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If you’re someone with no credit, it’s not necessarily seen as a “bad” thing. It can, however, indicate that there simply isn’t enough information to gauge how reliably you’ll pay back the money you borrow. This is entirely different from having bad credit, which suggests you’ve had financial missteps in the past that have left some negative marks on your credit history.
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What Does Bad Credit Mean?
A “bad” credit score is typically considered to be any score below 580 on a scale from 300 to 850, used by major credit scoring models like FICO and VantageScore. This score range indicates to lenders that a borrower may be a higher risk. As a result, those with bad credit might find it challenging to get approved for loans, credit cards, or might face higher interest rates than those with better credit scores.
Both no credit and bad credit make it harder to borrow money, but each has its own set of challenges and solutions. No credit means you’re just starting, while bad credit requires you to rebuild trust with lenders.
No Credit vs. Bad Credit: What’s the Difference?
As noted, having no credit means you don’t have a credit history for lenders to review. It’s a fairly common situation; for example, young adults just starting their financial journeys or those who have avoided using credit altogether. On the other hand, bad credit implies that you have a history of borrowing but may have missed payments, defaulted on loans, or faced other challenges that negatively impacted your credit score.
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Here’s a breakdown of the main differences between having bad credit and no credit.
No Credit:
- What It Means: You haven’t used credit before, so lenders can’t tell if you’re good at paying back money you borrow.
- Why It Happens: You might still be starting out with managing finances, or you’ve always paid with cash or debit.
- The Main Issue: It’s tough to get loans or credit cards without a history showing you’re reliable.
- Bright Side: You have a clean slate and can start building a good credit history right away.
Bad Credit:
- What It Means: Your credit history shows you’ve had trouble paying back loans or credit cards in the past.
- Why It Happens: Missed payments, borrowing too much or having debts sent to collections can hurt your score.
- The Main Issue: Loans and credit cards may come with high interest rates, or you might not get approved at all.
- Silver Lining: It’s possible to fix bad credit by paying debts and bills on time.
Is 0 Credit Good or Bad?
Neither no credit nor bad credit is ideal, but they pose different challenges. With no credit, you’re a blank slate, which can be both good and bad. Since lenders have no way to gauge your reliability as a borrower, which can make it tough to secure loans or credit cards. However, you also have the opportunity to build a strong credit history from scratch.
Bad credit, however, signals to lenders that you’ve had trouble managing credit in the past. It can be more difficult to overcome, but it’s not impossible. By taking the right steps, you can improve your bad credit over time.
How To Check Your Credit Score
To start understanding your credit situation, you’ll need to check your credit score and review your credit reports. Here’s how you can do it in a step-by-step manner:
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1. Choose a Platform
Begin by selecting an online platform that offers free credit score checks. Many banks, credit card issuers and financial websites provide this service to their users.
2. Access Your Free Annual Credit Reports
You are entitled to receive one free credit report from each of the three major credit bureaus–Equifax, Experian and TransUnion–every year. To access these reports, go to AnnualCreditReport.com, which is the only website federally authorized to provide them for free.
3. Request Your Credit Reports
Once you’re on AnnualCreditReport.com, you will need to fill out a form with your personal information. This includes your name, address, Social Security number and date of birth to confirm your identity. Then, choose which bureau’s credit report you wish to receive. You can request all three at once or space them out over the year.
4. Review Your Credit Reports
After you receive your credit reports, take your time to go through them thoroughly. Check for any inaccuracies, such as payments you made on time that were reported as late or accounts you don’t recognize, which could suggest errors or potential fraud.
5. Identify Areas for Improvement
As you review your credit reports, identify any factors that might be negatively affecting your score. This could include late payments, high balances on your credit cards or even the length of your credit history. Make a note of areas where you can make improvements.
6. Correct Any Errors
If you discover any errors on your credit reports, contact the credit bureau that issued the report. Provide them with any documentation that supports your claim to have the errors corrected. This can help improve your credit score once the inaccuracies are resolved.
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You can get ahead of many credit issues by addressing them quickly. Try following these steps to help you get started.
What Should You Do if You Have Bad Credit?
If you find yourself with a less-than-ideal credit score, don’t despair. Here are some actionable steps you can take to start improving your situation:
- Pay your bills on time: Your payment history is a significant factor in your credit score. Make sure to pay all your bills, including non-credit bills like rent and utilities, on time.
- Reduce your debt: High balances on your credit cards can negatively impact your credit score. Work on paying down your debts, starting with the highest interest rates first.
- Consider a secured credit card: If you’re struggling to get approved for traditional credit cards, a secured credit card can be a good starting point. These cards require a deposit that serves as your credit limit and can help build credit with responsible use.
- Limit new credit inquiries: Each time you apply for credit, it can slightly lower your score. Try to limit applications to those that are necessary.
Final Take
Both no credit and bad credit can be stumbling blocks on your financial journey, but they’re not insurmountable. By understanding the differences between the two and taking proactive steps to build or repair your credit, you can gradually improve your financial health. Remember, building good credit doesn’t happen overnight, but with patience and consistent effort, you can achieve a credit score that opens doors rather than closes them.
Editor's note: This article was produced via automated technology and then fine-tuned and verified for accuracy by a member of GOBankingRates' editorial team.
