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No credit is generally better than bad credit, mainly because no credit is easier to fix. However, lack of credit and a bad credit history cannot similarly complicate your life. For example, you may not be able to qualify for a credit card or loan without credit or with a low credit score, and it may even be difficult for you to rent an apartment on your own.
Interestingly, the steps you need to take to fix your lack of credit and bad credit are pretty much the same. To build a credit history or fix past credit mistakes, you need to find a way to get approved for a loan so you can get on the right track.
Here’s everything you need to know about the difference between no credit and bad credit, and how to make a difference.
No Credit vs Bad Credit: What’s the Difference?
No credit means you have no credit history at all. This may be the case if you have never had a credit card or credit and if you have never had any accounts in your name. When you have no credit, your credit score is not zero. Instead, you have no credit score at all.
Bad credit means that you have a credit history on your credit reports, but you have made mistakes in the past. For example, you may have a history of late payments, or you may have defaulted accounts or bankruptcy. Using the FICO scoring method, any score below 580 translates to a bad score.
Why bad credit is worse than no credit
Generally speaking, no credit history is better than bad credit history. After all, having no credit means you have a clean slate to work with, while having bad credit means that lenders already have evidence that you’ve handled credit recklessly in the past.
For example, with bad credit, you will have to take extra steps to prove your creditworthiness, and it may be difficult for you to get approved for a credit card or loan that can help you prove that you are in a better position.
Bad credit can also affect your ability to rent your own apartment, and you may have to pay sky-high insurance rates. Bad credit can even prevent you from getting the job you’re applying for if your employer asks you to view an amended version of your credit report.
On the other hand, if you don’t have credit, you can usually start improving your score in less time. You don’t have to fix anything from your past and you can start working on having great credit with every timely credit card payment or loan you make.
6 ways to improve your credit score anyway
Whether you have no credit or bad credit, your path to a better future is basically the same. Here are a few steps you can take to get a loan and improve your credit score anyway:
- Review your credit reports. It can help you review your credit reports from all three credit bureaus – Experian, Equifax and TransUnion. This step can help you find any problems in your reports so you can fix them, and you can view this information for free on the AnnualCreditReport.com website.
- Allow any old default accounts or collections. If you have a bad credit history due to default accounts, you must take immediate action to address them. This may mean paying off an overdue debt or contacting a creditor to set up a payment plan.
- Consider a secured credit card or loan builder loan. If you have no credit at all or you have bad credit, a secure credit card issuer may approve you when others won’t. This type of credit card requires you to make a cash deposit as collateral, but your loan payments will be reported to three credit bureaus who will help you build or rebuild your account over time.
- Keep your balances low. If you get approved for any type of credit card, keep your usage rate below 30 percent for best results. This means that for every $500 of available credit, your balance must be below $150.
- Look for a credit builder loan. You can also look into credit building loans, which essentially allow you to make payments into a savings account and those payments will be paid back to you later. Because credit history loans report your payments to credit bureaus, they can help you build credit or improve your credit score.
- Become an authorized user. If someone in your life has excellent credit and is willing to add you as an authorized user to their credit card, let them. As long as the master account holder uses their card responsibly and makes timely payments, this can help you get credit using their cards.
If you have no credit or bad credit, the story is basically the same. The only way to make a difference is to get to work immediately, which means looking for ways to boost or improve your credit.
Luckily, there are ways you can do this, either by responsibly using whatever credit you have now by becoming an authorized user, or by applying for loan products focused on bad credit or no credit.
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