credit

Is no credit the same as bad credit?

Janna HerronDear Credit Card Adviser,
Is no credit the same as bad credit?
-- Caroline

Dear Caroline,
What an interesting, almost existential, question. The short answer is no, bad credit and no credit aren't the same. However, their effects on your ability to qualify for a credit card, car loan or other loan could be the same. The paths to good credit from bad credit or from no credit also are similar, but a person with no credit is more likely to get good credit faster.

Let's start with why they are different. When you apply for credit, the lender relies on your credit history to help determine if you will pay back your debt as agreed. Your credit history acts as your "credit reference," says Rod Griffin, director of public education at Experian, one of the three national credit reporting agencies.

That means if you are up-to-date on all your bills, your credit references are good. If you make late payments, if you have charged-off accounts, or if you have any bankruptcies or foreclosures in your past, then your credit references are bad. But if you have no account history, you have no credit references at all, and a lender has no idea how you manage your debts, Griffin says.

Still, most lenders will probably turn you down for a loan for no credit just like they would if you had bad credit. This is how these credit situations are similar.

With bad credit, the lender knows you are a risky borrower and doesn't want to take the risk. In the instance with no credit, the lender doesn't know if you're risky or not, but doesn't want to guess at it. Lenders don't usually give the benefit of the doubt. They want to give credit to consumers who are not risky.

The ways to build good credit history from no credit or bad credit are also alike: Get a secured credit card or become an authorized user, or AU, on someone else's card.

A secured credit card requires an upfront security deposit, typically between $300 and $500, to serve as collateral against the card's credit line. You use the card as you would a typical unsecured credit card by charging and paying your bill every month. If you pay on time and keep your balance below 20 percent of the credit limit, you may be able to qualify for a regular credit card at some point.

The other choice is to ask a family member or close friend with good credit to add you as an authorized user on their existing credit card. The good payment history on their credit card will populate on your credit report immediately and help boost your credit.

Those without any previous credit history likely will benefit quicker from these two methods to build good credit.

In as little as three to six months, a person previously with no credit can build a solid FICO credit score by opening and responsibly managing one credit card, says Anthony Sprauve, spokesman for myFICO.com, the consumer education division of FICO.

A person with bad credit may need more time because the past negatives in his or her credit files will offset some of the recent good payment behavior. The length of time to recover from a bad credit history depends on how long ago those negatives occurred, how severe they were and how many exist.

"No credit history is a clean slate," Sprauve says. "But a bad credit history is a dirty window that will take longer to clean up."

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To ask a question of the Credit Card Adviser, go to the "Ask the Experts" page and select "Credit Cards." Read more columns by the Credit Card Adviser. Follow Janna Herron on Twitter.

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