating
300-629 Bad
630-689 Fair
690-719 Good
720-850 Excellent

How to Start Building Credit

Being a credit newbie can be overwhelming. However, having no credit is even worse than the process of building one.

Below are possible ways you can build credit:

Building Credit With a Credit Card:

■ Apply for a Secured Credit Card

A secured credit card is a credit card that requires a cash deposit. The deposit is usually equal to the card limit. Suppose you deposited $350 on your account. Then this means your card limit is $350 as well. 

Your deposit will act as collateral. Thus, if you fail to make payments, the credit card issuer can take the money away from your deposit. That is the reason why this is good for people with no credit.

However, secured credit cards are not meant to last forever; they are used to build credit until you may qualify for an unsecured credit card- a type of credit card that has better benefits and requires no deposit.

■ Be an Authorized User

The credit card owner is called the primary cardholder. On the other hand, an authorized user is someone who is authorized to use another person’s credit card. Moreover, the authorized user can use the primary cardholder’s credit card without being liable for any bill payments.

If you become an authorized user, the payment history of your card will be added to your credit status. On top of that, you don’t have to use or possess the said card to benefit at all. However, you might want to make sure that the primary cardholder is an excellent payer to have a positive impact on your credit files. 

Building Credit Without a Credit Card:

Here’s to do it:

■ Apply for a Credit-Builder Loan 

A credit-builder loan is a type of loan that helps people build credit without using a credit card. The lender keeps the money you borrow until you repay the total amount due. Furthermore, payments you’ve made will automatically be reported to the credit bureaus.

■ Apply for a Secured Loan

If you have money deposited in your bank account or a credit union, you might want to think about applying for a secured loan for credit-building. Your deposited money will serve as collateral. However, interest rates tend to be high in this type of loan.

■ Get a Cosigner

People with no credit usually get approved for a loan if they have a cosigner with a good credit score. A cosigner is someone who becomes liable if you fail to make repayments. Before you plan on doing this, it is vital to ensure that the cosigner is aware of the responsibilities in cosigning for a loan to prevent future problems.

Rebuilding Your Credit

While someone with no credit needs to build credit, a person with bad credit needs to rebuild it. You need to prove to lenders that you are responsible enough to qualify for loans with the best rates or getting a credit card. Here are tips you can do to turn bad credit into a good one:

■ Check your credit files for errors: There may be flaws in your credit status that need to be corrected. 

■ Keep existing credit accounts: Closing old cards can shorten your average age of accounts and lessen your overall available credit significantly affecting your credit files. 

■ Consider applying for a secured credit card or a credit-builder loan: Proper payments will positively impact your credit score.

Takeaway

Having no credit or bad credit only means the same thing- you don’t have good credit. Good credit will qualify you to get better interest rates and deals and even increase your chances of getting an excellent apartment.

Hence, it is essential to improve your credit status as soon as possible to open vast opportunities. 

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