No Credit vs. Bad Credit 

Are you thinking of applying for a loan? One of the first things that the lender will look at is your credit rating. Why? Because it’s what the lender will use to determine your credit worthiness. After all, your credit score reflects how financially responsible you are. The higher your score is, the more likely you are to fulfill your loan obligations, at least in the eyes of the lender.  

But what if you have less than stellar credit? It’s possible for you to be in either of these situations: 

  • You have no credit history 
  • You have low credit score 

If you’re like most people, you’re probably wondering which of the two is worse. Let’s discuss each matter so you’ll know what to do if you are in either of these situations. 

No Credit 

Having no credit history means that you have nothing on your credit report. In other words, you have never borrowed any money in your life. You might have borrowed from family and friends, but not from financial institutions such as banks and credit unions. It may also mean that you have not borrowed within the last seven years.  

In reality, having no credit history is not a bad thing. It may be because you do not believe in borrowing money, and that you’d rather save up on what you need. It’s also possible that you are still in college, and have not yet found the need to use credit cards or take out a loan.  

But this can be a bad thing if you are going to take out a loan, because having no credit history does not give the lender any proof of your credit worthiness. The lender will have no idea whether you are going to pay back the loan or not. 

What to Do 

If you need to build your credit history, you can start by applying for a credit card and using it for small purchases. It’s just important that you make prompt payments. If you miss a payment or default on your debt, this will negatively affect your credit rating, which is something that you don’t want to happen. Remember, you do not only want to build a credit history, you want to maintain a high credit score as well.  

If you make poor financial decisions that will lead you to difficulties in fulfilling your financial obligations, then it will even be worse than if you had no credit history.  

Bad Credit 

Having bad credit means that you have late or default payments on your credit report. If you are late in paying your utility bills or credit card debts, this will also appear on your credit report. The same is true if there are debts that have been turned over to debt collections agencies.  

Any negative activity in your credit will result in a lower credit score. These can also include going too close to your credit limit on your credit cards, or borrowing too much money, more than what you can afford.  

Having a bankruptcy or foreclosure will obviously also appear on your credit report, and will cause your credit score to drop very low. 

When you have a low credit score, it would be difficult to get approved for a loan, and if you do get approved, your loan will likely to be charged with high interest rates. 

What to Do 

While it’s possible to get a loan even when you have bad credit, it’s best that you improve on your credit score first before applying for a loan. This is the more practical move so you don’t get burdened with high interest rates. To do this, you need to be current on your payments that you are falling behind on.  

You also need to work to increase your income to reduce the amount of money that you owe. This will result in a lower debt to income ratio.  Of course, you also need to resolve your debts that are already in collections. 

Working your way to get your credit score back up is an important step before applying for any type of loan. 

Your credit rating will greatly affect the turnout of your loan application. Whether you have no credit history or low credit score, you must take the necessary steps to improve your financial situation.