No Credit vs. Bad Credit: Is One Better or Worse?

In the United States, your credit rating has a significant influence over your financial health.

Good credit can empower you to save money and qualify for various types of financing. Your credit might also come into play when you try to rent somewhere to live, take out insurance policies, or apply for a job.

It’s safe to say, the condition of your credit matters a great deal.

You may be wondering, is no credit better than bad credit? The truth of the matter is having no credit or having bad credit can cause you problems. With either of these credit statuses, you may be at a disadvantage when you want to apply for financing like a home loan, auto loan, or credit card.

In some cases, lenders might not be willing to work with you at all. Othertimes, a lender might approve your application, but charge you more to borrow money.

If a poor credit score or no credit at all is holding you back from living your best financial life, there’s good news. You can take steps to improve either of these credit situations. In fact, the solutions for improving no credit or bad credit are quite similar.

What does it mean to have credit?

When you say that you “have credit,” it implies that you have a credit file with at least one of the three major credit reporting agencies—Equifax, TransUnion, or Experian. Having credit typically signifies that you qualify for a credit score as well—under either a FICO® or VantageScore credit scoring model.

You can check to see if you have a credit report with each of the three major credit bureaus at AnnualCreditReport.com. Through that website, the Fair Credit Reporting Act (FCRA) gives you the right to a free credit report from all three bureaus once every 12 months.

But, does checking your credit score lower it? A credit check run by a financial institution or lender could potentially lower your credit score by a couple of points at most. However, a personal credit check does not work against your credit rating.

Is it better to have no credit or bad credit? Let's first understand the difference between these credit situations.

What is the difference between having no credit and having poor credit?

No credit means you have no credit history. In other words, your credit reports with all three credit bureaus are blank.

If you don’t have any credit established yet, you are far from alone. According to the Consumer Financial Protection Bureau (CFPB), 26 million Americans (one in ten adults) are in the same position. The CFPB calls this group “credit invisible.”^[1]

Bad credit, on the other hand, indicates that you have a history of managing credit obligations poorly. You have a credit file with at least one of the major credit bureaus (possibly more). Your credit report likely contains at least some negative information. You may also qualify for a credit score, but that number is probably on the lower end of the 300-850 credit score range.

Challenges of having no credit

Many businesses examine credit history and scores to estimate the risk of taking on a new customer. This list includes lenders, service providers, insurance companies, and more. Credit data also helps businesses figure out how much to charge the customers they do approve, in order to remain profitable.

When you have no established credit, lenders and other businesses are unable to judge the level of risk you represent. Are you more likely to pay your credit obligations as promised or default on your debt? Without a previous credit track record to examine, you are an unknown venture.

Therefore, having no credit might cause you problems when you try to:

• Lease an apartment or rental house.
• Qualify for a mortgage, auto loan, personal loan, credit card, or other type of consumer financing.
• Borrow money for your business.
• Secure competitive interest rates and borrowing terms.
• Avoid security deposits on new utility accounts, mobile phones, cable or satellite service, and more.
• Receive a competitive price on your insurance premium.

Challenges of having bad credit

Like no credit, bad credit can also make your financial life more difficult and more expensive. Instead of being an unknown wild card, bad credit scores show that you’ve had some trouble managing credit well in the past.

With a low credit score, you may have a late payment history, collection accounts, high credit utilization, or too many credit inquiries. These and other negative credit behaviors could make a new lender or credit card issuer feel nervous about doing business with you.

Bad credit doesn’t mean you can never borrow money. But until you improve your credit rating, it may be difficult to:

• Secure housing (leasing or buying a home).
• Borrow money for yourself or a business that you own.
• Qualify for the best credit card offers.
• Lock in an attractive interest rate and terms on loans, credit cards, and other types of financing.
• Open a new utility account or lease without supplying a security deposit.
• Get a good deal on your auto insurance premium.
• Land a new job.

The Dave Ramsey point of view

Some personal finance personalities are members of the anti-credit club. They promote the idea that credit reports and scores don’t matter. They also believe that working to achieve good credit is a waste of your time (or worse). One of the most popular promoters of this line of thinking is Dave Ramsey.

Ramsey and others who follow this line of thought regarding credit may be well intentioned. However, they are also wrong. Or at least their approach isn’t right for many, if not most, people.

Sure, it’s possible to make it through life without establishing a credit report or a credit score. But at what cost? The benefits of good credit can easily add up to tens of thousands of dollars throughout your lifetime^[2].

Remember, you don’t have to go into debt to establish good credit. In fact, taking on debt for the purpose of building credit is a bad strategy.

Credit scoring models like FICO and VantageScore reward you when you keep your credit card balance-to-limit rate (aka credit utilization) low. Furthermore, the best way to manage credit cards is to avoid revolving debt from month to month anyway. In other words, pay off the full balance every month if you can.

Buying a house

It is possible to purchase a home with no credit, or even with bad credit in some circumstances. But be prepared for the process to be more complicated and expensive. In many cases, consumers find it impossible to qualify for a mortgage without earning a FICO Score in at least the “fair” credit score range.

When you apply for a mortgage, many lenders will require you to have at least a 620 FICO Score. There are some exceptions to this rule, which might allow you to qualify for a home loan without meeting the minimum credit score requirement^[3]. However, you should be prepared to potentially jump through additional hoops, pay a higher interest rate, and come up with a large down payment.

When you have a strong credit score, by comparison, buying a house can be easier and more affordable. According to the National Association of Realtors, the median home price in March of 2021 was almost $330,000^[4].

Using myFICO’s loan savings calculator^[5], here’s an estimate of how much you might pay for a $330,000 mortgage (30 year, fixed rate) with a FICO Score of 760 versus a FICO Score of 620.

By working hard to earn a FICO Score of 760, you could save $291 per month in the scenario above. Even more meaningful is the amount of interest you stand to save overall — $104.981.

Buying a car

Unless you plan to pay for your next vehicle purchase in cash (which isn’t a bad idea if you have the time to save in advance), you’ll want to prepare your credit before you apply for an auto loan. Finding a car loan when you have bad credit or no credit can be a stressful, costly process.

Like mortgage lenders, auto lenders will also review your credit report and score when you apply for a new loan. (In the case of an auto loan, the lender typically reviews only one credit report and score, rather than three.) And just like the example above, earning a good credit score could potentially result in a big savings.

According to Kelly Blue Book (KBB), the average cost of a new vehicle in February 2021 was just under $41,000^[6].

Assuming you finance a new vehicle loan for 60 months, below is an estimate of how much you would pay with a FICO Score of 720 versus a FICO Score of 580. Auto loan savings potential using the myFICO Loan Savings Calculator__^[5].

In the example above, improving your FICO Score from 580 to 720 you could save $253 per month. On a five-year loan, a 720 FICO Score could reduce the total interest you pay by $15,181. (With a long-term auto loan, the potential savings could be even more significant.)

Getting business credit

As a small business owner, it’s imperative to keep business finances and personal finances separate. For example, you don’t want to use your personal credit cards for business purchases. Yet you’ll often need good personal credit to qualify for business credit in the first place—especially business credit cards.

Many commercial lenders require you, as the owner, to supply a personal guarantee when you borrow money for your business. This provides the lender with added protection in the event your business fails—or simply fails to repay the money it borrowed as promised.

It’s also common for business lenders to review both your business credit score and your personal credit score when you apply for business financing. Good personal credit can work to your advantage here, as it can with other types of financing.

But if you have no personal credit or bad personal credit, you may have a hard time qualifying for the best business loans available, or perhaps qualifying for a business loan at all.

How to establish credit

Learning how to build credit from scratch may be a bit easier than rebuilding a bad credit score. One of the best ways to establish credit for the first time is to open an account with a creditor (aka data furnisher) that reports to at least one major credit bureau—preferably all three of them.

However, you’ll want to apply for accounts that you’re likely to qualify for without any previous credit history. Some types of credit you may want to consider applying for include:

• Credit builder loans
• Secured credit cards
• Unsecured credit cards for no credit

Asking a loved one to add you as an authorized user on an established credit card account might also benefit you.

Just remember, it’s critical to pay any credit account you open on time every month. With credit cards, you’ll also want to keep your utilization rate low so they have a chance to help you build a good credit score rather than hold it back.

How to rebuild credit

Much of the advice you should follow when you’re working to establish credit applies when you’re trying to rebuild bad credit as well. For example:

• You may benefit from opening new accounts that report to the three credit bureaus.
• Becoming an authorized user on a positive credit card account might help you.
• Seek out lenders that are willing to work with your current credit condition (aka look for lenders who approve people with bad credit).
• Responsibly manage any new accounts you open, with on-time payments and low credit utilization.

There are also a few differences between rebuilding bad credit and establishing credit from scratch. When you’re rebuilding your credit:

Maintain realistic expectations. New accounts won’t erase bad credit history, but they might help to counteract some of the damage the negative items on your credit report are causing.

You may need to fix credit errors. If your credit score is suffering because of incorrect negative information on your credit report, you should dispute those items with the appropriate credit reporting agency.

How long does it take to establish or rebuild credit?

Whether you’re building credit from the ground up or working to bounce back from previous credit mistakes, patience is key. Everyone’s credit situation is different. That being said, it can often take six months or more to see significant changes in your credit scores.

Building credit timeline

Around 20 percent of adults in the United States — some 45 million people — don’t qualify for a credit score^[1]. If you’re working to earn a credit score for the first time, you’ll need to satisfy the minimum requirements to qualify for one.

To be eligible for a FICO Score you need a credit report that has the following^[7]:

• One account (or more) that has been open for at least six months
• One account (or more) that has been reported to a credit bureau in the last six months

So, if you’re building credit from scratch, you’ll need to open an account that reports to the credit bureaus and wait six months before you qualify for a FICO Score.

Rebuilding credit timeline

It’s harder to predict how long it will take you to build credit or improve your credit score. Because everyone’s credit report is so different, the timeline for rebuilding bad credit can vary greatly from person to person.

If you want to rebuild your credit as quickly as possible, it’s wise to become familiar with the factors that affect your credit score. From there, you can review your three credit reports and build a customized credit improvement plan that fits your specific situation.

Actions with the most potential to change your credit score quickly include:

• Removing inaccurate negative information from your credit report via the dispute process.
• Lowering your credit utilization rate by either paying down credit card debt), requesting credit limit increases, or some combination of both.Many cardholders ask “does requesting a credit increase hurt your score?” If you are a responsible card user, remain accountable to your loan terms, or make sure to maintain a strong credit utilization rate, requesting a credit limit increase could actually benefit you.

Looking forward

Moving from no credit or bad credit to good credit is a journey that will take time. Yet every credit improvement you make will be another step in the right direction. Long before you reach the finish line, you may start to experience some benefits from your hard work.

Article Sources

1. Consumer Financial Protection Bureau. “A report on the Bureau’s Building a Bridge to Credit Visibility Symposium” https://www.consumerfinance.gov/about-us/blog/report-credit-visibility-symposium/ - Accessed May 14, 2021
2. FINRA. “How Your Credit Score Impacts Your Financial Future” https://www.finra.org/investors/personal-finance/how-your-credit-score-impacts-your-financial-future - Accessed May 14, 2021
3. Fannie Mae. Single Family Selling Guide, page 459. https://singlefamily.fanniemae.com/media/22431/display - Accessed May 14, 2021
4. National Association of Realtors®. “Housing Market Reaches Record-High Home Price and Gains in March” https://www.nar.realtor/newsroom/housing-market-reaches-record-high-home-price-and-gains-in-march - Accessed May 14, 2021
5. myFICO. “Loan savings calculator” https://www.myfico.com/credit-education/calculators/loan-savings-calculator/ - Accessed May 14, 2021
6. Kelley Blue Book. “Average New-Vehicle Prices Continue to Surpass $40,000” https://mediaroom.kbb.com/2021-02-15-Average-New-Vehicle-Prices-Continue-to-Surpass-40-000-Up-More-Than-5-in-January-2021-According-to-Kelley-Blue-Book - Accessed May 14, 2021
7. myFICO. “What are the minimum requirements for a FICO® Score?” https://www.myfico.com/credit-education/faq/scores/fico-score-requirements - Accessed May 14, 2021

About the Author

Michelle L. Black is a leading credit expert with over 17 years of experience in the credit industry. She’s an expert on credit reporting, credit scoring, identity theft, budgeting and debt eradication. See her on Linkedin and Twitter.

About the reviewer

Lauren Bringle is an Accredited Financial Counselor® with Self Financial– a financial technology company with a mission to help people build credit and savings. See Lauren on Linkedin and Twitter.