Is no credit really worse than bad credit?

by Stefan Holt | Mar 09, 2017

If you’ve never used credit before, your credit rating is spotless. There’s not a single missed payment, default or blemish of any kind. Unfortunately, there’s not a single payment, acceptance, or credit increase of any kind either.

You simply have no credit rating. But that’s OK, right? A clean — albeit empty — slate has to be better than one that's been tarnished.

Sometimes that’s true, but it may also surprise you that lenders may prefer to do business with an individual who has a poor credit history over a person who has no history at all.

Understanding the details

But how can this be, you ask? To understand how a poor credit applicant would be more attractive to a lender than a person with no history, you have to look at the situation through a lender’s eyes.

Lenders recognize that credit applicants don’t operate in a bubble, and that outside events often affect a person’s ability to pay. They can then look at the factors that forced a person with bad credit to fall on hard times and determine if those factors still exist in the person's life, and if so, whether these factors would have any impact on the loan they are considering.

At the same time, lenders are also able to look at a person’s entire credit history. While some aspects of that history may be less appealing, lenders may be more apt to do business with an individual if they notice factors like a solid credit performance in their immediate history or an increase in income.

People with no credit history present a completely blank slate, which forces a lender to gamble with no method to weigh their risk. Some lenders simply aren’t willing to take that chance.

Adding a credit history to your blank slate

If you have no credit history and are looking to lay your initial foundation, you’re not without options. Apply for a credit card — just one, to start — and use it in a safe manner that allows you to pay off the bill easily without falling into debt. If you can’t get a traditional credit card, apply for a secured card instead. 

In addition to a credit card, you can also build your credit rating with smaller loans. A small personal loan, paid off promptly, can be a helpful building block to your credit history. You can also apply for a loan for larger purchases. A car loan is ideal, but if such a purchase isn’t in the cards or you can’t get approved for one, a loan for a smaller purchase, such as furniture, can be beneficial as well.

Any of these credit options can help you build a foundation for a successful credit history — provided you handle your newfound credit responsibly. So pace yourself, start with small bills, and pay them on time. While you may want nothing more than to create a credit history as quickly as possible, a positive history will be worth the wait.

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