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Bad Credit vs. No Credit: Which is Worse?

Rebecca Lake • May 30, 2023

Is no credit worse than bad credit? The answer might not be what you think. Learn how having no credit vs. bad credit can affect your ability to get approved for loans and lines of credit.

Is no credit worse than bad credit?
Having no credit is better than having bad credit. No credit tells lenders that you don’t have experience using credit yet, while bad credit suggests that you don’t manage money responsibly.

When you want to open a credit card or apply for a loan, it’s usually a given that a lender will check your credit. If you’re a first-time borrower, you might have no credit history at all. On the other hand, if you’ve used credit before but have made some financial mistakes, you might have bad credit instead.

Is no credit worse than bad credit? Not exactly. While having no credit history can make it more challenging to qualify for loans, bad credit could be an even more significant obstacle. Here’s what you need to know about having no credit vs. bad credit.

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What's the difference between no credit and bad credit?

When you borrow money, lenders can report information about your account to the credit bureaus. The three main companies that collect information about credit accounts are Equifax, Experian, and TransUnion.1

The information that’s in your credit report is used to calculate your credit scores. A credit score is a three-digit number that tells lenders how responsibly you manage credit and debt.

The details that can affect your credit score include:

  • Payment history
  • How much of your available credit you’re using (credit utilization)
  • Credit age
  • The types of credit you’re using (i.e., loans or credit cards)
  • How often you apply for new credit

Having no credit means you don’t have a credit report, which means you don’t have a credit score either. There are two main credit scoring models: FICO and VantageScore. Both range from 300 to 850, with 850 being the highest possible score. If you have no credit, then your score would just be zero.2,3

Having bad credit means having a credit history but having some negative marks on your credit report. Some of the factors that can contribute to a poor credit score include:

  • One or more late payments
  • Using a higher percentage (>30%) of your credit limit
  • Applying for multiple credit card or loan accounts in a short period
  • Closing credit card accounts, which shortens your average credit age
  • Collection accounts, defaults, and delinquencies
  • Bankruptcies or foreclosure proceedings
  • Public judgments

What is a bad credit score? If you’re looking at FICO credit scores, which are used by 90% of top lenders in lending decisions, then a bad credit score is anything below 580. For VantageScores, a score below 600 is considered subprime.2,3

Is no credit worse than bad credit?

Is it better to have no credit or bad credit? That’s an important question when you need or plan to borrow money.

Here’s the answer: bad credit is worse than having no credit. Why? Because bad credit can indicate to lenders that you’re not responsible when borrowing money. On the other hand, no credit suggests that you don’t have any experience with using credit yet.

If you have no credit, you could still get approved for loans, though you might be limited to borrowing smaller amounts. Bad credit loans exist for people with less-than-perfect credit, but they can become much more expensive since they usually carry higher interest rates.

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How to fix bad credit

If you have bad credit, you don’t have to stay stuck with it permanently.

Here are some ways to fix a bad credit score and improve your credit score over time:

  • Pay down balances. One of the most important factors in credit scoring is credit utilization, or how much you owe relative to your credit limits. Reducing balances can help improve your score.
  • Raise credit limits. Requesting a credit limit increase can give you a better credit utilization ratio overnight if your overall balances remain low.
  • Dispute credit report errors. Credit reports aren’t always perfect, and if yours has a mistake or error, that could be costing you credit score points. Disputing inaccuracies could help add some points back to your score.
  • Double up on payments. Making on-time biweekly payments vs. monthly payments to credit cards can help reduce what you owe faster, improving your credit utilization ratio.

How to build credit from scratch

Is no credit better than bad credit? Yes, in some ways. But at some point, it’s a good idea to consider how to start building credit, especially if you have some big financial goals, like buying a home.

Here are some steps you can take to begin building a healthy credit footprint:

  • Get a secured credit card. secured credit card is a type of credit card that requires a cash deposit to open, which doubles as your credit limit. Making purchases, then paying them off on time can help build credit.
  • Try a student card. Student credit cards are what they sound like—credit cards for students. If approved, you can build credit by making on-time payments and keeping your balance low.
  • Use a credit builder loan. Credit builder loans allow you to borrow small amounts and build credit history as you pay it back. Some credit builder loans may require a savings account or CD account as collateral.
  • Become an authorized user. Authorized users can charge purchases on someone else’s credit card and benefit from having positive account history show up on their credit reports. This is one of the easiest ways to build credit from scratch.
  • Get a co-signer. A co-signer is someone who agrees to apply for and sign off on a loan alongside you. Asking someone to cosign can help you get a loan so you can start building credit through on-time payments.

Starting building (or rebuilding) credit today

Is no credit worse than bad credit? No, and by now, you should understand why. If you don’t have a credit score yet or your score isn’t where you’d like it to be, it helps to know what you can do to change it. A higher credit score can save you money in the long run if you qualify for lower interest rates.

Interested in borrowing but don’t know where to start? Learn how to get a loan with no credit.

FAQs

Is it better to have no credit or bad credit?

It’s better to have no credit at all than bad credit. Having no credit means you have a clean slate to start building a credit history. Bad credit can suggest to lenders that you haven’t used credit responsibly.

What happens if you have a bad credit score?

A bad credit score can make getting approved for loans or lines of credit harder. If approved, you might pay higher interest rates to borrow money.

What happens when you have no credit score?

Having no credit score means you don’t have enough information on your credit report to generate a score. When you have no credit at all, that can limit your options for borrowing money. Lenders might charge higher rates for loans or credit cards when you have zero credit history.

Is no credit the same as bad credit?

No credit means you have no credit history, and your credit score is nonexistent. Bad credit means you have some credit history, but there are negative marks on your credit report.

How fast can you go from no credit to good credit?

There’s no straightforward answer, as it can take several months to establish credit and several years to build a good credit history. Some of the best ways to build good credit include paying bills on time, keeping credit card balances low, and limiting how often you apply for new credit.

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  • No credit check to apply
  • No annual fees
  • No interest~
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Chime® is a financial technology company, not a bank. Banking services are provided by The Bancorp Bank, N.A. or Stride Bank, N.A., Members FDIC. The Chime Visa® Debit Card and the Chime Credit Builder Visa® Credit Card are issued by The Bancorp Bank, N.A. or Stride Bank pursuant to a license from Visa U.S.A. Inc. and may be used everywhere Visa debit and credit cards are accepted. Please see the back of your Card for its issuing bank.

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1 Information from the Consumer Financial Protection Bureau's "List of consumer reporting companies" as of May 11, 2023. https://www.consumerfinance.gov/consumer-tools/credit-reports-and-scores/consumer-reporting-companies/companies-list/

2 Information from myFICO's "What is a FICO Score?" as of May 11, 2023. https://www.myfico.com/credit-education/what-is-a-fico-score

3 Information from VantageScore's "The Complete Guide to Your VantageScore" as of May 11, 2023. https://www.vantagescore.com/press_releases/the-complete-guide-to-your-vantagescore/

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