Having no credit or bad credit can complicate your financial life. In general, having no credit is better than having bad credit. But either unestablished credit or a negative credit report can make it difficult to qualify for loans or credit cards. If you’re able to secure financing with either credit issue, you might receive higher interest rate offers or less attractive borrowing terms.
Although the consequences are similar, no credit and bad credit are two different problems. As such, you may need to follow a slightly different strategy depending on which of these two credit obstacles you’re trying to fix.
No Credit and What It Means
Having no credit means that you’ve never applied for a loan, credit card or other financing before. You have zero credit history with the major credit reporting agencies—Equifax, TransUnion and Experian. The Consumer Financial Protection Bureau (CFPB) calls you “credit invisible.” And there are around 26 million U.S. consumers who fit into this category with you.
With no credit history, you won’t meet the minimum requirements for a FICO or VantageScore credit score.
Minimum Credit Score Requirements:
- FICO: Your credit report needs at least one account that’s a minimum of six months old and one account that’s been reported to the credit bureaus in the past six months.
- VantageScore: Your credit report needs at least one account with no minimum age requirement.
In addition to “credit invisible” consumers, the CFPB says another 19 million people have credit reports but don’t qualify for a credit score based on the requirements above. If you’re in this situation, lenders may still consider you to be a borrower with “no credit.” Some 45 million Americans have no credit, either due to a lack of credit history or scores.
Credit reports and scores help lenders judge the risk of doing business with you. (Credit scores predict the likelihood that you’ll pay a credit obligation 90 days late (or worse) within the next 24 months.) When you have no credit history or scores, your creditworthiness is a mystery. Until you establish credit, some lenders may decline your applications due to the unknown risk factor.
Bad Credit and What It Means
Bad credit means you’ve made credit management mistakes in the past. Your credit reports may show a history of late payments, charge-offs, collection accounts, bankruptcies or other derogatory items. Most likely, your credit scores will be bad as well—falling on the lower end of the 300 to 850 scale.
Credit Score Ranges:
A FICO Score over 670 is best when you apply for financing. According to Experian, FICO Scores lower than 670 are ranked as follows.
- Fair: 580-669
- Very Poor: 300-579
VantageScore credit scores are graded a bit differently.
- Fair: 601-660
- Poor: 500-600
- Very Poor: 300-499
Many people struggle with bad credit. Around 33% of consumers have FICO Scores under 670. Meanwhile, nearly 40% of consumers have VantageScore credit scores of 660 or lower.
It’s ultimately up to each individual lender to determine what it considers to be good credit or bad and to decide how much risk it’s willing to take. So, while a FICO Score of 620 might be high enough for you to qualify for a loan with one lender, that score might not satisfy another.
Why Bad Credit Is Worse Than No Credit
As mentioned, both no credit and bad credit can hold you back when you apply for financing. Yet bad credit is typically worse than no credit in the eyes of a lender.
More lenders may be willing to do business with a credit unknown versus someone who already has a checkered past. This is the primary reason why no credit is better than bad credit. The consequences of bad credit can be more severe. For example, some lenders may be willing to offer you a mortgage with no credit. Yet finding a home loan with credit scores that fall below a lender’s cutoff point may be impossible.
6 Ways to Establish Credit
Finding someone to take a chance on you as a credit newbie isn’t always easy. Thankfully, there are some lenders and credit card issuers who offer products to people with no established credit.
If you’re building credit from scratch, the following options may be a good place to start.
Secured Credit Cards
A secured credit card is a special type of account. The issuing bank requires a deposit when you open it. Generally, the amount you put down is equal to the credit limit the card issuer will assign you. This security deposit reduces the card issuer’s risk significantly. So, it’s usually easier to qualify for secured credit cards than unsecured cards, even without an established credit history.
Before you apply for a secured credit card, make sure the card issuer reports to all three major credit bureaus. (Most card issuers do, but some local banks and credit unions may offer limited credit reporting.) It’s also critical to manage your new card responsibly to avoid future credit problems. On-time payments are a must, and it’s best to pay your balance in full every month to avoid high credit utilization and interest fees.
Unsecured Credit Cards for No Credit
If you’re not crazy about putting down a deposit for a credit card, you may want to consider an unsecured credit card instead. Unsecured cards can be harder to qualify for without established credit history. But some lenders do offer beginner credit cards to students or others looking to build credit for the first time.
Of course, interest rates on unsecured beginner credit cards may be higher. Annual fees and less attractive terms may also come with these types of accounts. As with any account, you need to commit to managing your unsecured card well for it to potentially benefit your credit in the long run.
Another way to establish credit is to piggyback on the credit card of a loved one. When a friend or relative adds you onto an existing credit card as an authorized user, there’s a chance it could give your personal credit scores a boost.
For the authorized user strategy to work as effectively as possible, a few puzzle pieces need to fall in place.
- The account should have only a positive payment history. A credit card with a history of late payments could result in bad credit scores for you.
- It’s best to be an authorized user on a card with a low balance-to-limit ratio (a.k.a. credit utilization).
- Older credit cards might benefit you more since credit scoring models pay attention to the age of the accounts on your credit report.
- The card issuer should report account history to the credit bureaus for authorized users as well as the primary account holder. (This doesn’t always happen.)
Credit Builder Loans
Credit builder loans represent a unique way to borrow money and build credit. With this type of financing, the lender holds onto the funds you borrow (usually around $1,000) instead of releasing the money to you right away. You make payments to the lender for the principal loan amount plus interest according to your repayment terms (usually 6 to 12 months).
After your final payment, the lender will release your funds. If you paid on time, you should have several months of positive payment history appearing on your credit reports. (Be sure to confirm that the lender will report the account to all three credit bureaus before you apply.)
This type of loan is an expensive way to build credit and is not likely to be the best option.
It’s not wise to take on educational debt for the sole purpose of building credit. But, if you plan to borrow money to finance your college education anyway, your student loans could help you establish credit as a side effect. As always, it’s crucial to make every payment on time, just like with other accounts. However, if your loan is in a confirmed deferment or forbearance period, those paused payments shouldn’t damage your credit scores.
If you have paid cell phone, utility or streaming service bills regularly and on time, you might benefit from Experian’s Credit Boost. This free service pulls data from your bank accounts and can help establish a credit history with Experian. While it won’t solve a lack of credit data with the other two bureaus, since the service is free it’s worth a try.
4 Steps to Fix Past Credit Mistakes
Rebuilding credit is different than starting from scratch. When you have bad credit, establishing positive accounts alone generally won’t be enough to turn a bad credit score into a good one. You also need to identify your existing credit problems and fix them—either now or in the future.
- Start by reviewing your three credit reports. Visit AnnualCreditReport.com to claim a free report from each credit bureau once every 12 months. Through April 2021, you can download a free credit report from each bureau once a week, as a result of the Coronavirus crisis. Remember, checking your personal credit never hurts your credit scores.
- Dispute credit reporting errors. A study by the Federal Trade Commission found that one in four consumers had errors on their credit reports. Credit reporting mistakes can damage your credit scores and hurt you when you apply for future financing. If you find incorrect or questionable information on your credit report, you have the right to dispute those errors with the appropriate credit reporting agency.
- Establish new credit, if needed. Consider the five options above (secured credit cards, unsecured cards, authorized user status, etc.) if you have few or no positive accounts on your credit report currently.
- Adopt smart credit management habits. As you’re waiting for the old (but accurate) negative items to fall off your credit report, it helps to start managing your current credit wisely. (Most accurate negative items on your credit report come off your report after 7 to 10 years.) Good payment history and low credit card balances (compared to your credit limits) are key. It may also help to understand what makes up your credit score to make sure you’re doing everything possible to put yourself in a better credit situation in the future.
It’s easy to feel impatient when you’re working to build or rebuild your credit. Yet improving credit takes time.
Once you establish your first credit account with a lender that reports to the credit bureaus, it takes six months to qualify for a FICO Score. (Tip: Authorized user accounts may help speed up this time frame.) And becoming eligible for a credit score doesn’t mean you’ll earn a great score right away. If you’re working to overcome past credit mistakes, that process also takes time.
Yet as long as you keep following good credit habits, you should start to reap the benefits of your hard work little by little. In the long run, you’ll be rewarded as long as you consistently follow smart credit management habits. After all, the lifetime value of a good credit score can easily be worth tens of thousands of dollars.
3 credit habits that you need to break
Are you using your credit card responsibly? Or do you have a few bad habits? Take a look at three common bad habits that people have with their credit cards and the best ways to stop doing them.
Habit 1: Pushing the limits
The first bad credit habit is pushing your outstanding balance close to its limit. What’s wrong with that? The first problem is that you’re giving yourself a larger debt load to contend with every month — one that accumulates interest the longer that it sits. It could be very difficult to pay down, and it could even lead to you maxing out your card.
The second problem with this habit is that it leaves you vulnerable to emergencies. You’ve taken up the majority of your available credit, so you can’t depend on it for unexpected payments. What if you need to pay for an urgent repair and there’s not enough room on your card? What can you do?
To avoid that difficult situation, you could apply for an online loan to help you cover the emergency costs and move forward. See how you can apply for an online loan in Ohio when you have no other safety nets to fall back on. It’s important that you only turn to this solution when you’re dealing with an emergency. It’s not for everyday purchases or small budgeting mistakes.
In the meantime, you should try your best to keep your credit utilization at 30% or lower — this means that your balance should be below the halfway point of your limit.
Habit 2: Paying the minimum
You pay your credit card bills on time, but you only give the minimum payment. While this habit can stop you from racking up late fees and penalties, it can still get you into hot water if you’re not careful.
Only paying the minimum for your bill will make it very difficult for you to whittle down the balance, especially when you’re continuing to charge expenses on your card. You’re only taking $20-$25 off a growing pile.
So, what can you do? If you’re paying this amount by choice, stop it — you’re only making things harder for yourself down the line. If you’re paying this amount because you don’t have any more funds, look at your budget to see whether you can cut your monthly costs to get more savings and use them to tackle your balance.
Habit 3: Using it for every single expense
You don’t need to put every single expense on your credit card. Your morning coffee? Your afternoon snack? Putting these small, everyday expenses on your card is a habit that can make your balance climb quickly.
You also don’t want to put some very important expenses on there, like mortgage payments. For one, these payments are large and will take up a significant amount of your credit. Secondly, if you need to use a credit card to make these payments on time, you need to reinvestigate your budget to see whether you can actually afford your living space.
So, what you should you do? Use a debit card, cash or checks to pay for the items above. Only put expenses on your credit card that you’re positive you can pay off in a reasonable timeframe.
Don’t let these bad habits drag you down and get you into financial trouble. Break them now, before it’s too late.
Free credit reports have been extended; here’s why it’s important to check yours regularly
Typically, you’d be able to check your credit report — at least for free — just once annually through each of the three major credit reporting agencies. But thanks to the coronavirus pandemic, credit reports are now more accessible than ever.
Credit reporting companies Equifax, Experian and TransUnion are all offering free credit reports weekly through April 20, 2022.
The move means better insight into your financial health during what, for most, is an economically challenging time. According to experts, it might also be a time that’s ripe for at-risk personal information and identity theft, too — even more reason consumers should be checking their credit on the regular.
Have you checked your annual credit lately? If not, here’s what you need to know about these free nationwide credit reports and how to get them. If you’re not sure where you fit on the credit score spectrum, you may want to start using a credit monitoring service to track changes to your credit score. Credible can get you set up with a free service today.
Free credit reports for all?
The nation’s three credit bureaus initially started offering free weekly credit reporting last year, just after the pandemic began. In early March, they announced they’d extended the offer for another year, this time through April 20, 2022.
To request your free credit reports and access copies, you can go to AnnualCreditReport.com and provide some basic information to verify your identity (things like your date of birth, Social Security Number, and address).
Once your report is ready, you should see a detailed list of all open and closed accounts in your name, your payment history, recent credit activity and more.
Protect yourself from identity theft
There are many reasons why checking your credit activity is important, but chief among them? That’d be the prevalence of data breaches in today’s world — not to mention the risk of identity theft they come with.
“In the past, it was perfectly acceptable for people to check their credit history once a year, but now with security breaches happening on a regular basis, consumers should be monitoring their credit more closely than ever,” said Clint Lotz, president and founder of TrackStar.ai, a predictive credit technology firm.
Lotz said the Equifax breach — which exposed over 147 million Americans’ personal information in mid-July 2017 — is the perfect example of why watching your credit report is important as far as identity theft protection goes. The pandemic, he said, adds an extra layer of risk to things.
“It took them [Equifax] months before they even realized they had been hacked, and considering that they hold files on hundreds of millions of Americans, it’s fair to say that many identities were stolen by the time they caught up to it,” Lotz said. “With many of us worrying about very serious issues not related to our credit, it’s a prime time for that stolen data to be put to work by bad actors in slow, methodical ways and in the hopes that nobody notices it.”
More reasons to check your credit
Checking your credit health often isn’t just good for detecting fraud alerts and to protect your identity, though. You can also monitor your report for errors — things like inaccurately reported late payments, for example — and then dispute those with the credit bureau.
If the error gets corrected, it could improve your credit score and make a jump from bad credit to a FICO score that’s more favorable. Not sure of your credit score? Head to Credible to check your score without negatively impacting it.
You can also use your credit reports and scores to monitor your financial habits — like the timeliness of your payments or how much debt you have left to pay off. Both of these factors can play a big role in your score, as well as how likely you are to get approved for loans, credit cards and other items.
“If you’re taking out a loan, getting insurance or even applying for a new job, checking your credit will allow you to see an overview of what would be seen by others looking at your credit,” said Leslie Tayne, a debt relief attorney with the Tayne Law Group. “Staying up-to-date on your credit reports and information allows you to know exactly where you need to improve.”
Want to be sure your credit is stellar before applying for a loan or insurance policy? Consider Credible’s partner product Experian Boost, which lets you use positive payment history on utilities, streaming and other bills to improve your credit score.
Set up a monitoring service, too
Though checking your credit reports manually is smart, you should also consider signing up for a credit monitoring service. These consumer financial services check your credit information and score regularly and alert you of any changes.
If you’re interested in monitoring your credit or improving your score, head to Credible and learn more about how Experian can help. You can also use Experian Boost to get credit for on-time bill payments.
Have a finance-related question, but don’t know who to ask? Email The Credible Money Expert at [email protected] and your question might be answered by Credible in our Money Expert column.
Do Personal Loans Have Penalty APRs?
Select’s editorial team works independently to review financial products and write articles we think our readers will find useful. We may receive a commission when you click on links for products from our affiliate partners.
The Blue Cash Preferred® Card from American Express, for instance, has a 13.99% to 23.99% variable APR, but the penalty APR is a variable 29.99% (see rates and fees). Penalty APRs usually last for at least six months, but card issuers often reserve the right to extend them — especially when you continue making late payments. A look at the terms for the Citi® Double Cash Card show us that the “penalty APR may apply indefinitely.”
Penalty APRs are certainly not a trap you want to fall into, but it’s not something you usually have to worry about if you have a personal loan. Personal loan lenders can, however, charge late fees upwards of $39 per late payment. Whether your loan charges late fees all depends on how good of a loan you qualify for, and that comes down to your credit score, borrowing history and ability to make your payments.
Personal loans also tend to charge lower interest rates than credit cards, too. The average personal loan interest rate for two-year loans is currently 9.46% according to Q1 2021 data from the Federal Reserve, compared to 15.91% for credit cards.
Typically, interest rates for personal loans range between roughly 2.49% and 24%, but personal loans for applicants with bad credit can come with even higher APR — so do your research before applying.
Other common personal loan fees include:
- Interest: The monthly charge you pay to borrow money
- Origination fee: A one-time upfront charge that your lender subtracts from your loan to pay for administration and processing costs
- Late fee: A one-time fee charged for each payment that you fail to make by the due date or within your grace period
- Early payoff penalty: A fee incurred when you pay off your balance faster than planned (because the lender misses out on months of expected interest payments)
As you can see, personal loans can be costly, even without a penalty APR. It’s obviously best to avoid paying extra fees whenever possible. That’s easier to do when you have a good to excellent credit score, since you’ll qualify for better loan options.
None of the loans on our best personal loan list charge origination fees or early payoff penalties, but some may charge late fees.
Find the best personal loans
For rates and fees of the Blue Cash Preferred® Card from American Express, click here.
Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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