After finding the home of your dreams, the next step before the purchase is a mortgage application. Lenders consider several factors such as your credit history during the approval process. Applicants with no credit or bad credit face limited mortgage options. But are you more likely to get approved if your credit history doesn’t exist or if your credit score is poor? 

Below, we’ll discuss which is worse: bad credit or no credit. We’ll also share why having a healthy credit history is crucial and how you can build – or rebuild – your credit score. 

Bad credit vs no credit: what’s the difference? 

Bad credit and no credit are both similar in that they can have a big impact on your financial well-being. But what’s the difference between bad credit and no credit? Let’s take a look.

No credit

Not having a credit score means that you have a non-existent or limited credit history. If you haven’t taken out a loan before or you don’t have open lines of credit, you lack a credit history. In some cases, you may not have credit because of account inactivity.

Bad credit

When you have bad credit, you have a credit history but lack a record of successful management. For example, if you’ve missed credit card payments, defaulted on loans, or have utility accounts that aren’t in good standing or have been suspended, you are more likely to have a low credit score. 

What is credit? 

Credit refers to your credit history and credit score. Your credit history is a detailed account of your financial obligations: how much money debt you carry, what kind of debt you carry, and how you have managed your debt (paid back the money you owe). 

Equifax, Experian, and TransUnion are the three main credit bureaus in the United States. These credit bureaus keep track of your U.S. credit history and use the information in your credit history to create a three-digit credit score. There are five main factors that credit bureaus take into consideration when they calculate a credit score: 

  • Timeliness of payments
  • Amount of debt 
  • Type of debt 
  • Length of credit history 
  • New loans and lines of credit that have been opened

Some of these factors weigh more heavily on your credit score than others, but all of them impact your score. Credit bureaus calculate your score based on the information on your credit report and the factors above to create a three-digit number between 300-850. The breakdown of credit scores is as follows: 

  • Poor: 300-579
  • 580-669: Fair
  • 670-739: Good
  • 740-799: Very Good
  • 800-850: Good

Why credit is important

Whenever you apply for a loan or attempt to open a new credit card, financial institutions check your credit history and credit score to determine your creditworthiness. Those with higher credit scores are considered lower risk and individuals who have a lower credit score are considered high risk. In other words, a healthy credit score means that you are financially responsible, repay debts on time and hold a small amount of debt. If your credit score is poor, you have managed your debt irresponsibly and a history of making late payments, have previously missed payments, have accounts that aren’t in good standing, or carry excessive amounts of debt. 

Because lenders and service providers view individuals with better credit scores as less risky, they are likelier to be approved for loans and credit cards. Those who have bad credit have a harder time getting approved for loans and credit cards. 

In addition to being approved for lines of credit and loans, your credit can affect the following areas: 

  • Interest rates. If your credit history is high, you’ll be charged less interest on any loans or credit cards you open whereas you’ll be charged more interest if your credit history is poor. An interest rate is the amount of money financial institutions charge consumers for borrowing money. If your interest rates are low, you’ll pay substantially less so having good credit can save you a large amount of money.
  • Insurance premiums. Like interest rates, your credit score can affect your insurance premiums. Consumers who are considered less risky pay less in premiums than those considered high risk. Since your credit history is a reflection of how financially responsible you are, insurance companies believe that it is also a reflection of how responsible you are while driving. If you have bad credit, you can expect to pay higher insurance premiums. 
  • Work. Many employers check the credit history of job applicants to ensure they are hiring the most responsible employees. Because your credit history is deemed a reflection of how your responsible you are, a low credit score might indicate to employers that you may not uphold your obligations at work. There’s also a risk that you will engage in fraud or theft. 
  • Living arrangements. Not only do financial institutions check the credit history of mortgage applicants, but so do landlords. Applicants with low credit scores will be granted lower mortgage amounts; if they’re granted at all. Likewise, landlords reserve the right to refuse rental applications of individuals with poor credit scores. 

How bad credit and no credit affect you

Having good credit affords you a lot more opportunities and can even save you money. If you have bad credit, you may not qualify for high lines of credit or loan amounts – or you may be denied completely. You’ll also spend more if you have bad credit as you’ll be charged more interest on any loans and credit cards that you obtain and will pay more for your auto insurance premiums. Bad credit can also prevent you from securing housing and a job. 

But how can no credit affect you? Without a credit history, creditors don’t have a way to accurately predict the likelihood that you will repay your debts. If you don’t have credit, you may experience some of the same difficulties those who have bad credit experience from non-approval for credit cards and loans to trouble finding housing, and more. 

Both bad credit and no credit means that you have fewer options — neither one is ideal. But which is worse? According to financial experts, bad credit will impact you more severely than no credit. 

How to establish credit

Not having a credit history may not be ideal, but it’s better than having bad credit. No credit means that you’re starting out with a clean slate; financial institutions, property owners, utility providers, and your employer can’t penalize you for mismanaging your debts. Nevertheless, you should work on building your credit because having a credit history provides you with more options. How can you build your credit? Here are some tips that you can use to not only establish your credit history but also keep it in good standing. 

Become an authorized user on a credit card

Becoming an authorized user on a credit card is a great way to build healthy credit. Consider asking a trusted family member or friend if they will add you as an authorized user for one of their credit cards. Doing so will allow you to benefit from the credit history of the primary cardholder. The account will be linked to your credit report, even if you don’t use it, which will help establish your credit score. 

If you choose this option, make sure the primary cardholder manages their debt responsibly. If the primary cardholder uses up their available line of credit or makes late payments, their credit – as well as your own – could be negatively affected. 

Open a secured credit card

A secured credit requires a security deposit. To use this type of card, you deposit an amount of money equivalent to the credit limit of the card. For example, a security deposit of $300 would grant you a $300 limit on a secured credit card. If you fail to make payments, the credit card issuer can use your security deposit to pay your debt. If used responsibly, a secured credit card will establish your credit and a healthy credit score. 

Open an unsecured credit card

While many credit card companies do require a credit history, there are several that don’t have such requirements. With an unsecured credit card, you don’t have to make a security deposit, which means you can use the card without paying anything upfront. 

Do be advised, however, if you don’t have a credit history, you may be required to pay an annual fee and your interest rate may be high (although there are cards available that don’t charge annual fees and offer low-interest rates). Shop around to find the best option that meets your needs before choosing a card. 

Once you open an unsecured credit card, make your payments on-time and for the total amount due. Financial experts recommend paying the balance in full to avoid carrying debt; the amount of debt you carry affects your credit score. If you use an unsecured credit card wisely, you’ll not only build a credit history, but your credit limit (the amount you can borrow) will likely increase, interest rates may decrease, and annual fees may be removed. 

Take out a loan

Taking out a loan isn’t recommended simply for the sake of building credit, but it will help establish your credit history. If you need a car, you could consider taking out an auto loan or if you’re going to school, you could consider a student loan. 

If you don’t have credit, you may need a co-signer to take out a loan. A co-signer is someone like a trusted friend or family member with an established credit history in good standing. Having a co-signer increases your chances of getting approved for a loan and can help you get better terms too. If you fail to make payments on your loan, the co-signer becomes responsible for making payments. 

Pay your bills on time 

While many utility companies and landlords do check your credit score, not all of them do. If you don’t have credit and are able to rent an apartment or open an account with utility companies, make sure you pay our bills on time and for the total amount due. Doing so will establish your credit history, bring up your credit score, and ensure you can hold onto your lease and your utilities. 

Transfer your international credit history 

Nova Credit creates a global Credit Passport that helps people bring their credit history with them when they move to the U.S.. If you’re from countries like Mexico, India, or Canada and have a record of on-time payments at home, you can now use Nova Credit to translate your international credit history into an equivalent report for U.S. lenders. Companies like American Express partner with Nova Credit to incorporate that information directly into their application process and make it easier for you to get approved for credit cards, loans and other products. Once you establish a U.S. credit account using the credit you’ve earned, you can start building a local credit history. 

Here are some cards we suggest for U.S. newcomers. Nova Credit currently connects to international credit bureaus in Australia, Brazil, Canada, India, Mexico, Nigeria, South Korea and the UK.

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How to rebuild your credit 

Bad credit indicates that you haven’t been responsible with your financial obligations and can be detrimental for many reasons. Generally, a credit score below 649 is considered “bad”. The good news is that if your credit score falls into the “bad” range, it doesn’t mean you’re stuck. With good money management and persistence, you can improve your credit score and move it up to a “good”, “very good”, or even the coveted “excellent” range. 

How can you rebuild your credit? Here are some tips that may help you increase your score. 

Check your credit

It’s a good idea to get into the habit of checking your credit report. You are entitled to one free report from all three credit bureaus – Equifax, TransUnion, and Experian – once a year. 

Don’t just check your report to find your score; review it to ensure it does not contain incorrect information such as a credit card that you never opened may be a sign of identity theft or payments that you paid on time may have been processed as late. If you do find any inaccurate information, submit a dispute in writing along with the necessary documentation, to the credit bureau that reported the incorrect information.

Pay down your debts 

The amount of debt you carry affects your credit score, so make sure that you pay down any money you owe. Establish a budget and, if possible, make larger payments than required. Doing so will allow you to pay off your debts faster. 

Consider debt consolidation

If you carry multiple debts, you might want to consider debt consolidation which combines your debts into one monthly payment with a single interest rate. This approach not only makes managing your debt easier, but it also makes it more financially manageable, as you’ll pay less in interest. 

Pay your bills on time 

How you repay your debts has a significant impact on your credit. If you make late payments or miss payments, your credit will suffer. Get in the habit of paying your bills by the due date; if possible, pay them ahead of time. Many credit card companies, lenders, and utility providers offer automatic payments. Your payments will automatically be deducted from your account on the date they are due. Auto payments simplify the process of paying your bills and help to ensure you don’t miss a payment. Just make sure that the amount of money you owe for each bill is available in the account that is linked to auto payments before the due dates or your credit could take a hit. 

Avoid opening new accounts 

Every time you open a new credit card or apply for a loan, your credit report is checked. These credit checks are considered “hard inquiries”, and multiple hard inquiries can bring down your credit. To avoid this issue, avoid applying for new lines of credit or loans. 

Don’t close accounts

When you’re trying to get out of debt and rebuild your credit, closing credit card accounts may be tempting. However, closing these accounts can have a negative impact on your credit. The longer your accounts are open, the better because your credit history includes the length of time your credit cards have been open. 

Open a secured credit card

A secured credit card is a credit card that requires a security deposit. The amount of the security deposit is the amount of credit you have access to. For example, if your deposit is $400, you’ll have access to $400 in credit. Secured credit cards are reported to credit bureaus, so as long as you are responsible, they can boost your credit score. 

The takeaway

Which is worse: bad credit or no credit? While neither one is ideal, building a new credit history is easier than fixing a bad credit history. The good news is that whether you have no credit history or your credit score is poor, there are ways that you can establish your credit or rebuild it, and maintain a healthy credit history. 

More from Nova Credit:

Credit Cards for International Students

Credit Cards Without SSN

American Express Credit Cards

How to Build Credit