You may find it quite tricky to answer the question “is no credit better than bad credit?”, especially when there are actually good reasons to stay away from credit. However, part of building your net worth, personal or business, is taking on different types of credit. A good credit history opens you to a lot of financial opportunities that would otherwise be impossible if you don’t have a credit history of some sort.
No Credit vs. Bad Credit
A person with no credit, even with reliable income, has no history that lenders can use to predict their creditworthiness.
A person with bad credit, usually with a credit score below 630, means there is a credit history with a few mishaps; although it may take a while to bounce back.
Whether you have no credit or have bad credit, you’ll be dealt upon by lenders in much the same way — seen as a risky borrower. Because of this, while both types of people are not entirely the same, they may experience similar difficulties in certain situations such as:
- Trouble finding a place to live
- Having to pay higher utility deposits
- Fewer loan options in case of emergency expenses
- Higher interest rates or getting turned down if you want to take out a loan
What are the Advantages of Having No Credit?
1 in 10 Americans have no credit history. Though the reasons why may vary, a good majority of these people still choose to build their net worth with very little or no credit at all. For these people, living a life without credit has it’s advantageous such as:
Having a line of credit does not teach self-control
Exercising restraint with a line of credit is often difficult, and in most cases end up in failure. Commercialism demands us to keep up with everything new in the market, that the impulse attitude toward buying creates a negative impact in many areas of life including relationships.
Relying on a cash budget keeps the budget under control
People with lines of credit think that they can afford a little bit of spending here and there, and realize later when bills add up that they couldn’t really afford it. Spending discipline always starts with a budget that you stick to. As the adage goes, “if you can’t pay it in cash, then you can’t afford it.”
Purchases don’t have to come with expensive interest rates
Avoiding added cost on even the most basic of purchases is the most practical thing a disciplined spender can do. Buying your basic goods on credit and having a habit of paying only the minimum balance each month, even after a year of paying interest you’d still owe a large portion of that purchase.
Financing leads to more spending
People with a line of credit miss the notion that they are spending now the amount of money they would still have to earn in the future. This is a common trap among those that do not think twice about unneeded or overly expensive items when they pay with credit instead of cash.
Bad credit management can lead to bankruptcy
Good credit management can’t be underestimated because as simple as it may sound, may people with credit end up in default. The census in 2019 is that there are 1 million people defaulting every year. Those who are unable to resolve this problem file bankruptcy without much choice.
Can You Still Get a Loan With No Credit?
People with no credit may be in a much better position in managing debt because they are fully aware of the problems that can arise when they aren’t careful.
If you have no credit and need to make a major purchase such as a car or home, you may be concerned whether you could still get a loan. The good news is you can!
Although the application process could be challenging, there are many loan options that are available for you. Your first step is to gather all your financial records to back your payment history in place of credit score.
Small / Personal Loans
Look for lenders that accept non-traditional credit history
Some smaller banks or credit unions offer loan opportunities to people that don’t have credit history. They use alternative data to analyze creditworthiness using bank account activities, record of timely payments with utility services and rent among others.
Apply for Payday Alternative Loan from credit union
Be a member of a credit union to gain access to Payday Alternative Loans for immediate cash needs. These are unsecured loans with terms of 1 to 6 months, with borrowed amounts ranging from $200 – $1,000. The maximum interest rate applied to such loans is 28%.
Obtain a secured loan by putting down collateral
If you’re able to put down something of value as collateral – real estate, vehicles, bank accounts, paper assets, insurance policies, collectibles, and precious metals – you are highly likely to be approved of a loan and with low interest.
Borrow from your 401(K)
If you have a secure job with the potential to pay back your loan quickly then accessing your 401(K) for a large amount of money would be a sound option. As long as you remain with your employer for the duration of your loan, you can pay it for as long as 5 years.
Add creditworthy cosigner to your loan application
Have a family member or a close relation who trusts your financial discipline to cosign a loan with you. Note however that mismanaging a loan with a cosigner also damages the credit of that person.
Home / Auto / Business Loans
Federal Housing Administration mortgages
The Federal Housing Administration offers the mortgage loans through accredited lenders and with much leniency to borrowers. You may be required a lower value down payment compared to the average conventional home loans. However, expect the interest rate to be much higher.
Car dealers have auto loan programs in place, and often prefer that you apply for it than to finance your auto purchase by another way.
Community banks and credit unions
Smaller lenders such as community banks and credit unions are not short in service when it comes to home, auto or business loans. They are more adaptable and could offer you programs that fit your needs.
With a marketplace loan, you deal with a loan broker that takes your financial and loan profile and presents it to a host of investors. The investor interested in your profile may decide to make a counter offer. If you are taking this route, be sure to stay involved in the loan process in order to secure your data.
Angel investors are focused on providing loan assistance to business startups with a show of growth potential. These are typically individuals with spare cash who want to earn higher interest rates on their money than would be given by traditional investments. They too may decide to make a counteroffer, such as acquiring a stake in the startup instead of just providing a loan.
How Can You Build Credit if You Don’t Have Credit History?
Building your credit on a clean slate can be more successful with proper guidance. Your best options are:
1. Get a store card
Brand stores encourage you to apply for their credit card because you’ll be notified of their store promos and discounts that prompt you to make a purchase.
2. Apply for a secured credit card at a bank
Your credit limit will be based on the deposit amount that you put in your account.
3. Apply for a credit-builder account
This also establishes your credit but does not require upfront cash as secured cards do.
4. Become an authorized user of an established credit account
This will build your credit fast whether you actually use the account or not.
5. Report all your utility payments to credit bureaus
If you do not deal with lenders on a regular basis then no one will submit your credit information for you. In this case, you may submit your own payment information to the credit bureaus.
As a consumer, it is nearly impossible to go through building your financial life without needing to access credit in one way or another. When you have no credit report or have too little information to build a score, your credit opportunities become too limited thus hampering your financial growth.