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Is No Credit Better than Bad Credit?

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When it comes to no credit vs. bad credit, it’s typically better to have little to no credit rather than poor credit. However, both scenarios can make it difficult for you to qualify for financial opportunities, as lenders may be hesitant to loan you money until you prove yourself. Fortunately, there are plenty of strategies to give your credit a boost.

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Is no credit better than bad credit?

Generally, no credit is better than bad credit. If you don’t have any credit history, lenders don’t know what kind of borrower you are and whether you tend to repay your debts. However, if you have bad credit, lenders can see any poor decisions or mistakes you’ve made with your credit for as long as they’re on your credit reports. In both instances, lenders may decline your loan applications.

No credit vs. bad credit

Your credit score and history are some of the biggest factors lenders consider when deciding whether to offer you a loan or revolving credit. Here’s what your credit reports and scores may look like if you have no or bad credit.

No creditBad credit
Credit reportsIf you’ve never opened a credit account or haven’t used any credit in a long time, you’re what is known as “credit invisible” — in this case, you likely have no activity on your credit reports.If you have bad credit, your credit report will contain your credit history, including the events negatively impacting your score. This can include missed payments as well as high credit utilization.
Credit scoresSince the activity on your credit reports calculate your credit scores, if you don’t have a credit history, you likely don’t have a score.Bad credit activity that’s reported to the credit bureaus will go onto your credit reports, bringing down your credit scores.

What does having no credit mean?

Having no credit — also known as being “credit invisible” — means that there’s no activity on your credit reports and, as a result, you may not have a credit score. This typically includes people under the age of 18 — in most states, you must be 18 or 19 years old to begin borrowing money — and recent immigrant and older consumers who have never taken out credit or haven’t in a long time.

While not having a credit profile can make it difficult to qualify for loans or revolving credit, you may still qualify with some lenders. For instance, there are credit cards for no credit history as well as lenders who offer auto loans with no credit.

What does bad credit mean?

A bad credit score is a FICO Score below 580 or VantageScore below 600. If you have bad credit, it may be because you’ve made a late payment or your credit utilization ratio needs improvement. These two types of activities are some of the most influential factors on your credit and can bring your score down.

Here’s how bad credit can affect you:

  • May have a hard time qualifying for unsecured debt
  • May have a difficult time finding a place to rent
  • May pay higher interest rates
  • May pay larger down payments

How to build credit with no score

Building credit from scratch can take time, but it can help you gradually prove to lenders that you’re a trustworthy borrower.

  • Authorized user: If you have a loved one with a credit card, consider becoming an authorized user on their card. As an authorized user, you can piggyback on that person’s credit and boost your credit score. The primary cardholder will continue to be responsible for repayment.
  • College student credit card: If you’re a college student with no credit, consider applying for a student credit card. These are credit cards specifically catered to students with little to no credit history. Requirements and limitations vary by lender, but you’ll likely start with a small borrowing amount.
  • Secured credit card or loan: If you own an asset like a home, car or savings account, you may be able to leverage that collateral to qualify for a secured loan. You may also want to consider applying for a secured credit card.
  • Credit builder loan: This type of loan works differently than traditional loans. Instead of giving you the funds upfront, the lender puts credit builder loan funds into a savings account that you can’t access until you pay off the loan.
  • Cosigner support: If you have a loved one with good credit, consider asking them to cosign on a loan. For young borrowers with little to no credit, a common form of that is having a cosigner on a student loan. A cosigner takes on responsibility equal to the borrower’s when it comes to repaying the loan.

How to improve a bad credit score

Whether you have little experience with credit or you’ve made some mistakes along the way, there are steps you can take to improve your credit score and your chances of being approved by lenders.

  • On-time payments: Your payment history plays one of the biggest roles in determining your credit score. A 30-day missed payment can cause your FICO Score to drop by as much as 83 points, whereas paying your bills on time and in full can gradually improve your score.
  • Good credit utilization: After payment history, how much debt you have has the second-most impact on your credit score. To improve your credit score, budget to pay off your debt.
  • Credit report errors: Unfortunately, it’s not uncommon for errors to pop up on credit reports. Carefully look them over and dispute credit report errors with the major credit bureaus.
  • Cosigner or co-borrower support: Just as you can if you have no credit, you can get a loan with a cosigner to improve your chances of approval. As you pay it off, this can help improve your credit over time.
  • Secured debt: While most lenders offer unsecured debt — meaning no collateral is required — if you have bad credit, you may qualify with a lender if you apply for a secured loan or secured credit card. Since your debt is guaranteed by collateral, the lender is taking on less of a risk.
  • Credit counseling: If you find yourself deep in debt and/or you have bad credit, you may need to seek the support of a professional. A certified credit counselor can help you navigate the process of improving your credit and, if you qualify, may sign you up for a debt management plan.