In general, having no credit is preferable to having poor credit. Anyhow, having no credit or having a negative credit report can both make it difficult to qualify for loans or credit cards. In both cases, you may be offered higher interest rates or less favorable loan terms. However, though the consequences are similar, having no credit at all and having bad credit are two separate issues.
Having No Credit At All
Your credit report, which includes a history of current debt, existing loans, and payment history compiled by Equifax, Experian, and TransUnion, reveals your ability to pay bills on time and manage debt wisely. Lenders and creditors cannot assess your creditworthiness—your ability to borrow and repay the money, if you do not have a credit report.
Besides, you will not meet the minimum requirements for a FICO or VantageScore credit score if you have no credit history: FICO requires that your credit report include at least one account that is at least six months old and another account that has been reported to the credit bureaus within the last six months. VantageScore requires at least one account on your credit report, with no minimum age requirement.
Having Bad Credit
A low credit score — commonly defined as less than 630 on a scale of 300-850 — makes lenders cautious of providing loans to you because you've made significant credit mistakes in the past. For example, you may have made late payments, used more than 30% of your credit limit, allowed your account to go to collections, or declared bankruptcy.
According to McClarren Financial Advisors in State College, Pennsylvania, having a low credit score is worse than having no credit at all. If you don't have any credit, you can start from scratch. If you have bad credit, you are starting from the bottom, and it will take longer to improve.
How to Repair a Bad Credit History
- Check for mistakes and out-of-date debt. Then, follow up with the credit bureaus to correct any errors or inconsistencies on your report.
- Pay your bills on time. Paying your bills on time will not only improve your credit score but will also save you money. In addition to receiving lower interest rates on your credit accounts, you will avoid being charged a late fee or penalty.
- Set up a payment plan to avoid falling further behind. A payment plan is a cost-effective method of debt repayment. You agree to pay a set amount each month to cover the outstanding debt under the payment plan.
- Keep your credit utilization ratio below 30%. A ratio of less than 30% and greater than 0% is generally considered good.
Once you begin working to repair your credit, it is a good idea to check your score once a month to keep track of your progress. That way, you'll be able to catch any mistakes and see how your actions are affecting your score.
How to Build Credit
- Start with a secured credit card. A secured card is backed by a cash deposit that you make upfront. Secured credit cards are not intended to be used forever. Instead, the goal of a secured card is to build your credit enough to qualify for an unsecured card, which does not require a deposit and offers better benefits.
- Become an authorized user of a relative’s card. Doing so adds that card's payment history to your credit files. Furthermore, being added as an authorized user can shorten the time it takes to generate a credit score.
- There are some alternatives if you do not want to use a credit card to build credit. Experian Boost is a free and simple tool provided by Experian. This service allows you to receive credit for on-time payment of monthly utility, cell phone, and streaming service bills, which has the potential to improve your credit.
It is essential to maintain good credit habits. For example, try to make your payments on time, and if possible, pay at least the minimum. Keep your credit utilization low if you use credit cards. Do not apply for multiple credit accounts at the same time.