No Credit vs. Bad Credit: What’s the Difference

Your credit score may be critically important when it comes to securing a home loan or an auto loan. To assist you in the process, you should keep track of your score at the three major credit reporting companies.

If you do not have a credit history, you may think it is terrible. However, having no credit is not the same as having bad credit. Let us look at the differences between the two.

The difference between no credit and bad credit

What does it mean having no credit?

When you have no credit, it merely means that you have no or limited credit history. Having no or limited credit history is typical with young people or people who have not had their name on any credit card or utility account for an extended period of time.

Having no credit is not necessarily a bad thing. However, you potentially will not be able to get approved for unsecured lines of credit. Over time, you may be able to turn no credit into good credit by following certain steps.

What does it mean having bad credit?
Having bad credit means there are blemishes on your credit report due to creditors having reported collection notices, late payment notices, or high usage notices to the three major credit reporting agencies. Over time, these notices can lead to bad credit.

There are typically six categories that factor into an overall credit score:

• Payment history - High impact – Lenders need to ensure you will repay your debt. Paying all your debts on time should help you to build a better credit score.

• Credit Utilization - High impact - Maintain usage under 30% of your available credit. Going above that amount is negative to most lenders.

• Derogatory remarks - High impact - Have zero derogatory comments, such as missed or late payments, to build and maintain a good score.

• Credit age - Medium impact – Lenders look at the average length of your credit history. The longer your credit history, the better your scores.

• Total credit accounts - Low impact – Lenders like to see a diverse list of credit accounts.

• Hard inquiries - Low impact - Have less than two hard inquiries per year to help build and maintain a good score.

How to turn no credit into good credit

If you are looking to turn no credit into good credit, then you will want to follow these steps:

1. Get a secured credit card

   One of the first steps to establishing a credit history is getting a secured credit card. A secured credit card is a credit card where you make a deposit to the credit card company. This deposit is held as collateral in case you do not pay your credit card.

   There is a good chance that you can get approved for a secured credit card from your bank, financial institution, or credit union. If you can keep your usage under 15% and make your payments on time, you should potentially see some positive movements on your credit score.

2. Become an authorized user on a family's credit card

   Another way you may help turn no credit into good credit is to become an authorized user on a family member’s credit card. This is a popular choice for teenagers to use their parent’s accounts. If you are a parent, you will want to check if your credit card allows for authorized users. Having a family member guide the teen on the proper use of a credit card can help prepare the teen for their financial future.

3. Get credit for paying a utility or phone bill on time

   Finally, placing your name on a utility or phone bill and paying those bills on time may potentially turn no credit into good credit. It is crucial that you do not miss a payment or send in your payment late. Over time, being responsible with your utility or your phone payments may lead to a good credit rating.

How to turn bad credit into good credit

There are several steps you can take that may allow you to turn bad credit into good credit. Here are the three most popular tactics that you could take to improve your credit.

1. Watch your credit scores

   You are entitled to a free annual credit report, consider reviewing one credit report each quarter from one of the three bureaus. If you find incorrect information, it may be removed. As tempting as it might be to enroll in a credit repair program, you can dispute any inaccurate information for free on your own.

2. Pay down debt

   If you owe a large amount of money to your credit cards or other creditors, then you can begin to repair your bad credit by paying down your debt. For instance, having a high usage rate on your credit card can lead to lower credit scores. Try to pay down your credit card until your usage is below 15% of your limit. Over time, the lower usage rate can potentially positively affect your credit score.

3. Pay on time – every time

   Not only will paying your bills on time help your credit score; it may also save you money. In addition to getting lower interest rates on your credit accounts, when you pay your bills on time you will not be charged a late fee or penalty, which can go as high as $35.

How to check your credit reports

One of the easiest ways to check your credit report is to visit AnnualCreditReport.com. You can request a free copy of your credit report from each of the three national credit bureaus. Your free annual credit report does not include credit scores. If you would like to have consistent access to your credit score, you can register with CreditKarma.com. Be aware that Credit Karma does not use FICO score, and instead they will provide you with a Vantage Score. Using a website like Credit Karma will provide you with a general idea of your credit risk.

Understanding how credit works
Understanding the difference between no credit and bad credit could go a long way to helping get a better credit score. Be sure to use the following steps to help you secure good credit, no matter what your current situation. Over time, good credit may allow you to enjoy the ability to get a competitive loan on a home or vehicle purchase.