Is No Credit Worse Than Bad Credit?

May 20, 2013, Written By Bill Hardekopf

Many people assume that “no credit” and “bad credit” are the same thing, but that is not the case. This is not like taking a test in school, where 0 and 50 both lead to an “F”. Having no credit at all does not send the same messages as having bad credit, but it could put you in a similar situation. In either case, you should strive to build up a good credit score.

Is no credit worse than bad credit? What can you do to improve your credit score? Check out the tips below to find out.

No Credit vs. Bad Credit

Having no credit typically means that you have never done anything to establish your credit score. You have never used a credit card, gotten a car loan, taken out a mortgage, etc. This is usually the case for young adults, but there are a number of senior citizens who have no credit either. They pay for everything they need in cash and never use credit.

Having bad credit usually means that you have had a credit account, but you didn’t manage it properly. Perhaps you haven’t made your payments on time or have experienced foreclosure, repossession or bankruptcy. No matter what the case may be, you were trusted with money that you didn’t pay back or at least didn’t pay back in a timely manner. Fortunately, this is something you can correct.

Which Is Worse: Bad Credit or No Credit?

Some theories suggest that having no credit is better than having bad credit, mainly because having no credit means that you haven’t had a shot to prove yourself. The problem is that a lot of banks won’t loan money to people without some sort of credit history. Think about it like a job interview. A boss at an oil field can either hire someone with no training straight out of high school or someone who got fired after working 10 years as an oil rigger. Should the boss spend time training and testing the new guy or give a shot to the one with experience? A number of executives would choose option #2.

The reason why having bad credit isn’t as damaging as no credit is because this situation gives lenders something to base their decision on. They can factor in the events that led to your bad credit and see if they would be current problems. If you have been working on your credit or recently saw an increase in your income, the lender may be able to overlook your bad score. He may not be able to look past the fact that you have no credit at all.

Easy Ways to Build Credit

Regardless of whether you have bad credit or no credit, you need to improve your credit score. This will be important if you ever need a loan. Here are some simple ways to boost your current score:

  • Get a credit card and use it. If you can’t qualify for a traditional card, get a secured card. This will still give you a chance to make payments, and it will get some positive marks up on your credit history. As long as you keep your balances low and your payments consistent, your credit score should increase.
  • Get some rent-to-own furniture. Many companies like this will report payments to the credit bureau, and they may not check your credit before you get a loan. Yes, you’ll pay a lot for the furniture this way, but at least you’ll get something out of your payments. Just make sure that the store you work with does report positive payments. Some will only make reports when you don’t pay for a month.
  • Get a small personal loan. Ideally, you should put the money away from the loan and just pay the balance back with the same money. Then, you’ll only be out the cost of the interest.
  • Get a new car. A car loan can do wonders for your credit report because the payments are so sizable. If you cannot get a loan on your own, see if someone you know is willing to cosign with you.

To build your credit score, you may have to borrow money and pay it back. As much of an inconvenience as it may be, you need to have credit to get more credit. Once you take the first steps, you’ll have a much easier time building credit in the future.

The information contained within this article was accurate as of May 20, 2013. For up-to-date
information on any of the terms, cards or offers mentioned above, visit the issuer's website.

About Bill Hardekopf

Bill Hardekopf is the CEO of and covers the credit card industry from all perspectives. Bill has been involved with personal finance for over 15 years. He is a frequent contributor to Forbes, The Street and The Christian Science Monitor.
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