No credit or bad credit: which one is worse?

Quick insights

• Having no credit is different from having a bad credit score, but both can be changed and improved over time.
• Credit scores are an important part of your credit profile.
• Having a bad credit score or no credit score/credit history can limit you from financial opportunities, but there are ways to help build your credit to help improve your chances for approval.

The difference between no credit and bad credit

No credit means you have no credit history or existing credit score. This may imply that you’ve never taken out a credit card, loan, or other line of credit. It could also signify that you haven’t been an authorized user on a primary cardmember’s credit card account. Do not confuse no credit with 0 credit, which is actually not a credit score you can receive.

If you would like to start building your credit from scratch, you can apply for a starter credit card or loan to try to begin establishing a credit history.

Credit score models often have credit scoring ranges that go from poor to exceptional. Credit score models often have credit scoring ranges that go from poor to exceptional. If your credit score falls in the poor category as referenced by some models, you might feel this is "bad credit." While there is technically no definition of a "bad" credit score, in this article the term "bad credit" refers to low credit scores.

How to build credit with no credit history

If you don’t have a credit history there are a few ways you can begin to build your credit. First, you could become an authorized user on a primary cardmember’s credit card account. This means that you have the ability to use that credit card (although the primary cardmember can place limits on card usage). If payments by the primary cardmember are made on time and, when possible, in full, this can positively impact your credit history.

If you aren’t an authorized user but wish to build credit, you could apply for a loan or a credit card to get you started. You may have limited options and they may come with higher annual percentage rates (APRs) and lower credit limits, but establishing a repayment history can be an important first step towards building your credit.

You may wish to apply for credit cards specifically meant for starters looking to build up their credit. Make sure you read the terms and conditions so that you aren’t surprised by fees.

Getting back on track with bad credit

If you have a bad credit score and wish to get your score back on track, there are a few steps you can take. These include, but are not limited to:

• Reviewing your financial situation. How is it that you arrived at this credit score? Understanding your financial habits—such as frequent missed payments or outstanding debts—can help you to pivot and make changes.
• Set up automatic payments. Payment history is an important part of your credit score. If you enroll in automatic payments to avoid late payments, this can create a more positive payment history.
• Establishing a debt repayment strategy. If you have outstanding debts, you may want to consider implementing the debt snowball method or the debt avalanche method. The snowball method is where you begin with your lowest outstanding debt then “roll over” your monthly payments to the next largest amount. The avalanche method prioritizes higher APR loans first. Paying down your debt can also lower your credit utilization ratio, which can improve your credit score.
• Creating a realistic budget. You may want to start prioritizing debt payments, and doing so may mean creating a budget where you adjust your current spending. Are there expenditures you can cut and instead put those funds towards your debts? Can you freeze subscriptions for a few months?

Remember, improving your credit score takes time and consistency, so don’t be alarmed if your score doesn’t improve drastically right away.

Additional tips for managing your credit wisely

Building up healthy financial habits can be an important part of building and maintaining a good credit score. Some of these habits may include:

• Lowering your credit utilization ratio to about 30% or less.
• Monitoring your credit report to keep an eye out for potential inaccuracies that you can report to the credit bureaus.
• Remaining vigilant when it comes to keeping your sensitive information, such as your Social Security number (SSN), protected. For example, shredding personal documents before throwing them away.
• Keeping an eye on your credit score and tracking its overall fluctuations over time.

Improving your credit score for better financial opportunities

Note that your credit score is just one of several factors that lenders consider when it comes to approving you for a line of credit. Other factors, such as your employment history and debt-to-income ratio, are also taken into account.

If you’ve had a financial setback, there are ways you can continue to help improve or maintain your credit score. If your credit score improves and you’ve adjusted your spending habits, you may find that you’ve opened doors to new financial opportunities. With a higher credit score, you could be approved for loans with lower APRs or credit cards with higher credit limits and better benefits, for example.

If you do not have a credit history but have decided to start establishing credit, it can be important to implement healthy habits now so that you can help improve your score over time.

In conclusion

Whether you have no credit score or a bad credit score, establishing consistent, healthy habits can be an essential first step towards building up your credit. You may need to have patience and determination, as it can be difficult at first to create a realistic budget and manage expenses. However, over time you may see the fruits of your labor and unlock future financial opportunities.