In a nutshell, you’re better off with no credit history at all than a bad credit history and score. That said, both situations have their own challenges that you should be mindful of when attempting to apply for credit.
If you’re facing either option, you’ll have a hard time getting approved for a credit card with a low interest rate. You may not be approved at all. What’s more, you could also have trouble qualifying for housing, opening utility accounts, or even getting a job in certain industries, since credit history is often used to evaluate your reliability with money as a whole.
Here’s how each situation specifically impacts your finances, and what you can do to build—or rebuild—your credit.
Bad credit vs. no credit
In general, people with poor credit or no credit at all face challenges when applying for certain credit cards, especially ones with a low or promotional APR, lucrative rewards, or other perks. Lenders consider these consumers as higher-risk than those with a good credit history, but for different reasons.
A person with bad credit has demonstrated they struggled to meet their obligations in the past. “From a lender’s perspective, if a consumer has bad credit, the lender has information to suggest the consumer may not pay them back as agreed,” says Freddie Huynh, vice president of data analytics with Freedom Debt Relief. With bad credit, it can take months or years to repair, depending on the extent of the damage.
On the flip side, a consumer without an established credit history has given the lender no information to evaluate. The good news is that it takes as little as six months to establish a credit history and credit score. Either way, the lender will increase the interest rate and/or offer a lower credit limit to compensate for that uncertainty and added risk.
Bad credit history
A “bad” credit score is often considered anything that falls below 580 on the Fair Isaac Corporation (FICO) scoring model. FICO scores are the credit scores used by most lenders and range from 300–850. Here’s how these scores break down:
- Poor: 300–579
- Fair: 580–669
- Good: 670–739
- Very good: 740–799
- Exceptional: 800–850
Another common credit-scoring model is VantageScore. This system works similarly to FICO, though it isn’t quite as common. Still, it’s good to know where your score falls on the VantageScore scale:
- Very Poor: 300–499
- Poor: 500–600
- Fair: 601–660
- Good: 661–780
- Excellent: 781–850
7 tips to rebuild bad credit
If you have bad credit, there are a few steps you can take to improve it over time.
1. Make all your payments on time
The greatest factor impacting your credit score under both the FICO and VantageScore models is your payment history. Paying your bills on time and in full will have a positive impact on your credit score. And this doesn’t only apply to your credit card— you should aim to stay on top of all your bills including utilities, phone, and rent or mortgage. Missing even one payment can do serious damage to your credit.
2. Use credit responsibly
You might think that avoiding your credit card after making a mistake will protect your score, but that’s not true. Credit bureaus rely on your ongoing credit activity to predict how you’ll handle credit in the future. So instead of shying away from credit altogether, consider charging small amounts that you can comfortably pay off right away.
3. Decrease your credit utilization ratio
The second largest factor in determining your FICO credit score is “amounts owed,” or how much credit you use compared to the total amount of credit you have available. This is also known as your credit utilization ratio, which is the amount of revolving credit you’re using divided by the total credit available to you, expressed as a percentage. For example, if you have a credit card with a limit of $5,000 and a balance of $500, your credit utilization ratio would be 10%.
A credit utilization ratio signals to lenders that you’re too reliant on borrowing money to get by. A good rule of thumb is to keep your credit utilization below 30%, according to Experian.
4. Consider applying for a secured credit card
Secured cards are designed for people with less-than-great credit. They’re backed by a cash deposit and usually come with a smaller credit limit. These cards generally have more lax eligibility requirements than unsecured cards. A secured card can be a useful tool in rebuilding your credit, especially if you consistently pay your bill on time and in full. Just be sure that your particular card reports activity to the credit bureaus.
5. Avoid accumulating interest charges and fees
Allowing your debt to snowball because of high interest rates and late fees makes it that much tougher to manage. These charges can quickly add up and cause your credit utilization ratio to rise. Plus, if you let your balance get too big, you might have trouble keeping up with payments. You can avoid this situation by keeping credit usage to a minimum and paying your balance on time and in full each month.
6. Pay down outstanding debt
Any debts you owe will not only affect your credit but your ability to put funds toward other goals, so it’s important to pay down debt as soon as possible, especially if it carries a high interest rate. “If you are rebuilding after a financial crisis, one of the most important things to do is to develop a plan to pay off any credit card debt,” says Huynh. This will not only lower your utilization rate, but make it easier to meet your other financial obligations and future goals.
7. Regularly monitor your credit
Checking your credit reports can help you understand which factors are affecting your credit score the most. For instance, there could be a collections account or even a mistake on your credit report that’s dragging down your score. Reviewing your reports regularly can help you determine what factors you need to work on to improve your credit. You can get a free copy of your credit report from each of the three major credit bureaus (Equifax, Experian, and TransUnion) at annualcreditreport.com.
No credit history
Having no credit history means there is no information about your credit usage reported to the credit bureaus. Therefore, your credit score can’t be generated and does not exist. This happens when you’ve never borrowed money before, such as a credit card, mortgage, or car loan. It can also happen if you’ve only been using credit for a couple of months.
7 tips to build credit from scratch
The good news is that with no credit score, you can begin building good credit in just a few months, as long as you adopt responsible spending habits.
1. Learn the basics of credit
Before diving head first into applying for a credit card, take some time to learn what credit is, how to best manage it, and how it impacts your everyday life. Getting a solid understanding about credit can help you make good financial decisions when it comes time to apply for your first card.
2. Check your credit reports
If you’ve never pulled your credit reports before, it’s a good idea to take a look and see what information is being used to generate your credit score. Keep in mind that each credit bureau collects your data independently, so you’ll want to make sure the information is consistent across your reports. You can get a free copy of your credit reports every week through the end of 2023. (After that, free reports will only be available once per year.)
3. Get payment activity reported
Even if you don’t have a credit card, you may be able to start building your credit score by reporting your current housing or utility payments to the three credit bureaus. This can be done using a third-party service such as Experian Boost, which allows you to input recurring bills to your Experian report. Remember: Your payment history accounts for 35% of your FICO credit score, so ensure you’re making payments on time.
4. Consider applying for a secured or student credit card
Secured credit cards are a solid option for people with no credit, too. Again, these cards are usually easier to qualify for and are backed by a cash security deposit. If you’re in college, a student credit card may be another option for accessing credit with more relaxed eligibility requirements.
5. Avoid carrying debt month-to-month
One big credit myth is that you need to carry a balance to build up a credit history. That’s not the case, however. It is wise to avoid charging transactions to your card that you can’t reasonably pay in full and on time each month. This will help you avoid unnecessary interest charges, which can quickly add up, and keep your utilization low. Don’t worry: You’ll still get credit for using your card even if you pay it off right away.
6. Get added as an authorized user
If you have a trusted friend or family member, such as a parent or spouse, they may be able to add you as an authorized user on their credit card. This gives you the same spending privileges without the legal responsibility of paying the balance. You also inherit some of their positive credit activity, allowing you to build up a score over time. In fact, you don’t actually need to use the card in order for your credit to benefit. Just be sure that the primary cardholder uses it responsibly, as their mistakes will ding your score, too.
7. Regularly monitor your credit score
Keep an eye on your credit score to ensure that you have one, and your responsible credit use is helping it go up over time. Keep in mind that credit reports don’t include your score. You can pay FICO to get your score, but many banks, credit unions, and credit card issuers offer free FICO scores to customers. So check with your financial institutions first.
Starting fresh with building credit is generally better than rebounding from a poor credit history. While neither of these situations are ideal, the good news is that adopting smart financial habits will help you achieve your desired credit score in the future.
Regardless of whether you’re building your credit for the first time or repairing it after a few mishaps, you can begin making a positive impact on your credit history right away. Focus on paying your bills on time and in full each month, using only as much credit as necessary, and monitoring your credit for errors or changes. Finally, remember to be patient. “In both cases, slow and steady generally wins the race,” says Huynh.