Bad credit and no credit are two very different things, but people tend to think they’re the same. This is because both no credit and bad credit applications tend to go to the same conclusion: rejected loans. This sends a message that any other credit besides good credit is bad, but the story is a lot more complicated than that.
First, there is a clear difference between no credit and bad credit. To understand it though; you need to know what and how credit works. Credit is a history of past loans that lenders and bankers use to gauge how good you are in paying off debts before they hand over any money.
If you have a history of defaulting on your payments, that’s what constitutes bad credit, and you can hardly blame the banks for refusing to loan you money. Any kind of business, whether they’re auto financing companies, a bank, or even your local grocer, would think ten times before lending any amount to someone they know had, or still has, trouble paying back.
If you have no credit (which means you have no history for the lenders to look at), your loan and paying habits are a total mystery. A no credit status is much better than having bad credit, but sometimes loans go in the same direction as bad ones. This is because lenders have no idea how a person with no credit manages their debts, and consider those people as blind gambles. Lenders have tightened their belts in recent years, and continue to look at no credit applications with extreme caution, preferring to reject a potentially good creditor than accepting a potentially bad one.
But, it isn’t all bad news, as no credit applicants can get themselves a good credit status much faster than bad credit ones. One of the most reliable methods is the authorized user (AU) method. A person with no credit can ask a friend or relative to add them as an AU on an existing credit card, if the original user has a good payment history, it will reflect on the AU’s credit report, and boost their credit status.
A person with no credit can gain good credit status in as little as three to six months, whereas a person with bad credit has to contend with their status for at least a couple of years. Finance companies understand bad credit applicants, but at the same time, they don’t want to encourage the behavior, so it’s best just to make your payments as much as you can.