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Is no credit better than bad credit?

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Generally, having no credit is better than having bad credit, though both can hold you back. People with no credit history may have trouble getting approved for today’s best credit cards, for example—while people with bad credit may have trouble applying for credit, renting an apartment and more.

Luckily, there’s a way out. Whether you’re just getting started with credit or you’ve made a few financial mistakes in the past, the answer is simple: Learn what it takes to build your credit score and start working your way toward 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 isn’t zero. Instead, it’s nonexistent.

How it hurts you

Lenders evaluate people based on how they’ve used credit in the past. Having an empty credit report with no evidence of your borrowing history makes you look riskier to lenders. This could increase your chances of being denied for a credit card or loan.

However, there are many credit cards designed for people who are just getting started with credit, including student credit cards and credit cards for people with no credit history.

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—opening a credit card, for example, or signing up with a service that reports your rent and bill payment history.

If you want to start building a positive credit history, you need to start completing financial actions that get 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.

Bad credit

What does it mean to have a bad credit score? Under the FICO scoring model, people with bad credit have scores between 300 and 579. Get your score between 580 and 669 and you’ll move into the fair credit range; bump your score past 670 and you’ll finally have good credit.

The VantageScore model works similarly. People with very poor credit have a VantageScore between 300 to 499, people with poor credit have a score between 500 to 600, people with fair credit have scores between 601 to 660, and good credit scores start at 661.

How it hurts you

Financial institutions don’t like to lend to consumers with bad credit. People who have made mistakes with credit in the past are viewed as riskier than consumers with better credit histories. This is why it’s often difficult to get approved for new credit if you have a bad credit score and why credit issuers assign higher interest rates to people with bad credit. It’s also why landlords, mortgage issuers, auto dealers and even potential employers are occasionally hesitant to work with people with low credit scores.

How to improve it

In most cases, bad credit scores indicate past credit mistakes like missing credit card payments or failing to pay off your debt. In some cases, people receive bad credit scores after becoming victims of identity theft or other types of credit card fraud. Either way, it’s your job to know how to fix the problem because bad credit can limit access to things you may want in the future, like a mortgage or a car.

If you want to improve a poor credit score, consider applying for a credit card designed for people with bad credit. From there, practice responsible credit habits—making on-time payments every month, for example—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’s very little or no evidence to indicate what kind of borrower you will be. On the other hand, if you have bad credit, lenders have concrete evidence (like late payments or bankruptcy) that you are riskier to lend to.

A bad credit score has many negative effects. Some lenders may deny your applications for credit. And if you’re approved for a credit card or loan, you’re likely 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 a person with no credit can often build a good credit score fairly quickly. Since you don’t have to worry about contending with a credit report filled with derogatory marks, establishing good credit can be as simple as opening a starter credit card and proving to lenders that you can use credit responsibly.

7 tips for building your credit score

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.  Review your credit report

If you want to build good credit, you should get in the habit of checking 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 reviewing your credit reports regularly, you’ll know what information is reported to FICO and VantageScore—and you’ll know whether you need to dispute any errors that could be hurting your credit score.

Many credit issuers offer free credit monitoring services that track changes to both 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 score, the better prepared you’ll be to improve it!

2. Become an authorized user

If you can’t get a line of credit on your own, consider becoming an authorized user on someone else’s credit card. An authorized user is able to make purchases on another person’s line of credit without having to be responsible for the bills. In most cases, any activity on the credit account—on-time payments, for example—gets added to the authorized user’s credit report as well.

Many parents add their teenagers as authorized users to help their children 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 secured credit card

Another good way to build your credit score is opening a secured 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 manage credit responsibly.

If you practice 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 may even graduate you to an unsecured credit card. Plus, your responsible credit habits will appear on your credit report and help to boost your credit score.

4. Make sure your bills are reported

People with no credit or limited credit histories can benefit by taking advantage of services that report monthly bill payments to the 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 build achieve credit is by paying your bills on time—every time. Your payment history makes up 35 percent of your FICO credit score and a single missed payment can have serious negative effects on your credit.

If you want to boost your credit score, try to pay off as much of your statement balance as possible every month. But even if you can only afford to make the minimum payment, make sure you make it on time.

6. Keep your credit card balances low

In the FICO credit scoring model, 30 percent of your score comes from the amount of money you owe, often called your credit utilization ratio. The lower you can get your credit card balances, the better. Max out your credit card, on the other hand, and your credit score is likely to drop.

Some people may wonder if putting a large purchase on their credit card will hurt their credit score. Using up 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 applying for too much new credit at once

As your credit score goes up, you may be tempted to apply for new credit cards. Unfortunately, applying for too much new credit at once could erase your credit-building gains. Ten percent of your FICO credit score is based on recent credit applications, and having too many new credit requests on your credit report could hurt your credit score.

How long should you 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 no credit better than bad credit? Yes—but neither of these situations are good for you long-term. 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 establish credit history or using a secured credit card to rebuild your credit, make sure you practice responsible credit habits. Make all of your payments on time, keep your balances low and avoid applying for too much new credit at once. Track your credit score as it grows and get ready to enjoy all of the financial benefits that good credit can offer.

Written by
Nicole Dieker
Personal Finance Contributor
Nicole Dieker has been a full-time freelance writer since 2012—and a personal finance enthusiast since 2004, when she graduated from college and, looking for financial guidance, found a battered copy of Your Money or Your Life at the public library. In addition to writing for Bankrate, her work has appeared on CreditCards.com, Vox, Lifehacker, Popular Science, The Penny Hoarder, The Simple Dollar and NBC News. Dieker spent five years as writer and editor for The Billfold, a personal finance blog where people had honest conversations about money. Dieker also teaches writing, freelancing and publishing classes and works one-on-one with authors as a developmental editor and copyeditor.
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