Lenders often take extra precautions when dealing with potential borrowers with no credit or bad credit. Both can be disadvantageous because only those with the best credit receive the best deals.
Many people question whether one or the other is the better situation.
Both have distinct disadvantages, but one is better than the other. To understand that better, we need to look at what both mean.
A person with no credit is an unknown variable. The lender doesn’t have enough information to justify whether the deal will be honored or not.
There’s more prediction involved, and they don’t like that because lending is all about risk management. It does not matter whether you believe you can pay because your credit score always speaks louder than words or actions.
Having no credit means there is a risk when dealing with you. Lenders want assurances, and you may find yourself in a situation such as:
While it isn’t an ideal situation, you'll only have to endure it at the start. As you begin making your payments and establishing credit, you could find yourself with a better score.
You’ll have to endure dealing with these situations for a while. Once you have a good credit score, you can seek out better opportunities.
For example, you can lower your loans interest rates by refinancing through another deal. With a better credit score, you have more options.
“Lower interest means fewer payments and more financial control.”
Bad credit means that you have a lower score than average on the credit score scale. Numerically, it is a score lower than 630.
Lenders are also hesitant to deal with people with bad credit because they know they may not fulfill their end of the deal. Their actions in the past mean that they are high-risk borrowers.
It does not matter if their lower score was because of an accident or unexpected event. Lenders only look at the score and not the circumstances surrounding it.
People often get a low score because of a mistake while handling credit. Some examples include:
The best thing one can do is work to increase their score. There are many strategies to help with it, but it all takes time. Building credit is all about commitment and diligence.
The measurement of credit is called the FICO Score. It is a set of three numbers representing how trustworthy you are as a borrower.
It takes into account debt, payments, and more. It involves all good and bad circumstances, which translate to the score. The ratings are as follows:
Bad credit is a struggle many people have in the U.S. Most lenders will accept scores that fall in the Fair category though below average.
Lower scores also mean more barriers and higher fees associated with any deals you get.
While both situations can hold you back, lenders often view one in a bad light compared to the other. Having bad credit is the worse situation out of the two.
The reason is that you already have a record that shows you are risky. Lenders are more willing to work with someone with no information than someone with a proven low score.
A person with no credit will need a way to give a lender more assurance. For example, providing collateral for a loan will show the borrower’s confidence in paying off the loan.
A bad credit score acts as a barrier for many things. A borrower may not find any home loan options because lenders need to work with a minimum credit score.
Having no credit means that you’re starting with a blank slate. You only need to build a solid foundation to ensure that you’ll get better offers down the line.
Lenders provide several options to help people start. Here are some you may want to consider to improve your score:
Those with a poor credit score may need to approach improving it differently. Negative marks on your credit are often hard to remove, so it can be challenging to turn things around.
On average, it takes seven years before negative marks begin falling off the record. While you’re waiting for that time, you can re-establish yourself.
You’ll have to fix any credit problems you have while also building positive accounts. It will take time, but there are some things you can do.
One of the ways you can begin affecting your poor credit score is to lower your debt to below 30%. You’ll notice how some lenders begin reporting negative marks if you’ve exceeded that percentage on your credit card.
Many experts believe that going beyond 30% means that a person doesn’t know how to manage debt.
Lowering your debt also improves your purchasing power and gives you more control over your finances. One of the best things you can do right now stops all the factors lowering your credit score.
You can begin paying off debt with the highest interest first, as they’re costing you a lot in fees. Once you lower the principal, they'll charge you lower despite their rates.
All three credit bureaus offer a free report for you to get each year. Since the COVID pandemic, each bureau offers a free download once a week.
Errors, redundancies, and missing information are possibilities within the report. You should always check for these as they may be impacting your credit even when it’s not supposed to be the case.
Getting your credit report will not affect your score in any way. Reviewing and correcting any mistakes can retroactively improve your ratings.
It’s one of the faster ways to push your credit to a positive area. Agencies have a way for you to make disputes on errors. You can report any of the following:
Most people with bad credit scores often have few ways to improve them at the moment. It’s because most of their previous lines have expired or broken down, leading to their score.
If you have nothing to build credit on, it will be impossible to move up.
Treat your approach like you have no credit. You can use any of the following methods:
While you may lose access to some of your options because of your current score, many of these moves are still possible. Lenders want assurances, and these loans are easier to apply for than your traditional loans.
Each option can provide you with months of positive payment history which affects your score.
Building your credit score requires patience, as it will take time. If you don’t have any credit ratings yet, you’ll need to wait six months before you become eligible to get a FICO score.
If you’re working towards rising from a bad score, that will also take time.
All you need to do is maintain good payment habits and avoid unnecessary risks. You may also want to build an emergency fund you can use if you encounter a problem that endangers your consistent payments.
A good credit score provides many opportunities that many cannot access.
If you’re looking to improve your credit score, consider consulting with 121 Financial Credit Union. We have different programs and options available that can boost your rating to better categories.