Is No Credit Worse Than Bad Credit?
Maybe not, but it’s still not good. We give you tips on how to improve a short credit history.
No loan? No credit card? That’s a good thing, right?
Well, maybe not.
It might seem like never having a loan or a credit card would be good for your credit. After all, if you don’t have them, you can’t miss payments on them. But because of the way your FICO score is calculated, that’s not the case.
A big part of your score (35 percent) is your payment history. This includes credit cards and loans, and to be sure, missing payments on them will hurt your credit. (Check out our financial literacy lessons to learn more.) However, simply not having them won’t help. In fact, it could do just the opposite.
Another part of how your score is calculated is the length of your credit history. And if you’ve never had a loan or a credit card, this section of your credit report might be dragging you down.
Why is that? Well, your credit score is basically an attempt to predict how likely you are to pay back a loan. And if you’ve never had a loan, there’s no evidence to show that you can be trusted to make your payments. No evidence means uncertainty. Uncertainty means there’s a chance that you’ll default. A chance that you’ll default means a lower score.
Our latest episode of OppU Answers asks the age-old question: Is no credit worse than bad credit? We get to the bottom of things, and if the length of your credit history is a problem, don’t worry, we give you tips on how to boost it, too.
Why Is It Bad to Have No Credit History?
“Hey OppU Answers, I’ve never had a credit card, and I have no debt to my name. So why can’t I get a loan, a credit card, or even rent an apartment on my own?”
It seems backwards, right? In a world where pretty much everyone has some kind of debt, shouldn’t you be rewarded for having no credit obligations?
Unfortunately, that’s not how it works. I’m Caroline, and on today’s OppU Answers, we’re going to help Nick navigate the murky waters of credit building.
You see, Nick, your credit score is essentially your financial resume. In the same way that an employer probably wouldn’t hire someone with no job experience, most lenders won’t lend to people with no credit history.
“I guess that makes sense. But how am I supposed to build credit if I can’t get anyone to lend to me?”
How Can I Build a Short Credit History?
There are actually several simple ways to quickly build credit from scratch.
First, look into signing up for a secured credit card. You’ll have to pay a small cash deposit, but if you use it sparingly and pay it off in full every month, it won’t take long for your credit score to blossom.
If you’re close with someone who has a good credit score, see if they’ll let you become an authorized user on one of their credit cards. Just remember to pay off all your purchases in a timely manner, or both your credit scores could be on the line!
You can also take out a credit-building loan from a bank or a responsible lender. These kinds of loans should be used purely to build credit—not to buy the latest steam-powered scooter! Borrow the money, stash it away in a savings account, and use that to pay it back month by month.
Finally, make sure you pay your bills on time! Late payments on anything can tank your credit before it even gets off the ground.
Thanks for watching OppU Answers! If you have a money question you need help answering, drop us a line on Twitter at @OppUniversity. Until next time, stay saving!
Do you have no credit history? Has it hurt your FICO score? Tweet to OppU on Twitter and tell us about it!