Bad credit or no credit: which is better?
As a general rule, having no credit is better than having bad credit, although both can hold you back. People without a credit history may have difficulty getting approved today’s best credit cardsfor example, while people with bad credit may find it difficult to apply for credit, rent an apartment and more.
Fortunately, there is a way out. Whether you’re new to credit or have made a few financial mistakes in the past, the answer is simple: learn what it takes to build your credit score and start making your way to 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 is not zero. Instead, it is non-existent.
How does it hurt you
Lenders rate people based on how they have used credit in the past. Having an empty credit report without any proof of your borrowing history makes you appear riskier to lenders. This could increase your chances of being denied a credit card or loan.
How to improve it
You can’t build a credit score until you start doing the kinds of things that show up on a credit report, like opening a credit card or signing up for a service that reports your rent and bill payment history.
If you want to start building a positive credit history, you need to start taking financial actions 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 a student loan, which may require a co-signer if you have no credit history.
What does it mean to have a bad credit score? According to the FICO scoring model, people with bad credit have scores between 300 and 579. Get your score between 580 and 669 and you will fall into the fair credit range; raise your score beyond 670 and you will finally have good credit.
The VantageScore model works similarly. People with very poor credit have a VantageScore between 300 and 499, people with poor credit have a score between 500 and 600, people with fair credit have scores between 601 and 660, and good credit scores between credit start at 661.
How does it hurt you
Financial institutions do not like to lend to consumers with bad credit. People who have made credit mistakes in the past are considered riskier than consumers with better credit histories. That’s why it’s often difficult to get approved for new credit if you have bad credit, and why credit issuers charge people with bad credit higher interest rates. It’s also why landlords, mortgage originators, car dealerships, and even potential employers are sometimes hesitant to work with people with low credit ratings.
How to improve it
In most cases, bad credit scores indicate past credit mistakes, like missing credit card payments or not paying your debt. In some cases, people receive bad credit scores after being victims of identity theft or other types of credit card fraud. Either way, it’s your job 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 a bad credit rating, consider applying for a credit card designed for people with bad credit. From there, adopt responsible credit habits, such as making on-time payments each month, and see if you can push your credit score into a better range.
Why having bad credit is worse than having no credit
If you have no credit, there is very little or no evidence to indicate what type of borrower you will be. On the other hand, if you have bad credit, lenders have concrete evidence (like late payments or bankruptcy) that it is riskier to lend.
A bad credit score has many negative effects. Some lenders may deny your credit applications. And if you’re approved for a credit card or a loan, you’ll likely have to pay higher interest rates. Bad credit could even 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 with no credit can often establish good credit fairly quickly. Since you don’t have to worry about a credit report full of disparaging notes, establishing good credit can be as simple as opening a starter credit card and prove to lenders that you can use credit responsibly.
7 tips to build your credit score
Do you 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. Check your credit report
If you want to build good credit, you should get into the habit of check your credit score regularly and you should also review 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 regularly reviewing your credit reports, you will know what information is being reported to FICO and VantageScore, and you will know if you need to dispute any errors it could hurt your credit score.
Many credit issuers offer free credit monitoring services which follow the evolution of 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 goes into your credit rating, the better prepared you will be to improve it!
2. Become an authorized user
If you can’t get a line of credit on your own, consider becoming a Authorized user on someone else’s credit card. An authorized user can make purchases on another person’s line of credit without incurring the bills. In most cases, any activity on the credit account – one-time payments, for example – is also added to the authorized user’s credit report.
Many parents add their teens as authorized 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 start.
3. Get a secure credit card
Another good way to establish your credit score is to open a secure credit card. These cards offer a small line of credit in exchange for a small security deposit and, more importantly, allow you to prove that you can handle credit responsibly.
If you adopt good financial habits, such as paying your bills on time and keeping your balances low, your credit issuer will usually refund your security deposit after a designated period of time. They can even graduate 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 your invoices are declared
People with no credit or with a limited credit history can benefit from services that report monthly bill payments to major credit bureaus. Experian Boost, for example, adds your phone, utility, and streaming service bill payments to your Experian credit report. Read our Guide to 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 accounts for 35% of your FICO credit score and just one missed payment can have serious negative effects on your credit.
6. Keep your credit card balances low
In the FICO credit score model, 30% of your score comes from the amount of money you owe, often called your credit utilization rate. The lower your credit card balance, the better. Max out your credit card, on the other hand, and your credit score may drop.
Some people may wonder if put a big purchase on your credit card will hurt their credit score. Using a lot of your available credit on a single purchase could temporarily lower your credit score, but don’t worry. As soon as you start paying off your balance, your credit score is likely to improve.
7. Avoid asking for too many new credits at once
As your credit score increases, you may be tempted to apply for new credit cards. Unfortunately, applying for too much new credit at once could wipe out your credit gains. Ten percent of your FICO credit score is based on recent credit applicationsand having too many new credit applications on your credit report could hurt your credit score.
How long should I wait between credit applications? In general, it’s a good idea to wait at least 90 days. It’s even better if you can wait a full six months.
The bottom line
Is there no better credit than bad credit? Yes, but none of these situations are good for you in the long run. Knowing how to build your credit can help you overcome the obstacles of having no credit history or a low credit score.
Whether you’re applying for a starter credit card as a way to build credit history or using a secured credit card to rebuild your credit, be sure to adopt responsible credit habits. Make all your payments on time, keep your balances low, and avoid asking for too much new credit at once. Track your credit score as it grows and get ready to enjoy all the financial benefits that good credit can offer.
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