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How No Credit Differs From Bad Credit

No credit means you don’t have a credit record. Bad credit means you do, and you’ve made some big mistakes.
July 27, 2018
Credit Score, Personal Finance
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If you have no credit, it means creditors don’t have a good way to predict how likely you are to pay your bills as agreed.

Even if you have a reliable income, you’ll be seen as a something of a risk because you don’t yet have a track record. And a lack of credit can result in:

  • Trouble finding a place to live.
  • Having to pay higher utility deposits.
  • Fewer options in case of emergency expenses.
  • Higher interest rates (or getting turned down) if you should want to take out a loan.

No credit vs. bad credit: What’s the difference?

You face similar problems if you have bad credit. A bad credit score — often defined as a score below 630 on a 300-to-850 scale — makes lenders reluctant to extend credit because you’ve made some major credit mistakes in the past. Possible examples are:

If you have no credit, you’re in a better position to get a good credit score. No credit score can make lenders and card issuers wary of you, because it means they don’t know much about you.

You may also have no credit because your credit record may be too limited or too new to generate a credit score. Conversely, if you’ve had credit, but you haven’t used it in the recent past, you may also have thin credit.

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

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

If you have either no credit or bad credit, it’s smart to focus on raising your credit scores. How you’ll do that is different based on your situation.

How to turn no credit into good credit

If you have no credit score, you don’t have a credit history. The good news is that you’re starting with a clean slate.

You have five options to get on the credit radar. They are:

  • Secured credit cards. These cards, as their name suggests, are backed by a security deposit.
  • College student credit cards. Such cards are relatively easy to qualify for if you have no credit.
  • Credit-builder loans can also help you establish credit and do not require upfront cash as secured cards do.
  • Authorized user status. Becoming an authorized user on an old credit card with a good payment record can help put you on the credit map. You are not responsible for payments, though, and its effect is limited.
  • Getting a co-signer. This is risky for the co-signer because he or she is fully responsible for paying off the loan. Failure to pay on your part could jeopardize your relationship.

If you are starting with bad credit

If you have bad credit, you have a different problem with a similar solution.

Instead of trying to build credit, you are trying to rebuild it.

Unlike people with no credit, you have a credit report, and you’d be wise to know what it says. Here’s what to do:

  • Go to annualcreditreport.com to get a free copy of your reports from each of the three major credit reporting agencies.
  • Check your reports for errors, particularly for addresses where you’ve never lived, accounts you don’t recognize or payments amounts that seem off.
  • You can dispute errors online; you have to do it separately for each credit bureau, but it’s worth the time and effort. Incorrect information can significantly damage your scores.

Most credit missteps fall off your credit report in seven years. In the meantime, you can use some of the strategies for establishing credit, particularly credit-builder loans or secured credit cards (if you no longer have open credit accounts), to help re-establish yourself. Recent, positive payment information can help offset mistakes in your past.