Having no credit or poor credit can affect your ability to qualify for a credit card or a loan, and you could even struggle to rent an apartment on your own. Fixing both issues is a similar process.
Having no credit is typically better than having bad credit, mostly because having no credit is easier to fix. That said, no credit and poor credit can make your life more difficult in similar ways. For example, you may not be able to qualify for a credit card or a loan with no credit or a low credit score, and you could even struggle to rent an apartment on your own.
Interestingly, the steps you need to take to fix no credit and bad credit are pretty much the same. To build credit history or repair credit mistakes from the past, you have to find a way to get approved for some sort of credit so you can get on the right path.
Here’s everything you need to know about the difference between no credit and bad credit — and how to turn either situation around.
No credit vs. bad credit: What’s the difference?
No credit means you have no credit history at all. This may be the case if you’ve never had a credit card or a loan, and if you’ve never had any sort of bills in your name. When you have no credit, your credit score isn’t zero. Instead, you have no credit score at all.
Bad credit means you do have credit history on your credit reports, but that you have made mistakes in the past. For example, you may have a history of late payments, or you may have had accounts in default or a bankruptcy on your record. Using the FICO scoring method, any score below 580 translates into a bad score.
Why having bad credit is worse than no credit
Generally speaking, having no credit history is better than having bad credit. After all, having no credit means you have a clean slate to work with, whereas having bad credit means creditors already have proof that you handled credit irresponsibly in the past.
With bad credit, for example, you’ll have to take extra steps to prove your creditworthiness and you may struggle to get approved for a credit card or loan that could help you prove you are in a better place.
Bad credit can also affect your ability to rent your own apartment, and you may have to pay sky high insurance rates as well. Bad credit can even prevent you from getting a job you apply for if an employer asks to see a modified version of your credit report.
If you have no credit, on the other hand, you can typically start improving your score on a faster timeline. You don’t have anything from your past to make up for, and you can begin working toward having excellent credit with every on-time credit card or loan payment you make.
6 ways to improve your credit score either way
Whether you have no credit or bad credit, your path to a better future is mostly the same. Here are some steps you can take to build credit and improve your credit score either way:
- Look over your credit reports. It can help to look over your credit reports from all three credit bureaus — Experian, Equifax and TransUnion. This step can help you discover any issues on your reports so you can fix them, and you can see this information for free through the website AnnualCreditReport.com.
- Resolve any old accounts in default or collections. If you have bad credit due to accounts in default, you’ll want to take steps to resolve them immediately. This can mean paying off past due balances or reaching out to the creditor to set up a payment plan.
- Consider a secured credit card or a credit-builder loan. Whether you have no credit at all or bad credit, a secured credit card issuer may approve you when others will not. This type of credit card requires you to put down a cash deposit as collateral, but your credit payments will be reported to the three credit bureaus, which will help you build or repair your score over time.
- Keep balances low. If you do get approved for a credit card of any kind, keep your utilization rate below 30 percent for the best results. This means that for every $500 in available credit you have, you should keep your balance below $150.
- Look for a credit-builder loan. You can also look into credit-builder loans, which essentially let you make payments to a savings account, and those payments will get refunded to you later. Since credit-builder loans report your payments to the credit bureaus, they can help you build credit or improve your credit score.
- Become an authorized user. If someone in your life has excellent credit and a willingness to add you as an authorized user on their credit card, let them. Provided the primary account holder uses their card responsibly and makes on-time payments, this can help you build credit by piggybacking off theirs.
Whether you have no credit or bad credit, the story is mostly the same. The only way to turn your situation around is to get to work right away, and that means looking for ways to build or improve your credit.
Fortunately, there are ways you can do just that, either by using any credit you have now responsibly, becoming an authorized user or applying for credit products geared to poor credit or no credit.