Why No Credit Score Differs from a Zero Credit Score

Many people understand that having a high credit score is a good thing. After all, a high score means lenders are more likely to loan you money to cover large expenses like homes, cars, or other costly endeavors. Unfortunately, there is a misunderstanding about no credit and zero credit. 

What is a Credit Score?

A credit score is a three-digit number that many people believe represents how financially responsible they are. This understanding is a bit misleading but does hold some ground when it comes to financial responsibility.

A credit score is a number used by banks and lenders that gives the institution an idea of the interest rate they should charge you on loan based on your personal finance. Your credit score depicts how much you have borrowed, how long you’ve held any allotment of debt, and how regularly you pay it back based on your payment history. Based on your credit history and credit utilization, lenders can analyze the risk it will be for them to offer you a loan.

A credit score on a computer.

A good credit score will greatly increase your chances of getting a loan.

What Type of Credit is Considered a Low Score?

Traditionally, a low credit score is anywhere between 300 and 579, according to FICO. Low credit scores can be caused by things, such as:

  • Entering bankruptcy in your bank account
  • Having credit accounts filed under collections
  • Accruing a hefty amount of debt with little repayment
  • Failing to pay credit cards, utilities, student loans, or other loans on-time payments
  • Borrowing more than the available credit on your account or credit card

These activities can represent misuse and your inability to pay back the money you borrowed. A low credit score or bad credit during a credit check often depicts you as a high-risk client, which may deter lenders from aiding you in the future. 

What Zero Credit Means For Your Credit Card Account

Contrary to what you may believe, zero credit isn’t possible. According to FICO, FICO credit scores cannot fall below 300 and typically don’t fall far below 425. However, other major credit bureaus like TransUnion, Experian, VantageScore, and Equifax have reported different results, some with scores as low as 280.

As the term implies, a zero credit may mean a person is delinquent with several creditors or has filed for bankruptcy. Of course, this is not an ideal place to be, and building credit back up will be a long and challenging road.

However, building credit from a low credit score is possible. You can use secured credit cards (where you offer a payment upfront called a security deposit to represent what you can borrow) and build your line of credit as you would with a standard credit card. 

Unfortunately, you won’t be able to take advantage of credit cards that offer cashback rewards until you obtain an excellent credit score.

What No Credit Means 

Alternatively, no credit is far from the term zero credit. No credit doesn’t mean you have a low score or have fallen into bankruptcy. No credit implies that you haven’t borrowed money from lenders or have accrued any credit using a credit card, auto loans, home loans, or any other loan. 

When you have no credit, banks often refer to you and your account as “indeterminable.” This is because banks and lenders will not be capable of accurately predicting the level of risk it will be to allow you to borrow money. 

The downside to having no credit is that lenders will be less likely to let you borrow money. However, you won’t have to worry about accruing too much debt or filing for bankruptcy, and you earn the chance to build new credit. You can also partner with a cosigner or family member to share ownership as a cardholder.

Which is Better on Your Credit Report?

As you may have noticed, having no credit is much better than having zero credit. A low score is never a good sign and often places you as a high-risk borrower. Additionally, a “zero credit score” could mean you’ve fallen into bankruptcy or filed for collection, which can be a difficult situation to get out of.

No credit only means you have a limited or non-existing borrowing record. While lenders will be less likely to borrow from you, you can still build a line of credit from your current situation.

Just be sure to stay up to date on credit card payment plans by using a free credit report to get a free credit score. Do your best not to fall behind and try not to exceed your available credit limit as that will make you appear more high-risk to lenders. 

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Riley Draper