Does No Credit Equal Good Credit?

by Brandi Savitt – May 16, 2013
Building Credit

Why Building a Credit History Matters

Are you lucky enough to be living debt free? Instead of using a credit card, do you use your debit card or cash for every purchase?  Are you mortgage and student loan free?  Or perhaps your partner’s name is the only name on any mortgage or loan you have as a couple?  While living completely debt free may sound ideal, it also could mean you have no credit history.  And no credit history can be just as harmful as having bad credit when you’re building your financial future.

Your Credit History’s Role

Some people wrongly assume that no credit history is a good thing because there are no negative marks on your credit report. However, if you have little or no credit history, getting financing approval for a mortgage, new car, or any large purchase can be difficult.  It may even make it challenging to rent an apartment or get approved by a co-op board or condo association.

BuildingCreditSimply put, because your FICO credit score is based primarily on how you have used credit in the past, having no credit history leaves you with no credit score. Without a credit score, lenders don’t have an easy formula to determine if you are a credit risk and pay your debts on time.  And many lenders do not want to take a chance on an unproven applicant…

Credit Score Breakdown

Most lenders use your FICO score when determining whether they will extend an offer of credit to you. FICO scores range from 350 to 850.  The higher you score, the better chance you will get a loan at a lower interest rate.

  • Credit score between 750 and 850 is considered an excellent credit rating.
  • Credit score between 660 and 749 is considered a good credit rating.
  • Credit score between 620 and 659 is considered a fair credit rating.
  • Credit score between 350 and 619 is considered a poor credit rating.

And the anatomy of your score is determined as follows:

  • Payment history (35%).
  • Credit utilization, or how much of your credit you’re using (30%).
  • Length of credit history (15%).
  • Recently issued credit (10%).
  • Types of credit used (10%).

It is possible to have a score of 0 (many young people do), which means that there is not enough information in your credit file to generate a credit score.

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One Response to “Does No Credit Equal Good Credit?”

  1. louie says:

    Unfortunately, this is how our credit world works. Yes, you do need to establish your own credit. A credit card is one way to go, with one of the major brands, and make the payment in full upon receiving the bill. Also, apply for the highest amount of credit you can obtain, even if you’ll never use it. Avoid getting multiple cards and don’t cancel existing ones, even if it costs you an annual fee to maintain. For some reason, cancelling an unused card goes against your credit score.

Any Thoughts?