Many believe that “bad” and “no” credit are the same thing, but this is a myth, as both send a different message to creditors. In both cases, you should work to build a good credit history, but which is worse? And, how can you improve your credit score?
Bad Credit vs. No Credit
No credit means that you have not yet established a credit history. You have never purchased a car, obtained a mortgage or used a credit card. Generally, this situation applies to young adults, but some senior citizens lack a credit history as well. Since they often pay with cash, they never need or use credit.
Bad credit generally means that you have used credit, but you have experienced problems. Payments may have been made late, or you may have filed for bankruptcy, faced foreclosure or had a vehicle repossessed.
Fortunately, in both cases, there are things you can do to improve your situation.
Is Bad Credit or No Credit Worse?
Some believe that having no credit is better than bad credit because you have a chance to build a positive history. However, most banks will not loan money to people without any credit background. It is similar to applying for a job. Would a doctor rather hire a nurse with 10 years of experience who was fired or someone fresh out of school with no experience? Most would choose the first nurse.
The reason bad credit is sometimes better than no credit is that financial institutions have something to go on. They can see what factors led to your problematic credit and determine whether these will be issues going forward. If you have been working on your credit and making improvements, banks may be willing to overlook a low score.
How Can You Build Credit?
Whether you have no credit or bad credit, there are things you can do to improve your situation.
- Get a personal loan. Put the money from your loan into a savings account and make the monthly payments with that money. Then, you will only have to come up with interest costs.
- Buy rent-to-own furniture. Many rent-to-own companies do not check your credit before giving you a loan, but they report payments to credit bureaus. The furniture will cost much more this way, but you will be building positive credit. It is imperative that you make sure the store will report positive payments, though.
- Purchase a car. Car payments are sizable, so on-time payments do wonders for your credit score. If you cannot get approved on your own, ask if someone will cosign for you.
- Obtain and use a credit card. If you cannot qualify for a traditional credit card, get a secured credit card. This way, you will still have the opportunity to charge items and make payments, so you’ll be building a positive history. If you pay on time and keep your balances low, your score should increase.