Credit Myth: Having No Credit Proves You Can Manage Debt to Lenders

Nothing seems to confuse people more than a credit score of zero. Credit scores usually span from about 350 to 850, so how can someone have a score of zero? If you have a credit score of zero, don’t panic. This is not necessarily a bad thing. That may seem counterintuitive, and I’m afraid the explanation isn’t going to be any less so. Credit is a strange beast, indeed.

A Credit Score of Zero Is Not Poor Credit

It’s no credit at all. What it means, is that for the past few years, you haven’t had to pay back any borrowed monies on a regular basis, and so there is nothing to report and nothing to judge your ability to handle credit on.

If Bob has had 3 credit cards, a car loan, and a mortgage and has managed them without issue over the past six years, the credit bureaus can see that Bob is a great borrower. He can juggle many different credit products, make his payments on time, every time, and never let anything get out of hand.

However, if Bob has had no credit products to manage over the past six years, his credit report is pretty much empty. With a blank credit report, how do the credit bureaus judge his ability to pay back the money he has borrowed? They can’t. So, Bob gets a big, fat zero for a credit score.

Essentially, what the credit bureaus are telling you, is that they simply don’t have enough information to give you a credit score at this time.

But You Have No Debt

This might be confusing for many consumers. You feel like you’re doing everything right. You’re not living on credit, living fully within your means and not relying on borrowed money to get by. Any debts you may have had a long time ago were paid off in full and now you only spend what you have. It feels like that’s the sort of lifestyle that would be rewarded with a great credit score, doesn’t it?

Unfortunately, it’s not. You need to borrow, use credit and show that you can manage it in order to build up a great credit score. Living without credit might be great for your bank account, but it’s not so great for your credit score.

What Does Your Credit Score Do

Your credit score serves one purpose and one purpose only: to tell future lenders how much of a risk you are to lend to. If they have nothing to judge your behaviours with credit on, they can’t very much assess how much of a risk you would be as a borrower.

You must have credit to prove you can handle credit, so living without credit is no way to a great credit score. You should borrow, but borrow wisely. Borrowing doesn’t mean you have to live outside your means. Use only what you can manage to pay back, and use it often.

The bright side to a credit score of zero is that it’s the perfect place to build from. You don’t have anything bad on your credit report that you have to recover from; you’re starting from scratch. It won’t take you long before you’re able to build up a great credit score if you think wisely about how much you borrow and where you borrow it from. A great place to start is applying for a credit card with the financial institution you bank with. Use that card, and pay that card down every month on time, and you'll start to see your credit grow.

Have you known anyone with a credit score of zero? Let us know in the comments!