Why no credit is the same as bad credit

Personal story time.

My car died. I won’t go into the details of how it died (although it definitely didn’t go quietly in its sleep), I’ll just say that it wasn’t coming back and I needed to purchase a new car.

I’ll also spare you the details of shopping for a new car, because chances are good you already know what that’s like and those aren’t memories any of us need to relive.

No, I’ll skip straight to the part in the financing office where I found out that no one wanted to extend me a loan.

Well, to be fair, at the time I didn’t know that no one had wanted to buy my car for me. All I knew was that I had gotten a loan for a ridiculously terrible rate. I didn’t realize until after the fact – when I started receiving scores of obligatory “sorry we couldn’t extend you credit” letters in the mail – just how many lenders had turned me down.

Here’s the thing – I wasn’t rejected because I had “bad credit.” I was rejected because I had “no credit.”

To clarify, by “no credit” I mean no credit score. How does that even happen?

Neither a lender, nor a borrower be

I was a saver growing up. I liked the idea of money better than most of its practical applications. In other words, it was better to save it up and think of all the things I could buy than actually going out and buying things.

When I got older, that feeling transitioned into a fear of spending money I didn’t have. So I only spent what I had. I was fortunate in some instances – such as earning a nice college scholarship – and never really needed to borrow any money. So I was never in debt. And that’s a good thing, right?

The man who didn’t exist

No, in fact, it was not a good thing.

Since we tend to think of credit scoring as demerit-based (because it seems like the only things on there are notations of the few times you messed up) there’s an assumption that by not using credit – and therefore not having any mistakes – our credit should be “good” (if not perfect).

But a credit score is a product, created by credit reporting agencies, and sold to potential lenders. The purpose of this particular product is to help lenders understand how risky it will be to extend credit to certain individuals (or companies). Credit reporting agencies, therefore, need that product (the score) to be as accurate as possible, or else lenders won’t use it.

What that ultimately means is that if you don’t have enough of a credit history, then credit bureaus don’t have enough information to assign you a score that they feel would be an accurate representation of your riskiness as a borrower. And when you don’t have a credit score?

Rejection blues

Lending money is risky. In order to mitigate that risk, lenders set standards and protocols for who they will and will not lend to. Chances are good that many of the lenders who rejected me did so simply because they have policies in place that say that any applicant without a credit score is automatically rejected, no hard feelings.

And the lender that did agree to finance my car was required – by their protocols – to charge me an exorbitant interest rate in order to mitigate the risk.

It’s no fun for me, but it’s business and I understand that.

Build a healthy history

I’m taking steps now to build a positive credit history and my hope is that in the relatively near future I’ll be able to refinance out of my black hole of an interest rate.

The lesson to take away from this is that staying away from credit may seem like a good idea, but in the long run using credit responsibly will serve you much better.

Simple tips for building your credit history:

  • Open a checking or savings account, if you haven’t already
  • If you’re unable to open a regular credit card, try applying for a secured card
  • Make small purchases on the card and pay them back before interest charges are incurred
  • After a time consider applying for a second card, but again – pay off your charges before the interest kicks in

If you need further assistance, or aren’t sure what’s on your credit report right now, MMI offers free Credit Report Reviews. We can help you pull your report and review the information, so you know where you stand. We can also provide your current score. Check out the Credit Report Review section for more information.

Jesse Campbell is the Content Manager at MMI, focused on creating and delivering valuable educational materials that help families through everyday and extraordinary financial challenges.

  • The Consumer Federation of America (CFA) is an association of nonprofit consumer organizations that was established in 1968 to advance the consumer interest through research, advocacy, and education. Today, nearly 300 of these groups participate in the federation and govern it through their representatives on the organization's Board of Directors.
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