Poor Credit vs. No Credit: Understanding the Consequences

If you have ever come across a situation where your loan application was rejected, or you didn't get your desired credit card, you definitely might have wondered why. It could be majorly due to one of two reasons: Poor Credit or No Credit.

No credit means your credit history is non-existent. That means you have neither taken any loan/credit before nor do you have any credit card, and you are a beginner.

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Whereas bad credit means you have a credit history, but you have made some mistakes with payment. In India, if you are below 630 on the scale from 300-850, your credit/CIBIL score is terrible.

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But what does it mean for a lender and a borrower?

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A borrower with no credit history or bad credit history is untrustworthy to repay the borrowed loan.

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But there's a way out. Learn what it takes to improve your credit score and start working on building a good credit score. But both are bad for your financial health. Here's how:

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Why Having No Credit Score Is Risky?

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As we mentioned, having no credit score means you do not have any credit history, and the lender does not know whether you can repay your borrowed money in a timely manner.

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As a result, if the lender decides to take a chance and offer you a loan or a credit card, they may charge you a higher interest rate than usual. But, there's more. Due to no credit:

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• You may experience trouble in getting your loan application approved.
• You may have to pay higher utility deposits.
• You'd have fewer options to acquire money during any emergency.
• You may have a more challenging time qualifying for a credit card.
• You may have to pay a higher down payment while purchasing a house.

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How to Build Credit History With No Credit

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You cannot build a credit score unless you start. Don't worry; there are ways where you can get started building your credit score without having any credit history.

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• Get secured credit cards: As the name suggests, these credit cards require a security deposit. If you default on your repayment, the lender will deduct it from your security deposit.

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• Apply for college student credit cards: These types of credit cards are much easier to qualify for with zero credit history.

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• Sign up with a service that reports to credit bureaus: It could be a postpaid mobile connection, digital lending services, etc.

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• Authorised user of someone else's credit card: If you have a family member whose credit score is high, then get an add-on credit card from them and become an authorised user. Thus, you can reap the benefits of their good credit history, on-time payments, and minimum credit utilization ratio.

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• Getting a co-signer: A co-signer takes full responsibility for paying off the loan or credit card balance if you fail to make payments. Thus, it is risky for the co-signer as it could hurt their credit score and jeopardise their relationship.

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Is Bad Credit Score Worse Than No Credit Score?

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As we mentioned before, if you have a low credit score, your financial health will be immensely impacted. A bad credit report means you are more prone to default on your payment and are a risky investment.

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This is a significant reason why many lenders are more willing to do business with a person with unknown credit history than someone who has defaulted on payments in the past. This is the main reason why bad credit is worse than no credit.

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Benefits of Having A Good Credit Score

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Having a satisfactory credit score not only helps you to easily get a loan, a credit card, or avail EMI facilities with favourable terms, it can help you unlock many savings and benefits.

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Let's take a look at some aspects that you can benefit from having a higher credit score.

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Significant Savings on Interest Rates for Loans

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When you are applying for a large amount of loan for major purchases like a home, vehicle, business, agriculture, higher education, etc., even a small drop in interest rate can save you a ton of money.

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With a good credit score, you can secure a loan at the lowest interest rate.

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Qualify for Credit Card with Attractive Benefits

Apart from loans, having a good credit score can get you credit cards with higher value and more lucrative rewards.

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It also shows that you can handle your debt and pay your bills on time. As a result, credit card providers and banks are more likely to offer you a bigger credit limit.

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Easier Loan Approvals

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Having your loan application approved quickly and in a hassle-free way is one of the most significant benefits of having a good credit score.

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Many lenders offer pre-approved loans or loans on credit cards to borrowers who have a healthy credit history.

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With responsible credit habits, your chances of skipping the waiting period increase multifold.

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Stronger Visa Application

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Did you know that your plans for travelling abroad may get affected due to having a bad credit score?

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Yes, a high credit score has a major impact on your visa application.

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That's not all; countries like the US and the UK may also ask for your income tax records while approving your visa application.

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How Can You Rebuild A Good Credit History

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Rebuilding a credit history from a bad past is extremely hard. It may take 7-8 years sometimes. But, the good news is it's not impossible. Here's how you do it:

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Repay Your Debts On-Time

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This is the ultimate rule for improving your credit score. If you are already on the deep end, contact your credit card provider and come up with a suitable payment plan. From them, maintain responsible credit management habits. 

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Don't miss your credit card payment due date by even one day. Avoid paying late fees and high-interest rates. Not only will you save your hard-earned money, but your credit score will also improve drastically if you pay your bills on time.

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However, check your credit card statement and ensure you are not being overcharged before making any payment. Check out this beginner's guide on avoiding credit card penalties.

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Fix Error in Your Credit Report

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It's natural for a person to make mistakes. But one small mistake in your credit report can negatively impact your credit score. So, review your credit report every month diligently. 

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If you have found an error in your report, lodge a complaint and get it rectified. Remember, no mistake is too small to correct, especially when it comes to credit scores.

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Get Secured or Rebuilding Credit Cards

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People with bad credit can get credit cards that are particularly made for credit rebuilding purposes. For instance, secured credit cards and rebuilding credit cards.

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Many leading companies offer such cards. They are issued against collateral like bank fixed deposits.

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If the borrower is unable to make payment for 90 days, the lender is allowed to recover the money from the fixed deposit.

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Repair Your Credit Score

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Alternatively, you can get your credit score repaired by a third party. Many credit repair organisations can help you boost your credit score for a fee.

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Thus, you can easily become eligible to get a loan or all other benefits by improving your credit score.

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Final Thoughts

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While having no credit or bad credit are both equally unhealthy for your financial life in the long term, they're not necessarily permanent.

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By taking the steps mentioned above, you can effortlessly establish good credit, whether you're a first-time creditor to credit or are looking for ways to rebuild from bad credit.

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With time, positive payment history and a low credit utilisation ratio can help you boost your score.