Bad Credit VS Lack of Credit

Having bad credit is one thing, but completely lacking it is a different story altogether. However, their effect on your financial well-being is quite similar.

Do you know what the difference between bad credit vs. lack of credit is? If not, you’re about to find out. Learn more about the differences between bad credit vs. lack of credit, how they impact your financials, and how you can improve them.

What’s the Difference Between Having No Credit vs. Having Bad Credit?

Let’s start with having no credit. Insufficient credit history means you haven’t borrowed money in the last seven years. Perhaps you were distrustful of financial institutions, didn’t want debt in your name, or simply had cash for all your needs. It doesn’t matter what the reason is.

However, having no credit can harm your future loan applications. When someone labels you as a client with “insufficient credit history”, what they really mean is that there isn’t enough data in your history to generate a credit score.

Banks, insurance companies, and all other financial institutions are interested in how well you can manage multiple accounts. For that reason, it’s important to not only have a good credit score but a long credit history and multiple accounts as well. If they can’t verify you’re a responsible borrower, they’re less likely to give you a loan. Or they will approve a loan but at very high interest rates to cover the risk of taking on a debtor without lengthy payment history.

Having bad credit has a similar effect on the approval process as having an insufficient credit history. How does your credit go bad? The most common reason for bad credit is late payments. However, there’s more to it than that.

Credit history can also help (or harm) your credit score. The longer you have an open and active account that you manage to cover on time, the better you look to potential lenders. A short credit history won’t help your bad credit. The same goes for the types of accounts you have open. The combination of active accounts is called a credit mix, and the lack of it is a bad signal.

So, both having no credit and having bad credit can harm your chances of getting a loan. That much is clear. But is there any difference between the two? As it turns out, there is.

Most lenders are much more likely to approve a borrower who has no credit. The reason for that is quite simple. The lenders are aware of the fact that everyone has to start somewhere. That’s why they’re more likely to take on inexperienced borrowers. However, interest rates are probably going to be very high.

On the other hand, consumers with bad credit already have a poor track record. Lenders are going to be far more careful about approving loans to people who’ve shown less responsibility.

Both consumers with no credit and those with a poor one who want a car loan can still make use of subprime lenders if they get refused by the regular ones.
Bad Credit VS Lack of Credit

Are You ‘Credit Invisible’ or ‘Unscored’?

The terms ‘credit invisible’ or ‘unscored’ apply to borrowers who have an insufficient credit history.

‘Credit invisible’ are those consumers who’ve never had a credit report generated by a credit bureau. People who’ve never borrowed any money or opened any kind of account belong to this group. There is simply nothing to report to the credit bureaus yet.

‘Unscored’ are those borrowers who simply didn’t generate enough data for the bureaus to score. It can also mean that the borrower only has “stale” information on their report. In other words, there are no recent loans to record, only some very old ones.

In either case, lenders are likely to consider you to have an insufficient credit history and won’t approve a loan. They simply don’t have enough data to go on and are less likely to trust you with any big loans.

How to Build Credit With No Credit History?

If you have an insufficient credit history, you’re likely to run into a bit of a paradox. You need a credit card to start building your credit score, but in order to get approved for a card, you already need a good credit score. That’s why sometimes clients who’re applying for a credit card get rejected. So how can you solve this standoff?

First of all, it would be wise to ask for a free report from one of the three major credit bureaus (Experian, Equifax, and Trans Union). The odds are you might have some credit history you weren’t even aware of. For example, if you have a student loan, you already have at least some credit history.

One of the ways you can start building credit without a credit history is by getting a secured credit card. You put some cash in a security deposit account as collateral. Lenders can then see you actually have some money that you can use to pay them back. It gives them confidence that you’ll repay your debt.

Another option is the Self (formerly known as Self-Loan). After Self approves your loan application, they deposit the exact amount in a certificate of deposit with one of its partner banks. You’ll pay regular payments for the duration of the loan, and once you’ve paid it off, you gain access to the money. The Self will charge some additional finance charges and interest rates.

It’s an excellent way to start building score, but be careful. If you miss a Self payment, it can negatively impact the score you’re trying to build.

Finally, you can always apply for a smaller loan. As we pointed out, lenders are less likely to reject someone for having no credit, especially if the amount is negligible.

Begin Improving Your Credit Score Now

Don’t let a lack of a credit score or bad credit discourage you. Both of these situations are entirely fixable. The former with secured credit cards, Self, and smaller loans. The latter with timely payments, better credit mix, and more open accounts. It’s never too late to start making positive changes.

At White, Jacobs and Associates, we have expert credit analysts who can help you with improving your credit score. Get a no-cost consultation today, and we’ll help you get a better credit score. And by doing so, get you your buying power back.

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