Is No Credit Better Than Bad Credit?

If you’ve ever wondered if having no credit is better than bad credit, the answer is simple: bad credit is almost always worse than having no credit.

But why? Especially when people with bad credit often have scores in the same range as those with bad credit. We’ll explain why there’s a difference and what to do depending on which category you fall into.

What does it mean to have no credit history?

When a person has no credit history, it means there’s not enough information for the credit bureaus to calculate a credit score, so they’re assigned a low score as a starting point. Someone without a credit history may also be considered “credit invisible” or “unscored.”

There could be several reasons why someone doesn’t have any established credit:

• They’ve never opened any credit accounts.
• It’s been a long time since they’ve used credit.
• Their payments and accounts were never reported to the credit bureaus.

Not having a credit history means there’s no record of making on-time payments and fully repaying debts. Without this proof of good credit behavior, it can be difficult to qualify for loans, credit cards, auto loans, and mortgages. You may even have problems with rental or employment applications. If you’re approved for credit with no credit history, you’ll likely pay higher interest rates, have shorter repayment periods, and be approved for small loan amounts.

Lenders like to know what to expect from a borrower. Those with an established record of paying on time and in full are ideal credit applicants. Because there’s not enough information for a lender to know what kind of borrower someone without a credit history will be, they err on the side of caution by labeling the person as a “risky” borrower.

What does having bad credit mean?

When someone has bad credit, they’ve had some financial mishaps that have resulted in a low credit score. In this case, the person has an established credit history, but it shows problems being responsible with credit.

Causes of bad credit include:

• Making late credit card or loan payments.
• Defaulting on loans.
• Keeping credit card balances too high.
• Having too many open credit accounts with balances.
• Making late rent or utility payments (these can be reported to the credit bureaus).
• Errors on your credit history (this is why you should check your credit report regularly).

The effects of having bad credit are similar to not having a credit history. You’ll likely have difficulty getting approval for credit, higher interest rates, shorter repayment terms, and smaller loan amounts. There may be fewer products available for borrowers with bad credit since fewer lenders are willing to approve loans and credit cards for someone with bad credit.

Bad credit can also create potential barriers to housing and employment. Credit checks are standard for mortgage applications, rental applications, insurance policies, and setting up accounts for utilities or services like internet. A credit check may even be part of background checks employers run for certain jobs.

Credit histories are like reputations. Sometimes reputations take a hit and need repairing. Having bad credit means working to get people to look beyond our dings and blemishes.

Why is having no credit better than bad credit?

Having no credit means you’re a blank slate as a borrower. While there’s no good credit history information, there’s also no bad information. The lack of bad information means you’ll get more “credit” (pun intended) for your good financial behavior. If you know what to do, you can start seeing your credit score go up in a short time – possibly within six months.

Bad credit, on the other hand, is evidence of risk for a lender because the information in your credit history points to a likelihood of late payments or default. It takes longer to see the effects of good credit behavior because you have to establish a longer pattern of managing money responsibly. Bad credit can take several years to recover from.

Some lenders are willing to give someone with no credit history the chance to prove themselves. Products like student credit cards were created to help young borrowers build credit. Many lenders, however, are less likely to approve someone who’s already made credit mistakes. It doesn’t mean borrowers with bad credit are left with no credit options, but they have to find lenders offering loan products for bad credit.

Building credit from scratch vs. rebuilding credit

When you’re building your credit from scratch, it requires different tactics and goals than rebuilding damaged credit. If you have no credit history, the goal is to create a positive record of good credit behavior. Essentially, you’re building your money management reputation.

The goal of rebuilding credit is to rebuild trust with lenders again. The reality is you’ll be rebuilding that trust for a while. It may also mean spending hours correcting mistakes in your credit history. But don’t let this discourage you! It’s always worth the effort to get your credit history back into good standing. The reward is how much easier good credit makes life.

We’ll share ideas for either building or repairing credit that you can start doing today.

How to build credit from scratch

These simple strategies can help you build a good credit history from scratch.

• Open a credit card. Look for credit cards for building credit.
• Open a secured credit card. If you can’t get approved for a traditional credit card, look for credit cards that require cash deposits to lower a lender’s risk.
• Get a secured loan. If you have a home, auto, or other valuable asset, consider using it as collateral for a secured loan. Take out a small loan that fits your budget and make all your payments on time. But before getting a loan, make sure your payments will be reported to the credit bureaus. You want your hard work to count!
• Get a credit-builder loan. This is a “backward” loan that puts your loan funds into an account while you make payments. When the last payment is made, you get the loan money, and your credit history shows your on-time payments.
• Become an authorized user on an account. This is when someone with good credit adds you as an authorized user on their account, so their good credit behavior appears on your credit history. Lender policies differ regarding authorized users, so do research beforehand.

The most important tip is to use credit wisely. Make every payment on time, keep account balances low, and pay off your balances as soon as possible. When you have no credit history, you can raise your score quickly by being responsible with credit.

How to rebuild credit

Here are tips for rebuilding credit that you can start immediately.

• Correct all mistakes on your credit history. Those mistakes are costing you, so getting them removed is priority #1!
• Pay bills on time. Make all loan, credit card, rent, and utility payments on time. See if you can have your rent and utility payments reported to the credit bureaus so they’ll serve as positive payment history.
• Pay down debt. Lower the balances of any credit accounts you have. As you pay off credit accounts, don’t close them! Keeping accounts open with a zero balance is better for credit than closing them.
• Get a secured credit card. You’ll need to put down a cash deposit to open a secured credit account – and the deposit amount will determine your credit limit. You can then use the card to pay bills, make purchases, and work on your credit history.
• Apply for a credit-builder loan. Some loans are designed specifically to build or improve credit. Unlike traditional loans, the funds from a credit-builder loan are held in a special savings account. You make monthly payments until the loan is fully repaid, at which point you’ll receive the funds.
• Attend credit counseling. While this might not have a direct impact on your credit score, it can help you learn good money behavior or create a debt management plan.

Following these tips can help you repair your credit one payment at a time.

Explore no-credit and bad-credit loan options

Having no credit history might put you in the same credit score range as someone with bad credit, but it can make a big difference when you’re trying to improve your credit.

That being said, even folks with poor credit can boost their scores if they’re willing to work on building a positive payment history for a few years. So don’t be discouraged!

Whether you have bad credit or no credit history, we can work with you to get the financial solution you need to cover unexpected expenses. Apply for an Advance America loan today!