Lack of credit history or bad credit rating: which is worse
Lack of credit means that you have no credit history. But a bad credit rating means you made a few mistakes and paid the price. How is a bad credit history different from a lack of credit rating? Both are problematic, but no credit is better than a bad rating because building a good rating from scratch may be easier than rebuilding. This is especially important for newly arrived immigrants, since upon arrival in the country they do not have a credit rating. The edition told in more detail USNews.
Lack of rating and poor rating
An unrated person and a person with a bad credit history face the same problems due to different reasons.
“No rating means you haven't registered a loan yet, so you don't have a credit bureau file,” says Sanjay Baskaran, CEO of One Technologies, which owns credit monitoring service ScoreSense. "Bad credit means you have a credit record, but you have made some serious mistakes."
Consumers without credit are divided into two camps: those who have no experience of using credit, and those who have no credit history, or “credit invisibles”.
Sometimes you may have a credit history, but the credit bureaus do not have enough data to calculate the scores.
On the subject: How Various Financial Transactions Affect Your Credit Score
FICO, the most commonly used credit rating model, requires you to meet three criteria to create a credit rating:
- At least one account must be open for at least six months.
- At least one account must report activity to the credit bureau within the past six months.
- Your credit report cannot indicate that you are dead. This can sometimes happen if you share an account with someone who has died.
If you are new to lending or have not reported credit information to credit bureaus in the past six months, you may not have FICO points.
But you can have a VantageScore. Since scores include bills as soon as they are reported, you can set your credit score faster.
If your credit file is not reliable enough to create a credit score, your score will not be zero.
“If you have no credit, no credit score will be generated for you. The FICO and VantageScore will simply provide a message like, "Not enough information is available to build a credit rating," says Shiva Bhaskar, attorney and co-founder of Tier One Credit, which provides legal resources for credit creation.
On the other hand, if you have a bad credit history, it means that you meet the requirements for a point, but have abused your credit in the past.
“A bad credit history means you have a history of defaulting on credit,” says Bhaskar. "It could be due to late payments, collection, foreclosure, repossession, bankruptcy, or something else."
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Basically, a bad credit rating tells lenders that you are more likely to be late or not meet your payments.
Among those with a credit rating, only about 16% fall into the “bad” category.
Lack of rating is better than bad rating
Without a rating, you have a blank slate and must prove that you can handle credit responsibly, ”explains Patrick Beckman, financial editor of the Rave Reviews review blog.
“Think of your credit score as trying to befriend a new person you just met, and thinking badly as trying to befriend someone you’ve failed in the past,” Beckman says.
Getting over a bad rating is harder than not having one because lenders have seen your past credit management problems, Baskaran said. You need to be patient and avoid old bad habits while you wait for negative points to disappear from your record.
Beckman adds: “When you don't have credit, expect lenders to be healthy skepticism when you apply for a loan or credit card. In some cases, they may not approve your application. "
“You will need to create a loan that can be disbursed within one to six months,” says Beckman.
How to build a credit score from scratch
The main way to get a good credit rating is to use your credit responsibly over time. But if you fall into the no-credit camp, you might run into a chicken and egg situation where you can't get loan approval because you don't have a credit rating.
Never fear: you will be able to quickly earn a loan.
Some strategies include:
- Using a joint credit card
- Become an authorized user on someone else's card
- Check to see if your rent and other payments can be reported to the credit bureaus.
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