Is Bad Credit Worse Than No Credit?

As many students work their way into adulthood, they realize that they have no credit, and they may run into some problems as they try to build their credit rating. Some of these people decide to start trying to build a credit score, even if they are aware that they probably won’t be able to establish good credit. If you are in this situation, you may be wondering which is worse: having bad credit or having no credit.

Bad Credit

If you have bad credit, this means that your financial decisions have been poor in the past, and those decisions have negatively affected your credit rating. There are many ways to get a bad credit score, including defaulting on loans, making payments late, or missing them all together. It is possible to repair a bad credit score, but it takes a lot of time and effort.

With a bad credit rating, it can be very difficult to get loans or a credit card because the credit bureaus see the poor credit score as a sign that you won’t be able to be responsible with your credit in the future. They can’t be sure that you will make payments on time, or at all, because of the bad decisions you have made in the past. Those with bad credit who are able to get a loan or credit card usually have to pay much higher interest rates to help the creditor manage the risk of taking them on as a customer.

No Credit

Having no credit isn’t exactly a good thing either. With no credit at all, there is no record of your credit or other money handling decisions. If you have not established credit, you may find it difficult to receive a loan or a credit card without a co-signer. Most of the time, a responsible co-signer with a good credit rating will help you get approved, but you should still take it upon yourself to start building your own credit. This is why there is a lot of hope for those with no credit. It will be much easier to establish good credit from the beginning than it would be to try to improve a poor credit score after a few bad decisions.

The only good thing about having no credit is that you are not held back by any poor financial decisions you may have made in the past. However, if the credit bureaus don’t have any information about your financial history, they will have no way of predicting your financial decisions in the future, making you a risk to any bank or other financial company who takes you on as a customer.

Which is worse?

While neither is a particularly good situation to be in, having bad credit is slightly worse than having no credit at all. As I have said, a potential borrower with bad credit has already shown poor financial responsibility in the past. They have had a chance to prove their ability to handle credit wisely, and they have failed. A person without credit has no previous records to show that they will be a trustworthy candidate for loans or credit cards.

Each situation has its own downfalls, and you wouldn’t want to strive to be in either situation. However, having no credit will definitely put you in a better position with creditors than if you had bad credit. In either situation, you won’t be able to get a loan as easily or see the best interest rates, but with a little work, you can build or improve your score so that you will never have to deal with this kind of financial burden again.