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No Credit vs. Bad Credit: Know the Difference

Credit Score, Personal Finance
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No Credit vs. Bad Credit: Know the Difference

No credit, bad credit: Hear the terms often enough and they can blur together. These credit statuses aren’t one and the same, though. It’s important to know the differences between the two and why you don’t have to be stuck with your current credit standing forever.

How no credit and bad credit are similar

Whether you have no credit or bad credit, one thing’s for sure: You don’t have good credit. And without good credit, you’ll face an uphill battle any time you apply for a loan or credit card.

Potential lenders will want to know that you will almost certainly repay any money that you borrow. They likely won’t risk loaning money or extending credit to those whose creditworthiness is a big question mark or, worse, who have a track record of poor money management.

If you fall into either of these categories, it’s smart to focus on raising your credit scores. How you’ll do that is different, though.

How no credit and bad credit are different

If you have no credit score, you don’t have a credit history. If you have bad credit, it’s likely that you’ve mishandled credit in the past. And these two less-than-ideal credit standings require different solutions.

If you fall in the no-credit category, you haven’t necessarily made any financial mistakes. In this case, a good way to start building that history is to acquire a credit card for people with no credit. Secured credit cards (which require a security deposit) or college student credit cards are typically the easiest to qualify for if you have no credit. A credit-builder loan can also help you establish credit.

Bad credit can be a result of financial missteps, including missing payments, defaulting on loans, or having accounts sent to collections. If you fall into this category and need credit, you’ll need to look for a bad-credit credit card. A secured card or credit-builder loan is a good option in this situation, as well. You also may qualify for a bad-credit personal loan. If you still have open accounts, pay down the balances but don’t close credit accounts if you can avoid it.

Next steps

People with no credit are just starting to build their financial reputation, while those with bad credit are doing damage control.

Moving from one of these less desirable situations to a good credit standing may use different tools, but the method is much the same: Make your payments on time and keep your debt low. It takes diligence and dedication, but it can be done.

This article was updated July 27, 2016. It originally published Dec. 30, 2014.