Take the 2-minute tour ×
Personal Finance & Money Stack Exchange is a question and answer site for people who want to be financially literate. It's 100% free, no registration required.

There's a popular saying:

It's better to have bad credit than no credit.

Is this true?

share|improve this question

5 Answers 5

up vote 11 down vote accepted

There are flaws in the risk models regarding no credit status. They don't take into account the fact that someone who lives in society and responsibly meets their obligations for years is more likely to pay off loans than someone who has no history of paying off their loans. People with very poor credit will still be able to get some RTO and auto loans, but they pay high interest, and the lender expects collateral property to have value when it's repossessed.

Initial credit is not that difficult to obtain if you plan and put some time into it. A cell phone contract, utility bills and bank accounts (especially those overdraft "accounts" that you should opt out of) are ways to establish credit without a credit card. Secured credit cards should be more than sufficient to establish credit within a few years. A No Credit standing can be verified at annualcreditreport.com, and should be checked whether you believe you have credit or not because of identity theft concerns.

In summary, it's only better to have bad credit if you want to get a small, high interest loan right now. That's a good way to be even more in debt, and pay lots of money to creditors rather than yourself. If you are patient, good credit is easier to obtain than repairing really bad credit. Either way, you won't be able to get a mortgage for a few years.

share|improve this answer
4  
To be more explicit, good credit can be obtained within 3-4 years. Great credit in 5. Bad credit often takes 7 years to go away. The next question is why do you want credit? –  SpecKK Aug 28 '10 at 21:09
    
Why do you say overdraft accounts should be opted out of? Are they a drag on good credit, or are you just considering the risk that they might "accidentally" be used (since their interest rate is usually not that good)? –  Ether Aug 30 '10 at 4:42
    
Great question. Over the past couple of months, banks have been pushing over-draft coverage for debit cards. The financial reform bill now requires customers to opt-in for debit overages. These accounts have fees which get as high as $40 for each overdraft, regardless if it's < $5 each for a few small items. I still have an overdraft account which I accidentally used once, but I'd rather get my debit card rejected than deal with exorbitant fees when I have other ways to pay. –  SpecKK Aug 30 '10 at 20:26

From my limited experience, I would say yes.

My justification for that has to do with data I've analyzed from Prosper.com (a p2p lending site). They grade borrowers on a scale as follows - AA,A,B,C,D,E,HR. They also used to have a "NC" grade for people with no credit. The "NC" graded loans were the worst performing group, even worse than "HR" (score below 600 or so). Assuming other lenders have the same experience, it would be reasonable that they would treat people with no credit as if they have the worst possible credit.

share|improve this answer
    
How does prosper categorize people into the NC category? Can someone who has bad credit claim to have no credit? I'm not sure how prosper functions to know how to interpret the NC category. –  Alex B Aug 25 '10 at 15:54
    
@Alex - I believe it included people who either had no credit history, or no credit activity in the past 7 years (or something like that). But I'm not sure of their exact criteria. –  Eric Petroelje Aug 25 '10 at 16:35
    
A modern venture like prosper.com site is more likely to attract younger borrowers, so they're NC is more likely to be a young inexperienced person with more risk and fewer assets than a mature adult. –  SpecKK Aug 28 '10 at 0:02

With regard to Plus loans (school loans in the US backed by the government) No credit is better than bad credit. They require that you do not have an "adverse credit history"

How do Federal Student Loans use Credit Scores?

The Stafford, Perkins and PLUS loans do not depend on your credit score. The Stafford and Perkins loans are available entirely without regard to your credit history. The PLUS loan, however, requires that the borrower not have an adverse credit history. (Undergraduate borrowers whose parents are denied a PLUS loan will be eligible for increased unsubsidized Stafford loan limits.)

An adverse credit history is defined as being more than 90 days late on any debt or having any Title IV debt (including a debt due to grant overpayment) within the past five years subjected to default determination, bankruptcy discharge, foreclosure, repossession, tax lien, wage garnishment, or write-off. It does not otherwise involve your credit score.

share|improve this answer

This sounds counter intuitive to me but this is the best answer I found.

Bad credit is better than no credit. Bad credit means that you were extended and trusted at one point. Bad credit score could also mean that you're paid off, but the bad history of the past is still weighing your score down. Depending on your current credit situation, you'll probably get extended another loan or card...your rates will stink, but you'll get one. Also, bad credit shows that the application you filled out is probably not filled with any fraudulant information and they will have some way of being able to get a hold of you. NO credit is riskier for creditors because they have absolutly NO track record to what the person's character is. With no credit or anything on your report, how do they know that none of the info on the application is good or bad? Someone with no credit is going to have the higher interest rate from the beginning. Higher risk = higher interest rate...the same with every investment, the higher risk of loss you possibly face, the higher return you want on the investment. No credit record equals a higher risk of loss.

Source: Yahoo answers

share|improve this answer
10  
Seriously Yahoo answers is the best source? –  C. Ross Aug 25 '10 at 12:07
1  
@C. Ross. Hopefully someone on here with actual working knowledge of the credit industry will weigh in a agree or disagree with the answer above. The dude who gave the answer above is studying for Certified Financial Planner's license. –  mpenrow Aug 25 '10 at 12:46
1  
@C. Ross - Yeah, they are the COMPETITION! =) –  JohnFx Aug 25 '10 at 15:30
4  
@C. Ross and @JohnFX. I could remove the source info if that makes us feel better. But I thought I should give credit where credit was due. :-) –  mpenrow Aug 25 '10 at 16:07

I think the answer may change based on a person's net worth.

  1. If you have money in the bank, and never borrow, you could have no credit but you wouldn't need it. In that case no credit is better than bad credit.

  2. If you need to borrow then I could be convinced a bank would prefer to have any history, even bad, over nothing at all. This is because most banks let computers make lending decisions instead of people. With no data to use for the risk assessment a computer can't provide an answer on whether to make a loan. In that case bad credit may be better than no credit.

I'm assuming that a lender might make a high risk loan over a loan with unknown risk.

share|improve this answer

protected by Chris W. Rea Jun 26 '13 at 12:58

Thank you for your interest in this question. Because it has attracted low-quality answers, posting an answer now requires 10 reputation on this site.

Would you like to answer one of these unanswered questions instead?

Not the answer you're looking for? Browse other questions tagged or ask your own question.