Credit

What’s Worse: Bad Credit or No Credit?

Whether you have bad or no credit, you can improve your credit report with a few simple actions. Learn how to fix bad credit and establish new credit.
A young man holds a credit card while looking at his computer as he learns how to use credit responsibly
By Brandon Renfro
Posted on: September 15th, 2022

Credit is a normal part of most people’s financial lives. Having bad credit can make it harder to obtain financing for things that people typically purchase on credit such as a car or house.

The worse your credit is, the more expensive these things are too because your interest rate will be higher.

But what about if you have no credit? That’s not good either, but it isn’t the same as having bad credit.

Here is what you need to know about bad credit vs. no credit.

What’s Bad Credit?

Whether or not you have good or bad credit is determined by your credit score.

If you have bad credit, that means your recorded credit history includes items that indicate you have not always acted responsibly with debt. In other words, you have something in your past that left a bad mark on your credit.

So, what might that be?

Late payments

Late or missed payments are the typical culprit. Your payment history is responsible for 35% of your total score so even a few reported late payments can make a big difference. It’s very important to make your payments on time.

Too much debt

Having too much debt can cause you to have bad credit even if you’ve made all of your payments on time.

Specifically, having too much debt relative to your credit limit will drag down your score.

This is called your credit utilization.

For example, suppose you have several credit cards with a total combined limit of $20,000 and owe $12,000. Your credit utilization is 60%, which is considered high and will reduce your score.

This factor accounts for 30% of your total score.

Note that your payment history and credit utilization together are responsible for 65% of your overall credit score. It’s very important to manage these well.

Mix of credit

Your credit mix accounts for another 10% of your score. A more diverse credit file that contains different types of loans such as credit cards, car loans, a mortgage, and others is favorable because it shows that you can handle a variety of credit.

Credit scores can fall anywhere between 300 and 850. There are several variations of credit scores, namely FICO and VantageScore. There are technical differences between them and how they weigh different elements in calculating our score but the basic premise is the same. Bad credit is generally considered to be a FICO score under 579, while someone with a credit score up to 669 would still be considered a subprime borrower with only fair credit. Generally, a credit score of at least 670 is considered good.

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What Is Considered No Credit?

If you have no credit, that means you don’t have a reported credit history and you simply do not have a credit score.

Even if you’ve used credit in the past you may still not have a credit history if the lender didn’t report it to the credit bureaus.

Younger people are more likely to have no credit history, such as college students or someone that has just graduated from high school.

When you have no credit, it is difficult for a lender to assess whether you can handle credit responsibly or not because they don’t have any information about how you’ve used credit before.

This is fundamentally different from having bad credit in which you have a low credit score because your history indicates that you are not a good borrower.

Which Is Worse for Your Credit Score? Bad Credit or No Credit?

To recap, bad credit is reflected in a low credit score. It means you have done something to cause your score to be low.

On the other hand, no credit means you don’t have a credit score because you either haven’t used credit, or the credit you have used wasn’t reported.

Bad credit is worse than no credit.

Think of bad credit as something that needs to be repaired, while no credit means you’re just getting started and have a clean slate – but you do need to build it.

The bad news is they have a similar effect on you. With either bad credit or no credit, you will likely find it difficult to borrow money, get approved for a credit card, and maybe even rent a place to live.

Even when you are able to do any of those things it will be more expensive for you than if you had a good credit score and history.

That’s because lenders often base the interest rate they charge you on your credit score and history. If there’s nothing showing them you’re a good risk, they will probably charge you a higher interest rate.

Comparing Bad Credit & No Credit

Tips for Fixing Bad Credit

The key to fixing bad credit is recognizing what makes it bad in the first place. That way you can address the specific problems that are causing it.

For example, if you know that you have a high balance on your credit cards then paying those down will lower your utilization rate and increase your score.

Or, if you have late or missed payments then make sure that you don’t add any more of those to your credit history.

Start by looking at your credit report. This will show you all of the information that has been reported to the credit bureaus.

There are several ways that you can get a free copy of your credit report.

  • The three credit bureaus – Equifax, Experian, and Transunion – can all give you a copy of your credit report.
  • AnnualCreditReport.com is a website that allows you to access a free copy of your credit report once a year. This website also contains a lot of useful information about credit monitoring.

Don’t just assume that everything on your credit report is accurate either.

In a Consumer Report study conducted in 2021, approximately 2,000 of the nearly 6,000 people that participated found at least one error on their credit report.

Look for errors on your own report regularly. If you find one, contact the bureau that is reporting it and have them correct it.

Tips for Fixing No Credit

If you simply have no credit history, then the fix may be a little easier.

To build your credit you need to use it. So, you’ll want to look for ways to do that carefully.

Here are some steps to consider:

Use a credit card

Applying for a credit card may be one of the easiest ways to start building credit.

That doesn’t mean you need to rack up a balance on it either.

You can use it to make the regular monthly payments that you would be paying anyway and simply pay the balance off at the end of each month. This will create a history of on-time payments.

Apply for a small personal loan

Most new borrowers looking to build their credit won’t necessarily want to take out a $30,000 loan for a new car right off the bat. But taking out a personal loan of a few thousand dollars, either to buy an inexpensive used car or for another useful purpose, can help you build credit.

For example, if you take out a loan for $4,000, with a payback term of three years and an interest rate of 10%, your payments would be about $129. Your payments could be quite manageable while you slowly build your credit without racking more debt as you might be tempted to do with a credit card.

Use an installment loan calculator to determine how much you can borrow and what interest rate you need to get a low payment that can help you build your credit.

Find the best personal loan lenders and compare rates on small personal loans.

Report your rent

Rental payments are not typically reported to credit bureaus, but all three will include that information in your report if they receive it.

There are services that will report this information that either you or your landlord can sign up for.

Become an authorized user on another account

This route is particularly helpful for those that may have difficulty obtaining credit on their own or would like a responsible person they trust to help them get started.

When someone adds you as an authorized user on their credit card then the payment history will show up on your report as well. Parents might find this is a good way to help younger children get started.

These are just some examples of easy ways to get started. Anything that gets reported to the credit bureaus will build your credit. Car loans, mortgages, student loans, and bank loans are all options as well.

FAQ

Does checking my credit score or obtaining my credit report hurt my credit?

No, checking your own score or credit report will not hurt your credit or credit score. When a lender checks your credit because you have applied for a loan your score will likely drop temporarily, so try not to apply for too many loans in a short period of time.

How long will it take to build my credit if I have none?

If you are just starting out, it will take about six months to have enough history to generate a FICO score. It will likely take you several years to build a good credit history and reach a high score.

How long does it take to fix a bad credit score?

Some things in your credit history can be fixed quickly, while others may take a lot longer.

If high credit utilization is dragging your score down, this will usually resolve within a few months of paying down your balance. Late payments take longer.

  • A payment that is reported as 30 days late will likely affect your score for a year.
  • A 90-day late payment will negatively affect your score for up to seven years.