What’s the difference between no credit and bad credit? No credit means you have no credit history, but bad credit means you’ve made some mistakes and are paying the price. You may not be able to get a credit card or loan – and if you do, you may need a co-signer or to pay a sky-high interest rate.
While both credit scenarios present problems, having no credit is better than having bad credit. Building good credit from scratch can be easier than rebuilding credit.
Here’s more about the difference between no credit and bad credit.
What Is No Credit?
A person with no credit and a person with bad credit face similar challenges stemming from different issues.
“Having no credit means having no credit history, either positive or negative,” says Markia Brown, a certified financial education instructor and registered financial associate. “This can make it difficult to obtain credit or loans in the future, as lenders have no way of assessing your creditworthiness.”
Consumers with no credit fall into two camps: those with no experience using credit and those with no credit record, also known as “credit invisibles.”
Sometimes you might have a credit history but lack sufficient data for the credit bureaus to calculate a score.
How does this happen? FICO, the most commonly used credit-scoring model, requires you to meet three criteria to generate a credit score:
- At least one account must be open for at least six months.
- At least one account should report activity to a credit bureau within the last six months.
- Your credit report can’t indicate that you’re deceased, which can sometimes happen if you share an account with someone who has died.
If you’re new to credit or haven’t had credit or loan accounts reported to the credit bureaus in the last six months, you may not have a FICO score.
But you could have a VantageScore. Because the FICO competitor’s scoring includes accounts as soon as they’re reported, you can establish a credit score faster.
If your credit file isn’t robust enough to generate a credit score, your score will not be zero.
“If you have no credit, you won’t have a credit score generated. FICO and VantageScore will simply provide a message along the lines of, ‘There is not enough information to generate a credit score,'” says Shiva Bhaskar, consumer credit attorney and co-founder of Tier One Credit, which provides legal resources for credit building.
What Is Bad Credit?
If you have bad credit, it means you satisfy the requirements to generate a score but have misused your credit in the past.
“Bad credit means you have some history of not meeting credit obligations,” Bhaskar says. “You’ve somehow proved that you’re a credit risk. This could be due to late payments, collections, foreclosures, repossession, charge-offsbankruptcies or more.”
Essentially, a bad credit score tells lenders that you have a greater chance of becoming delinquent or defaulting on payments.
Credit scores range between 300 and 850; if you have bad credit, your score will fall somewhere below 580, which FICO considers the cutoff for fair credit. Among those with credit scores, only about 16% fall within the poor range.
Is No Credit Better Than Bad Credit?
With no credit, you must prove you can handle credit responsibly. “Having no credit history can make obtaining loans or credit cards difficult, as lenders have no way of assessing your creditworthiness,” Brown says.
Bad credit can be harder to overcome than no credit, because lenders have seen your past troubles with managing credit. You’ll have to be patient and avoid falling into old bad habits while you wait for negative items to drop off your record.
Brown notes that bad credit can result in higher interest rates, more fees or even having your credit applications denied. “It can also make renting an apartment, obtaining insurance or even getting a job more difficult,” she adds.
How to Build Credit From Scratch
The main way to build a good credit score is to responsibly use credit over time. But if you fall in the “no credit score” camp, you might face a chicken-and-egg situation where you can’t get approved for credit because you don’t have any.
Never fear: You may be able to build credit quickly. “Building a positive credit history typically takes several months to a year,” Brown says. “The time it takes will depend on various factors, such as your payment history and the types of credit accounts you have.”
Ultimately, she notes, using credit responsibly and making payments on time is the key to building a positive credit history.
How to Rebuild Credit
Whether you have no credit or bad credit, building your way to a good credit score takes time and patience. That said, you can rebuild your credit faster by taking the following actions:
- Obtain a secured credit card. Unlike traditional credit cards, secured cards are backed by a deposit, which acts as collateral for the credit line. Brown says you can build a positive credit history by using the card responsibly and paying your bills on time.
- Apply for a credit-builder loan. This type of loan is specifically designed to help build or repair your credit and is available at many credit unions and banks.
- Become an authorized user. A trusted friend or family member can add you as an authorized user on their credit card. “This can help you build a positive credit history by piggybacking off of their good credit,” Brown says. Plus, you don’t have to actually use the card in order to benefit.
- Have your rent reported to the credit bureaus. Your payment history typically doesn’t include rent, so your score isn’t affected by rental payments in most cases. However, some services report rent payment activity to credit bureaususually for a monthly fee. Signing up for one of these services may help you get credit for paying rent on time and build up a good score.