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Bad credit tougher to fix than no credit

Dear Debt Adviser,
Which is worse, bad credit or no credit? -- Mike

Dear Mike,
What would you say, Mike, if I asked you which is worse, a bad girlfriend or no girlfriend? If I had to choose, I believe I would take "none" over "bad." Both require some work to remedy, but "the absence of something" is an easier, less stressful situation to change!

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Bad credit means, among the many possibilities, that you have made mistakes, had life challenges such as divorce or a job layoff, just did not understand the commitment you were making or any combination of these and other factors.

Whichever way you arrived at bad credit, it was likely a bumpy, nerve-racking ride that you would, in hindsight, prefer to have avoided. I know there are some out there who think that bad credit comes from drinking too much champagne and working too little; but my experience has not borne this out. I think that this myth is so popular because we all want to think it couldn't happen to me. It only happens to those who do something to bring it on themselves. Comforting logic, but wrong. It can and does happen to anyone!

No credit, on the other hand, is simply a matter of having no credit history because you have paid with cash, check or debit rather than credit and have not borrowed money for a car, home or other large purchase.

There are limited cases where bad is better than none, or so I'm told. For example, Boston is full of Red Sox fans who claim that a bad team is better than none. After more than 80 years of the same negative result, you would have thought they'd have learned by now. Perhaps 90 will be the charm!

You did not ask, but I am sure inquiring minds want to know, how to "fix" both of the credit situations you mentioned. (Fixing the Red Sox will take more space than I have available here.)

Bad-credit fixes:

  • Pay all bills on time or ahead! To help simplify the process, once you get paid, pay all the bills that are due between then and your next paycheck. Allow time for the mail and processing.

  • Learn to live on your take-home income. This means if you do not have the money, don't buy it. In other words, do not add to your existing credit balances.

  • Pay all charged-off accounts that appear on your credit report. A paid charge-off is much better than just a charge-off.

  • Create a realistic plan to allocate a portion of your income to pay off large credit card balances. A high debt-to-income ratio could be causing you to lose points on your FICO score.

  • Give it some time. Most creditors look at your most recent credit history (last two or three years).

No-credit fixes:

  • Apply for a secured credit card. A savings account secures the card in case of default.

  • Once you have used your secured card for several months, apply for an unsecured credit card (just one, don't overapply). You may have the best luck with a retailer or with the same bank from which you received the secured card.

  • Your credit history measures all types of credit accounts, so you may want to establish a longer-term installment loan for a car or some other large purchase loan, such as furniture, with pay-back terms of longer than one year.

  • To avoid problems, never borrow without knowing how and when you will be able to pay off the balance. Also, you should establish an emergency savings cushion for those times when life throws you an unexpected curve.

Good luck with your credit and to the Red Sox!

The Debt Adviser, Steve Bucci, is the president of Consumer Credit Counseling Service of Southern New England. Visit CCCS for additional debt advice or click here to ask a debt question.

Bankrate.com's corrections policy
-- Posted: Sept. 17, 2004

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