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No credit is worse than having bad credit?

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By: Joy Mali
on 1st Sep,2013

Many people think that not having any credit at all places them in a better position than having bad credit.
No credit is worse than having bad credit?

Many people think that not having any credit at all places them in a better position than having bad credit. Besides, the reasoning goes, if you’ve never had credit then it must be better than if you had it and then got into financial trouble which ended badly. However, the question needs to be soberly asked, is having no credit worse than bad credit? Let’s take a look.

A Different Perspective

The above reasoning may seem sound, but it might be better explained by taking a different perspective. Here’s an example. One applicant has just graduated high school and is looking for a job. They go to a job interview where one other person is waiting for an interview for the same job.

The hiring manager has to make a choice between the two job applicants. He looks at both resumes and sees that the first person has not been fired from any job because they have never worked. Their resume is blank. The other person has been working in the industry for ten years and has a lot of experience, but has been fired from a couple of jobs. Which applicant do you think will be chosen? Will the hiring manager choose the one with absolutely no experience and a clean resume, or the one with 10 years experience that got into some trouble and left a smear on his resume? Looking at it in this light, is bad credit better than no credit?

No Credit vs. Bad Credit

We live in a credit-driven society. Therefore, lending institutions such as credit unions and credit card companies use credit reports and the histories of repayments contained within them to make their credit decisions. You may believe that it is a feather in your cap to have never needed to apply for credit, but lending institutions aren’t so impressed since they are in the business of making loans. Since you have come to them for a loan or a credit card, they are much more interested in seeing how you have handled such responsibilities in the past. If you have no credit history then lending institutions have no way of judging your repayment character.

However, if you approach them for a loan or credit card with a bad credit history, they can closely determine your repayment habits and how great of a risk you are to them. If they see that you got into financial trouble, but have been making efforts to improve your credit score then they are much more likely to give you another chance than if they know absolutely nothing about you.

Tips for Building Credit

As you can see, it is better to have bad credit than no credit at all. If you have a bad credit history then you should perform a check on your credit score and report and identify any problems that can either be eliminated (i.e. errors) or fixed (i.e. paying off small loan amounts). While you are repairing your credit report, ensure that you continue to make other payments on time and make additional payments when possible.

If you have no credit, there are some quick ways to build it. Credit cards are fairly easy to get and effectively build your credit as long as you make payments on time. You can apply for major credit cards, department store cards and gas cards, all of which will start building credit. If you find that you have trouble obtaining these, your bank can issue you a prepaid credit card with a set limit to begin with.

You can also try to get a small personal loan or a new car loan. Both of these will help build your credit effectively, but they may be difficult to obtain without any credit history. In such a case, seek a family member or close friend to co-sign a loan for you. As you build your credit, be sure to perform a check on your credit score and report regularly to ensure that items are being reported and that they are being reported correctly. It is less time consuming to protect your credit than to repair it.

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