In general, no credit is better than bad credit, although both can hold you back. People without a credit history may have a hard time getting approved for today’s best credit cards, for example – while people with bad credit may have trouble applying for credit, renting an apartment, and more.
Fortunately, there is a way out. Whether you’re just getting started with credit or you’ve made some financial mistakes in the past, the answer is simple: Learn what it takes to build your credit score and start working your way toward the benefits of good credit.
Here’s what you need to know about your situation and how to improve it.
No credit history
If you have no credit history, your credit score will not be zero. Instead, it does not exist.
how does it hurt you
Lenders rate people based on how they have used credit in the past. Having a blank credit report with no evidence of your borrowing history makes you appear riskier to lenders. This may increase your chances of being refused a credit card or loan.
However, there are many credit cards designed for people who are just getting started with credit, including student credit cards and credit cards for people without a credit history.
How to improve it
You can’t create a credit score until you start doing the kinds of things that show up on a credit report — open a credit card, for example, or sign up for a service that reports your rental history and pays bills.
If you want to start building a positive credit history, you need to start completing financial formalities that are reported to the three major credit bureaus (Equifax, Experian and TransUnion). Many people start their credit history by getting a credit card for the first time. Other people start their credit history with a car loan or student loan, which may require a co-signature if you don’t have a credit history.
What does it mean to have a bad credit score? Under the FICO scoring form, people with bad credit get scores between 300 and 579. Get your score between 580 and 669 and you will move into the fair credit range; Your score exceeds 670 and you will finally get good credit.
The VantageScore model works similarly. People with very bad credit have a VantageScore between 300 to 499, people with poor credit have scores between 500 to 600, people with fair credit have scores between 601 to 660, and good credit scores start at 661.
how does it hurt you
Financial institutions do not like to lend to consumers with bad credit. People who have made mistakes with credit in the past are seen as more risky than consumers with better credit history. This is why it is difficult to get approved for new credit if you have a bad credit score and why credit issuers allocate higher interest rates to people with bad credit. This is also why landlords, mortgage issuers, car dealers, and even potential employers are sometimes reluctant to work with people with low credit scores.
How to improve it
In most cases, bad credit scores point to past credit errors such as not making credit card payments or not paying your debts. In some cases, people receive bad credit scores after becoming victims of identity theft or other types of credit card fraud. Either way, your job is to figure out how to fix the problem because bad credit can limit access to things you might want in the future, like a mortgage or a car.
If you want to improve your poor credit score, consider applying for a credit card designed for people with bad credit. From there, practice responsible credit habits — for example, make payments on time each month — and see if you can push your credit score into a better range.
Why is having bad credit worse than no credit
If you don’t have credit, there is very little or no evidence to suggest what kind of borrower you would be. On the other hand, if you have bad credit, the lenders have tangible evidence (such as late payments or bankruptcy) that you are more risky to lend.
A bad credit score has many negative effects. Some lenders may reject your applications for credit. And if you are approved for a credit card or loan, you will likely pay higher interest rates. Bad credit may affect your ability to rent an apartment or qualify for a job.
Having no credit exposes you to many of the same negative effects, but someone without credit can often build up a good credit score fairly quickly. Since you don’t have to worry about dealing with a credit report full of scorn, establishing good credit can be as simple as opening an initial credit card and proving to lenders that you can use credit responsibly.
7 tips for building your credit score
Want to build your credit as quickly as possible? Here are seven tips to help you improve your credit score — whether you’re starting from scratch or turning a bad credit score into a better one.
1. Review your credit report
If you want to build good credit, you should get in the habit of checking your credit score regularly and you should also check your credit reports. why? Because the three credit reports created by Equifax, Experian, and TransUnion are the documents on which your credit score is based. By reviewing your credit reports regularly, you’ll know what information is being reported to FICO and VantageScore – and you’ll know if you need to dispute any errors that could harm your credit score.
Many credit issuers offer free credit monitoring services that track changes in both your credit score and your credit report. You can also use AnnualCreditReport.com to get free copies of each of your credit reports. The more you know about what’s going on with your credit score, the better prepared you will be to improve it!
2. Become an authorized user
If you can’t get a credit line on your own, consider becoming an authorized user of someone else’s credit card. An authorized user can make purchases on someone else’s credit line without having to take responsibility for billing. In most cases, any credit account activity – on-time payments, for example – is added to the authorized user’s credit report as well.
Many parents add their teens as approved users to help their kids build credit early. If you haven’t established a credit history yet, becoming an authorized user is a great way to get started.
3. Get a secured credit card
Another good way to build your credit score is to open a secured credit card. These cards offer a small line of credit in exchange for a small security deposit, and most importantly they allow you to demonstrate that you can manage credit responsibly.
If you practice good financial habits, such as paying your bills on time and keeping your balances low, the credit issuer will usually refund your security deposit after a specified period of time. They may even upgrade you to an unsecured credit card. Plus, your responsible credit habits will show up on your credit report and help boost your credit score.
4. Make sure to report your bills
People with no credit history or limited credit history can benefit by taking advantage of services that report monthly bill payments to major credit bureaus. Experian Boost, for example, adds phone bill payments, utilities, and streaming services to your Experian credit report. Read our guide on Experian Boost to learn more.
5. Pay your bills on time
The best way to get credit is to pay your bills on time – every time. Your payment history makes up 35 percent of your FICO credit score and a single miss can have serious negative effects on your credit.
If you want to increase your credit score, try to pay off as much of your statement balance as possible each month. But even if you can only pay the minimum, make sure you make it on time.
6. Keep your credit card balances low
On the FICO credit scoring form, 30 percent of your score comes from the amount of money you owe, often called your credit utilization ratio. The lower your credit card balances, the better. On the other hand, make the most of your credit card, and your credit score will likely go down.
Some people may wonder if making a large purchase on their credit card will harm their credit score. Using too much of your available credit in one purchase may temporarily lower your credit score, but don’t worry. Once you start paying off your balance, your credit score is likely to improve.
7. Avoid applying for too much new credit at once
As your credit score rises, you may be tempted to apply for new credit cards. Unfortunately, applying for new credit too much at once can erase your credit building gains. 10 percent of your FICO credit score is based on recent credit applications, and having too many new credit applications on your credit report can harm your credit score.
How long should you wait between credit requests? In general, it is a good idea to wait at least 90 days. It is better to wait six months.
Is there no better credit than bad credit? Yes – but none of these positions are good for you in the long run. Knowing how to build your credit can help you overcome the obstacles of no credit history or a low credit score.
Whether you are applying for a primary credit card as a way to build a credit history or using a secured credit card to rebuild your credit, be sure to practice responsible credit habits. Make all your payments on time, keep your balances low and avoid applying for more new credit than necessary at once. Track your credit score as it grows and prepare to enjoy all the financial benefits that good credit can offer.