There is a lot of confusing and conflicting information out there about credit reports and managing your credit history. One of the most debated is whether having bad credit or no credit is better. Many financial writers have claimed that having no credit (meaning no history of a credit card, home loan, car loan, etc. on your credit report) is as bad as or worse than having bad credit (report missed payments, defaults, bankruptcies, etc.). However, like most things, this depends on the severity of the credit history.
When a lender looks at a credit report and sees a history of late or no payments, they see a guaranteed risk that most lenders aren’t willing to take. When they see a credit report with no credit, it’s basically a guess if that person will make their payments, another risk that many aren’t willing to take. Both conditions provide a situation where the lender could potentially lose money, which isn’t a wise choice for a lender, so the person applying will likely be denied. However, one condition may be easier to recover from than the other.
If you defaulted on a loan, but corrected the situation with a payment plan and continued to maintain the payments on your other credit accounts, you have likely created a much better situation than if you had no history at all. However, if you have a bankruptcy on your credit report and years of struggling with payments, it’s going to take multiple years to recover and prove your reliability.
If you have no credit history what-so-ever, you can create a good credit score in about 6 months by opening, using, and maintaining a credit card. You can do this with a secured credit card, which requires an initial deposit, or, if you can prove your income, you can apply for an unsecured card, which does not require a deposit. The initial credit limit will likely be low until you can prove your reliability, which you do by keeping a balance below 20% (but not at 0%) while making all your payments on time. You can also establish your credit score by becoming an authorized user on a family member’s current card. This approach may be a better option if the credit card has a high limit, but be aware that if they don’t make their payments, your credit could be negatively affected.
In conclusion, bad credit can take longer to recover from than having no credit at all. However, the severity of the situation needs to be taken into consideration. If you’re hit by a hardship and default on a loan, proving you can recover and be responsible may be a better situation than having no credit history at all.
Likewise, if you are considering buying a home in the future, make sure you establish credit before applying for a home loan. If you don’t, you may find your home hunt delayed until you can establish some credit.
If you’re considering buying a home and are concerned about your credit score, we welcome you to give us a call. We can put you in touch with someone in Wilmington who will take a look at your credit report and advise you on the best steps for improving it. We understand people fall on hard times and we want to help. Call us at 910.202.2546 or send us a message through our Contact page.
