Bad Credit vs. No Credit: Which is Worse?

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 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.

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.

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. A 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.

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.