Is No Credit Better than Bad Credit?

What Does It Mean to Have No Credit?

Lack of credit typically refers to the inability to generate a credit score.

A credit score is the benchmark many lenders use to gauge your creditworthiness. Landlords, cellphone companies, auto rental agencies and employers in certain industries also may use credit scores to help decide if they want to work with you.

Lack of a credit score, also known as credit invisibility, indicates the absence of an active credit report at one or all national credit bureaus (Experian, TransUnion and Equifax).

A credit report is a record of your history of borrowing money and repaying debts.

Most individuals who lack credit have never taken on debt, and as a result have no recorded payment history. These people often include recent immigrants and young people new to the world of personal credit.

It's also possible to become unscoreable after years of positive credit history and good credit scores: If you go six months or more with no borrowing or payment activity, the FICO credit scoring system cannot generate a score from your credit report. This may be most common among retirees who've paid off mortgages and loans, and whose credit cards have fallen into disuse.

What Does It Mean to Have Bad Credit?

If you have bad credit, it means your credit report contains information that causes you to have a very low credit score.

The most popular credit scoring systems, the FICO^® Score^☉ and VantageScore^®, assign three-digit scores ranging from 300 to 850, with higher scores indicating greater creditworthiness. FICO characterizes scores of 579 or below as poor, and those from 580 to 669 as fair. Once you reach a score of 670 or higher, your credit is considered good or better.

Credit report entries that cause serious score drops include:

• Bankruptcy
• Foreclosure on a home or other real estate
• Significant numbers of bills turned over to collection agencies

Missed or late debt payments cause less severe drops in credit scores, but accumulating multiple instances within a few years can also lead to poor scores.

All of these events are evidence of failure to repay a debt according to the schedule agreed upon when you accepted credit. Failure to honor a loan agreement is a red flag for lenders, and the FICO^® Score and VantageScore systems respond to them with significant score reductions.

Which Is Worse, Bad Credit or No Credit?

If you have no credit, when someone runs a credit check on you, your lack of credit report means no credit score can be produced. If you have poor credit, a credit check returns a low credit score.

Having no credit score and having a low credit score are far from the same thing, but they often have the same practical results, which may include:

• Inability to qualify for loans or credit cards
• Ineligibility for instant financing approval on purchases from cellphones to cars
• Landlord or property manager refusal to rent you a house or apartment
• High security deposits on apartments, cable TV and internet equipment, and rental cars

While having no credit or bad credit can be obstacles to getting and using credit, lack of credit typically can be remedied much more quickly than poor credit: A track record of six months' credit usage can enable you to get credit scores.

Poor credit caused by severe credit mishaps can take years to recover:

• Chapter 7 bankruptcy filings remain on your credit reports (and adversely affect your credit scores) for up to 10 years from their filing date.
• Chapter 13 bankruptcy filings, foreclosures, repossessions and collection accounts appear on your credit reports for up to seven years, and may hurt your credit scores as long as they remain.

These events are all likely to hurt your credit scores as long as they persist in your credit reports. Their negative effect on your credit scores lessens over time, but lenders may consider them grounds for disqualifying your application, even if your credit scores have improved.

How to Build Credit if You Have No Score

• Get a student credit card. Individuals with no credit history may establish one by obtaining and using a credit card designed for students. Your first use of the card will generate credit reports at all three national bureaus within a month or two, and six months of usage (these can be small purchases you make and pay off in full each month to avoid interest charges) will enable you to get a FICO^® Score.
• Consider a secured credit card or credit-builder loan. Newcomers to credit can use secured credit cards or credit-builder loans to establish credit. Created to help rebuild bad credit, these products can address credit invisibility as well. Just be sure that your lender reports payments to all three credit bureaus to get the full benefit.
• Use Experian Go™. Experian Go allows you to create a credit report and begin building your credit history. If you have a solid record of paying cellphone or utility bills, sharing that history through the free Experian Boost^®ø feature can help credit invisible individuals generate credit scores based on Experian data immediately.
• Use your credit card. If you have established credit reports that have gone dormant, you can become scoreable by using a credit card to make purchases. Your ability to get a credit score should be restored within a few weeks of use (the time it typically takes for the card issuer to report the activity to the credit bureaus).

How to Build Credit if You Have a Low Score

Avoiding missteps that can further damage your scores while taking action to promote score improvement can get you on the right path.

• Pay all bills on time going forward. Payment history is the most important factor that contributes to your credit scores.
• Pay down credit card balances. Avoid credit card balances that exceed about 30% of your borrowing limit, and work to get balances down to 10% or less of your limit.
• Get a credit-building product. If poor credit prevents you from qualifying for conventional loans or credit cards, secured credit cards and credit-builder loans―products designed to help rebuild bad credit—can help you re-establish a pattern of timely payments that promote credit score improvement.
• Use Experian Boost. If you have a strong record of on-time bill payments for your cellphone, utilities and streaming subscriptions, Experian Boost can bring immediate increases to credit scores based on Experian data.

The Bottom Line

Both lack of credit and poor credit can make it difficult to use credit to finance a home, vehicle or other items you need. While neither situation is ideal, lack of credit is easier to address. Poor credit can take years to rebuild, and is a situation you should do your best to avoid. Neither situation is a life sentence, however, and with time and patience, you can always improve your credit.