Is No Credit Worse Than Bad Credit?

The general feeling surrounding most Americans dictates that we collectively carry an immense load of debt, such as student loan or credit card debt. With reports from the CBO warning people that the rising federal debt may choke economic growth within a decade and begin a death spiral that will sap revenue from government programs, this mistrust of debt is increasing rapidly. People are afraid that budget cuts or tax increases may be the only way forward.   Therefore, many people these days prefer to stay debt-free in their everyday life. They try to avoid using any kind of credit, be it long-term loans, like mortgages, or short-term revolving line of credit, such as credit cards. There seems to be a general perception that having no credit is a safe option.

Sadly, not many of us have an uninterrupted flow of cash that allows us to afford expensive assets like a house or a car. Nevertheless, we need these items in order to support a healthy lifestyle and provide our family with the comfort and convenience they deserve. Imagine being in a situation where you need to buy an asset but do not have adequate cash to pay for it. Luckily, financial institutions around us have enabled us to buy things that we can pay off in the future. But before that service can be extended to us, we need to assure our lender that we are, in fact, good borrowers.

One of the most common tools that lenders use to gauge a borrower’s due diligence or their intention to pay back is the evaluation of the borrower’s credit score. Your credit score is a measure of your creditworthiness, based on a level analysis of your credit files. Your score relies primarily on your credit report information, which is typically sourced from credit bureaus.   The problem is that a lot of banks won’t loan money to people without some sort of credit history, since they have never had a chance to prove their financial conscientiousness to the lenders. Without any previous assurance of their creditworthiness, there is a high chance that many lenders will let down a “new borrower’s” application for a loan.   In contrast, people with bad credit may not be in as sticky a situation as those with no credit.

In case of a borrower with bad credit, lenders can factor in the events that led to bad credit and see if those events would be current problems. Experts also advise that if borrowers with bad credit have been working on their financial situation in the recent past or have experienced an increase in their income, lenders may be able to overlook their bad score. This means that people with bad credit may be offered a loan, albeit on unfavorable terms and high interest rate. On the other hand, having no credit history may jeopardize your chances of getting a loan altogether. Therefore, if you are completely debt-free, you might want to consider starting to build credit in order to be eligible for loans in the future.

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