Having poor credit or no credit can make it challenging to qualify for a credit card, home loan, or mortgage. That’s because lenders view you as a potential credit risk if you have a history of missed payments or you lack experience managing credit.
The good news is that both situations are fixable—you can bounce back from bad credit and build credit from scratch. But is having no credit worse than having bad credit? Here’s what you need to know.
What Does It Mean to Have No Credit?
Having no credit means that you don’t have active credit accounts reported to the credit bureaus or your history is too limited to calculate your credit score. This could be the case if you’ve never applied for credit, like a credit card or loan, or you haven’t had account activity reported in the past two years.
While it’s common for young adults to find themselves in this situation, a variety of other people may have no credit as well.
If your U.S. accounts are closed or inactive because you leave the country for many years, you could return to a thin credit file, according to Rod Griffin, senior director of public education and advocacy at Experian.
“The same thing is true for new immigrants to the country,” Griffin said in a phone interview with The Balance. “If you moved to the U.S., you wouldn’t have a U.S. credit history until you have credit in your name.”
Other groups of consumers that may find themselves with a thin or non-existent credit history are divorcees, widows, and widowers whose spouses handled all the finances.
Borrowing money is a challenge when you don’t have credit because it’s hard for creditors to measure how likely you are to pay debts on time when you have no credit history.
What Does It Mean to Have Bad Credit?
Bad credit can occur when you have negative marks—such as payments more than 30 days late, bankruptcy, or accounts in collections—on your credit report. Negative marks lower your credit score, making it difficult to get approved for credit at a competitive interest rate.
There are many credit scoring models but the most well-known, FICO, considers bad credit anything below 580. VantageScore, a scoring model jointly owned by all three major credit bureaus Experian, Equifax, and TransUnion, considers bad scores anything at 600 or below.
How long it takes to recover from bad credit depends on the negative records on your report. Generally, late payments, accounts in collections, and Chapter 7 bankruptcy stay on your report for up to seven years. Chapter 13 bankruptcy can linger on your report for up to 10 years. However, the impact a negative mark has on your credit score decreases over time.
Is Having No Credit Worse Than Bad Credit?
It depends on the severity and reason behind the bad credit. If you miss one payment and catch up on the balance, a lender may be willing to remove the late payment with the credit bureaus, putting you right back where you were, Griffin said.
Taking steps like paying off a balance or disputing incorrect records could help you see score improvement, too. In this scenario, having less-than-perfect credit may be better than having no credit simply because you can remedy the issues causing your low score.
While it may be better to have some credit than no credit, it could take a long time to rebuild your credit score. The accounts you have that are in good standing will show lenders evidence that you’re capable of borrowing responsibly, so focus on keeping them in good shape.
“It’s better to have a tool in the tool kit than no tools at all,” Griffin said.
However, if you have more serious, systemic issues—such as an ongoing history of late payments, accounts in collections, or bankruptcy—it could take years to recover from the damage. In this scenario, bad credit could be worse than having no credit at all because it may take longer to rebuild your credit history and improve your score.
When starting from a clean slate, it might take a few months for the first account to appear on your report. Then it could take around six months of payments for FICO to produce a score from that account activity. From there, you could start building a positive payment history without worrying about the multi-year lingering effects of negative marks like bankruptcies.
How to Establish Credit
If you have no credit, taking the following steps could help you build good credit.
Shop for a Secured Credit Card
A secured credit card is often the best type of credit card for no credit history. Secured cards are backed by a security deposit you make when you open the card, which makes them easier to qualify for.
You may be able to get a secured credit card through your bank or credit union, or a credit card company like Mastercard or Discover.
Get a Co-Signer
Getting approved for a loan with a co-signer and making on-time loan payments can help you build your credit history.
Get Utility, Subscription, and Rent Payments Counted
Experian Boost is a free Experian service that lets you add on-time utility and subscription service payments to your credit report, which could help your credit score. In some cases, you may also be able to report on-time rent payments to the credit bureaus through your property management or rent-payment processor to build credit.
Use a Credit Builder Loan
A credit builder loan is a way to build credit without a credit card. It’s an installment loan where you don’t get access to the lump sum upfront. Instead, your monthly loan payments go into a separate account, which are then reported to the credit bureaus, and you get the lump sum loan at the end of the loan term.
How to Rebuild Bad Credit
If you have bad credit, don’t fret—taking these steps could help improve your credit.
Review Your Credit Reports and Dispute Inaccurate Records
Pull your free credit reports from all three credit bureaus at AnnualCreditReport.com once per year and sign up for free credit report monitoring. Check to make sure all records are accurate and report any errors you find.
You can get a free credit report from AnnualCreditReport.com once per week through April 20, 2022.
Pull Your Credit Scores
You can get your score at one of several free credit score sites to see where you stand. Many websites explain which factors are impacting your credit score so you can develop a strategy to improve it.
Make On-Time Payments From Here on Out
Payment history is the most influential factor that affects your credit score, so establishing a record of on-time payments is key. Consider setting up automatic bill payments so you never miss a due date.
Aim to Keep Your Credit Utilization Low
The second-most important factor that affects your credit score is the ratio of your credit card balances to your credit card limits. Paying down your balances to reduce your credit utilization could have a positive effect on your score.
The Bottom Line
While having no credit or poor credit can be a roadblock when applying for a car loan or mortgage, it’s not a permanent roadblock. Following the steps above can help you establish good credit, whether you’re new to credit or rebuilding from bad credit. As time passes, a positive payment history and low credit utilization can help increase your score, which could help you get approved for better terms and interest rates the next time you want to borrow money.