Why No Credit Can Be as Bad as Bad Credit

Many people take pride in the fact that they have no credit - eg, no credit cards, no car loans, no student loans etc. However, this can be as bad as having bad credit. Lenders are as hesitant to lend to a person with no credit history as one with a bad credit history. Why? Let me explain.

When I was a loan officer (mortgage consultant), sometimes I would pull an applicant's credit and no score would pop up. This usually meant that there was no established credit history.

To illustrate, consider this: would you loan money to a stranger on the street? If someone just came up to you and asked you for $50, would you trust them to pay you back?

Now, would you loan money to a friend you've known for the last three years? This friend has borrowed from another mutual friend and has always paid back the money in a timely manner, just like she promised.

How Lenders Work: Why You Need a Credit History

The message I'm trying to get across? Lenders don't like to loan money to strangers. And, without a credit history, that's what you are to them - a financial stranger; an unknown; an unproven.

They have no background to judge you on. So, a person with no credit is in essence asking the lender to "trust them." Lenders are not in the trust business. They assess, based on past behavior. They follow the old idiomatic expression, "the best indicator of future behavior is past behavior."

So, how do you rectify a nonexistent credit history?

How to Establish a Credit History

Open Some Accounts: When you are applying for a mortgage, for example, lenders like to see at least three revolving accounts that are at least 3-5 years old.

If the account is younger than this, they might want to see five accounts at least 24 months old. NOTE: Every lender is different; these are just general guidelines.

What are revolving accounts? Revolving accounts are those that you pay every month, like credit cards, furniture accounts, car payments, etc.

I always advised clients to open two secured credit card accounts and another type of account, eg, furniture, jewelry, home depot (one you can really use if you're buying a home).