When it comes to the world of personal loans, the stigma is that only people with good credit can get approval, and it’s that same stigma that has run off and intimidated so many good people with bad credit or no credit from getting the financial help they need. Well, the time has come to lay that stigma to rest because there are options out there for people whether you fall into the no credit category or the bad credit category.
For a long time, there have been numerous debates on which one is worse: Having no credit or bad credit. Well, both are similar in the aspect of being far from having good credit, but the answer to that question is quite complicated, and there’s really no direct or specific answer to give because everyone’s financial situation is different… but there is a difference between the two.
Bad Credit vs No Credit
You see, not having a credit score shows a lack of credit history… bad credit is a direct reflection of having a poor credit history. For a lender, it’s all about money management. It can be a risky gamble lending to someone with no credit because they don’t have a record of money management, while the person with bad credit has a record of bad money management. So from the eyes of a lender, you can see why it’s complicated.
No one is born with credit, and although there are personal loan options out there for bad credit or no credit, you also don’t want to get comfortable in either of those credit categories. Your goal is to aggressively work to get out of those categories and build your credit to good or excellent, but it is reassuring to know that even though your credit situation might not be ideal, you still have opportunities to see the light.
Whether you’ve had credit before and made some bad choices financially, or if you’re finally ready to establish credit and want to make sure you’re going about it in the right direction, pay attention closely. Experts from all across the finance industry have shared some of their best advice and tips on personal loans for people with bad credit or no credit.
Know the Difference Between Bad Credit and No Credit
We touched on the fact that there is a difference between bad credit and no credit earlier, but we’re going to dig a little deeper into the topic. So you, of course, know that there is a difference between the two, but let’s see what having no credit and bad credit says about you.
Who Has No Credit?
Typically, the people who have no credit are kids, teenagers, and possibly young adults. The only exception to this is when the parents of kids/teenagers or young adults add them as authorized users on a particular account or add them as a joint account holder. Without that exception, you will not have a credit history or score.
No Credit Myths
Myth 1: Paying Bills Establishes Credit
Some people think that paying bills such as your utilities and cell phone bills will build your credit. That particular myth is false. People think that because when you first move into a home or apartment or apply for a cell phone contract, your credit has to be checked in order to get your electricity turned on.
Most electric companies run credit checks to see if you have a record of paying utility bills at other residences. This will determine whether or not you will have to pay a deposit. The Federal Trade Commission states that if you are a new utility customer or a customer with bad credit, the utility company can require you to either pay a deposit or present a letter of guarantee. A letter of guarantee is a letter stating that someone will pay your bill in the event that you don’t or can’t.
Once your utility or cell phone account is set up, people also think that paying those bills every month affects their credit. It actually doesn’t. The only way those types of bills will affect your credit is if you miss payments and get so far behind that the utility company sends your account to a collection agency.
Myth 2: Your Credit is a Reflection of Your Financial Health
Whether you have bad credit, good credit, or no credit, this does not dictate your economic standing. There are people with six and seven figure salaries that have no credit. This is the case for a lot of people who pay for everything in cash, have never missed any type of payments, or who’ve never had a credit card or loan.
Who Has Bad Credit
Anyone can have bad credit. It differs a little from the demographic of people with no credit (more so with teens than young adults). According to Experian, 21.2% of Americans had credit scores below 600 in 2017 and 22.6% of Americans had scores below 600 in 2016, so it looks like more and more people are taking better care of their credit health. Just remember, bad credit discriminates against no one.
Bad Credit Myths
Myth 1: You Won’t Be Able to Make Big Purchases
People who have bad credit think that because they’ve dug themselves into a hole that they are just out of luck on major purchases that they may really need. Accidents and emergencies happen all the time, and when they do, you tend to feel helpless when you think you have no access to financial help.
For example, if your car breaks down and you have bad credit, you have the ability to obtain a personal loan for a car. When you use a personal loan for a car, you not only have the flexibility to finance any type of car but depending on your loan amount, you also have the ability to pay for a car in full and spend any additional funds on other expenses.
Myth 2: Having Bad Credit is a Reflection of the Type of Person You Are
The purpose of credit scores is solely to evaluate and determine what type of risk you would be to lend money to. If your credit score is low, it is because you have a history of defaulting on a debt. It doesn’t mean that lenders look at you as a bad person… it just means your credit suggests you might pay them back if they lend you money.
Think Realistically About Your Loan
When I say think realistically about your loan, I’m saying to be ready to accept the good, the bad, and the ugly of everything that comes with having bad credit or no credit. The main thing to accept with either type of credit is that one is just as risky as the other. One has no history to look at and the other has a bad history to look at.
With this reality check, you have to keep in mind that these aspects are things that come with the territory of bad credit and no credit. If you are responsible with your bad credit or no credit personal loan, you have the opportunity to raise your credit to where you’ll be able to look into fair credit personal loans and eventually reach the status of excellent credit, but you have to start somewhere, right?
You can easily opt for one of those loans that guarantee instant approval but is anything ever really that easy? Usually, loans like that don’t require credit checks. You want to try and avoid them at all cost because they will lead you down that spiraling path to never-ending debt.
Benefits of Personal Loans with No Credit or Bad Credit
- You have the opportunity for a fresh start to establish good credit.
- You will have the opportunity to display a positive account on your credit report.
- There are no restrictions on what you use the loan for.
- They are easier to obtain than car loans or mortgages.
- The terms and interest rates are fixed, meaning there won’t be any surprises… what you pay one month will remain the same during your entire loan term.
Disadvantages of Personal Loans with Bad Credit
- The interest rates will be higher.
- Repayment terms may be stricter.
- There’s a possibility that loan amounts might be smaller.
As you can see, there are more advantages than disadvantages of these types of loans, and given whatever financial situation you’re in, it would be in your best interest to consider this type of loan.
Show and Prove That You Can Repay the Loan
Being that you either have bad credit or no credit, you know that lenders are going to be looking at you with an eyebrow raised, and that’s okay. That’s why you want to go in with guns blazing! They NEED to know that you have abilities to pay them back if they loan you any amount of money.
Since you don’t have any credit history to show or you have a bad credit history, you have to look at other methods to prove that you’ll be a responsible borrower. A great way to show this is by having a cosigner or showing your proof of income.
A cosigner is a person taking on the full responsibility of paying back your debt in the event that you’re unable to. Now, your cosigner will need to have a good credit score and history in order for a lender to consider lending to you. Having all the essentials you need, including a cosigner, up front will show the lender that you are serious about borrowing from them. It really shows that you intend to pay them back.
Proof of Income
Again, go in with guns blazing. You know that you don’t have the best credit or don’t have any at all, but you also know that those factors don’t mean you won’t get approved for a loan. This is a situation where your credit score or lack of a credit score doesn’t determine your economic value.
You may have bad credit or no credit, but that doesn’t mean you don’t make a decent salary. Lenders will want to see your proof of income anyway to see if you can afford a loan but when you present pay stubs with a nice “bring home” amount, that gives lenders a sigh of relief.
As far as proof of income is concerned, if you know that you’ll need a cosigner, your cosigner may need to present proof of income as well. A lender cannot rely solely on your cosigner’s credit score and report. Make sure you have all of those ducks in a row as well before going through the application process.
Live in the Moment and Work Towards Improvement
Whether you have bad credit or no credit, the journey to establishing or rebuilding your credit won’t be a quick process. The fact that you have either bad or no credit means that there is room for improvement, and isn’t improvement something everyone has room for?
While you have bad credit, that doesn’t mean that you have to remain there. There are actions you can take to transition yourself to having good credit, but you have to understand it’s not a quick fix.
Bad Credit/No Credit, Reflect Something Positive on Your Credit
When you have no credit and want to establish some, the last thing you want on your newly established credit report is a negative account. The same can be said with bad credit. In a sea of negative accounts, it helps to at least have one positive account on your report.
This is when a personal loan for people with bad credit or no credit will help you out. Acquiring this type of loan will give you that opportunity to go about your credit responsibly. Make your payments on time, and even early if your loan terms allow it. You also can pay more than the minimum due. These efforts will reflect positively on your credit report and can raise your credit score.
Just make sure to do your research on what lender will work best for you according to terms and rates… no sense in getting this type of loan to let it default or let it blend in with the rest of your negative accounts.
Fix Any Incorrect Information
Disputing any incorrect information on your credit is for people who already have a credit report. When people look at their credit report, they never really think that there could be any errors on their report.
The Federal Trade Commission reported that 1 out of every 5 Americans have errors on their credit report that they didn’t know about. This is why it’s so important to check your credit report. Incorrect information on your credit report could be what’s keeping you in the bad credit category.
Reduce High Balances
If you have bad credit, you will want to try and pay your balances down, not necessarily off, just down… closing an account can hurt your credit. You can pay the minimum (preferably more or the entire balance) on high credit balances, and be sure to pay them on time! Some people will pick one account at a time to aggressively pay down with the lowest of the high balances while paying on the other accounts.
This is essentially your utilization… balance to limit ratio. You ultimately want to pay your balance off every month. Utilization is the second most important factors that contribute to your overall credit health.
Catch Up on Any Late or Missed Payments
Your payment history is one of the most important factors on your credit report. Showing a positive history of on-time payments on accounts will definitely help improve your score, but missing any can hurt it.
Now depending on how late you are with your missed or late payments and how much you owe. will determine the severity of how much your credit score will be affected. A payment that’s 30 days late will not affect your credit score as much as it would for something going unpaid for 90 days.
Set Creditworthy Goals
Putting forth the time, effort, and discipline to improve your financial situation, as you know, can be a lengthy process. Sometimes it helps if you have something to work towards. Whether you’re wanting to buy a house or put a downpayment on a car, those goals can be your motivation.
When you actively have something to work towards, you will do whatever it takes to accomplish those goals. Even if it means you taking a second job to pay down some of your debts… you’ll do that if it puts you one step closer to getting the home of your dreams or the car of your dreams.