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No Credit vs. Poor Credit
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Ian D.
Certified Credit Union Financial Counselor
Posted March 12, 2019
At face value, it may feel like having no credit established is the same as having poor credit or a low credit score. This is a common myth and it likely arises from the experience of applying for your first car loan, credit card, or any application requiring a credit check. You may be told that you are not approved because you don’t have a credit history, but the reasoning is not the same as someone who is denied because of poor credit history. And the steps toward approval are quite different.
Credit is your “reputation”
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Credit is nothing more than your reputation of paying others as agreed. This may be from a loan, an apartment lease, a phone contract, or anything else where you agree to pay a specific amount over a set term. Not all of these situations will result in building credit history, but all of them can affect your credit if you don’t pay as agreed. If we use the term “reputation” when describing credit, it becomes clearer why having no credit is not the same as having poor credit. Having no reputation is far better than having a poor reputation, right? Let’s talk about this more.
Having no credit
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When you have no credit established, you essentially have a clean slate. While you might be told that you don’t qualify for a loan due to lack of credit history, this generally comes with an offer of either a lower dollar amount than you requested or it may come with the request to add a cosigner. The cosigner is usually only there to back up your reputation and increase the lender’s confidence that they will be repaid. If someone you’d never met approached you asking to borrow money, you’d probably be hesitant; however, you would be more likely to give it to them if someone you knew and trusted vouched for their character. Creditors simply don’t know how well you will pay them until you’ve demonstrated it by building a reputation.
Having poor credit
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When you have poor credit, this means you’ve already done something that damaged your reputation and it will take a few extra steps to correct it. Someone with poor credit may also be unable to get approved for a loan, but they will be asked to correct the negative items affecting their credit. For example, someone with poor credit likely either maxed out all their available credit cards or has not been making payments on time. They will have to pay all their credit accounts on time for several months and/or pay down their credit card debt to rebuild trust in their willingness to pay as agreed. Then they can begin to build a positive reputation and start getting approved for things they qualify for when they apply in the future.
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