Are “Bad Credit” and “No Credit” the Same Thing?

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Is this a “flammable” and “inflammable” situation, because we’ve been burned by that before. Literally.
Instead of doing that thing where a blog post asks a question and then makes you read like half the article before answering it, we’re just going to get to the point: No. “Bad credit” and “no credit” are not the same thing.

So what’s the difference?

“No credit history means you’ve never borrowed money from a financial institution. Bad credit means you have borrowed money from a credit provider but made some financial mistakes in the past. Either way, they are both not ideal,” says Natasha Rachel Smith, a personal finance expert at TopCashback.com. “No credit is typically seen amongst high school and college students, and also with people who have been misled to think all forms of credit are bad.”

Remember that FICO scores exist on a scale from 300 to 850. (The higher the number, the better the score.) Having bad credit means having a FICO score of 620 or below—all the way down to 300. Having no credit means you don’t even have a score at all.

According to Kerri Moriarty, Head of Company Development at Cinch Financial, “Having “bad” credit means you’ve demonstrated some kind of negative behavior in the context of your credit history—it could be anything from missing payments, to carrying a very high balance compared to your available credit, opening a lot of new lines of credit at once, or filing bankruptcy for example.”

Moriarty says that “Having ‘no’ credit means that there is no information available that a lender can use to evaluate your ability to borrow money and repay in a responsible fashion. Just because you have no credit, doesn’t mean you have bad credit – it just means that the bank doesn’t know anything about you in the context of credit and that’s a risk in itself, just like the risk of lending to someone with bad credit.”

Simon Zhen, a research analyst at MyBankTracker says that “All kinds of people can have bad credit but it doesn’t mean that they are bad people. You can be wealthy with high income and still have bad credit. Common reasons for bad credit include personal bankruptcy, identity theft, and missed payments. It’s very easy to forget a bill and that can lead to a significant drop in your credit score.”

Who has bad credit?

“Bad credit affects people that have had trouble meeting payment obligations in the past, whatever the cause,” says Liran Amrany, cofounder and CEO of Debitize. “There are typically people that have taken credit in the past, whether through a mortgage or credit card, and failed to pay their amounts due on time—though there are many other factors than can impact your credit as well.”

“In fact,” says Amrany, “some people struggle from bad credit simply because they use most of their credit line—and making more frequent payments or asking for a credit line increase can often help here.”

According to Moriarty, it’s an unfortunate reality that “those with lower incomes are most susceptible to bad credit because their financial situations often leave them with no other option to make ends meet than financing the purchase using credit if they can’t afford it today.”

She adds, “Those that need the financing options the most end up paying the most for them.”

Moriarty adds that “underbanked consumers also tend to fall in the lower income category which creates a terrible cycle of keeping them in the “no” credit category because they don’t have the assets today to establish credit that they can then prove they are responsible with.”

Who has no credit?

According to Ian Atkins, an analyst and staff writer at Fit Small Business, having no credit—also known as having “thin” credit—primarily affects three groups: young adults, those new to the US, and those who never utilized credit.

Here’s what he has to say:

“Young adults often have thin credit. Unless you have a parent who is especially clued in on how important good credit habits are, it’s likely that you graduate with no credit. After high school, though, you’ll typically have opportunities to start building credit. Credit card offers, cell phone plans, apartment leases, auto loans, student loans—they’ll all start building the foundation of your credit history.”

Studies have shown that Millennials who came of age during the housing crash and great recession have tended to be very wary of credit. While their reluctance to take on excessive debt should be applauded, their reluctance to utilize credit accounts could prevent them from establishing their credit—and those delays could cost them in the long run.”

“Those new to the US (immigrants, exchange students, etc.) will have no credit. Differences in national laws and reporting mean that credit scores essentially stop at the border. While that has little impact on tourists, it can be a real problem for those who will be staying in the U.S. for extended periods or for those who will be calling the U.S. home. Regardless of how creditworthy you are in your country of origin, the US credit bureaus will have you showing no credit. And that can mean big issues renting an apartment, getting approved for credit cards, and even getting cell phones.”

“Some folks just don’t ever really have a reason to utilize credit and therefore never really build up a credit profile. Sometimes this is a spouse who relies on their partner to handle all the finances and was never placed on joint accounts. Sometimes this is someone who has always preferred to deal in cash. You’d be surprised how many very successful, high net-worth individuals have thin credit simply because they’re “old school” and only deal in cash. This avoidance of credit isn’t really a problem, until it all of a sudden is.”

How can I build my credit?

According to Smith, “Thankfully, there is an easy solution to build a credit score. If you have no credit, you can apply for a secured credit card to start contributing data to your credit history. Secured credit cards require a security deposit that acts as all or part of your credit limit. They are the easiest form of lending to qualify for if you don’t have a credit history.”

Amrany says that “The steps to improving your credit if you have bad credit, or building credit if you have no credit, are actually not that different. The best way to do either is to get a credit card and use it responsibly.”

“Make sure you keep your utilization low and pay your bills on time,” he says. “If you can’t qualify for a credit card, you can always start with a secured credit card. Within six months, you should be able to qualify for a better, unsecured credit card. If you’re nervous about using a credit card, Debitize can help. Debitize covers your credit card purchases every day—just like a debit card—so you can build credit and earn rewards without worrying about debt, interest, or late fees.”

Zhen also recommends that folks with no credit can “be added as authorized users on the credit lines of other people. This links the strong account history to their credit reports until they can qualify for credit on their own.”

How can I improve my bad credit?

According to Zhen, the first step towards improving your credit “is to remove errors or dispute any inaccuracies that are leading to negative marks on your credit report. This could entail contacting banks, lenders, and credit bureaus to sort out the problem.”

Here’s some good news: You’re actually entitled to one free copy of your credit report per year from each of the three major credit bureaus. Just visit annualcreditreport.com to request a copy.

To remedy bad credit, Moriarty suggests that you take steps to establish a strong repayment history.

“With whatever you have available, like your current credit cards, you want to begin spending a little bit on them each month, so that you can pay off the balance in full, month after month, until you’ve demonstrated to the lender you are good at making payments on time,” she says. “35% of your credit score is determined by your payment history, and it’s the most important factor that the bureaus use to determine your credit score.”

Moriarty also recommends working on your outstanding credit card balances, as “30% of your score is based on your utilization–which means the amount you’re spending (and possible carrying as a balance) on the card compared to the total credit limit. “

“The rule of thumb is not to exceed 30% of your total credit limit, she says, adding, “This is tricky, because your total credit limit amount is more important than the actual amount of debt you owe. It’s not that the company cares how much you’ve spend, they just worry when it looks like you’re spending almost all of your available credit because it sends a signal that you are really strapped for cash.”

“Negative marks fall off your credit report after 7 years,” says Zhen. “So stay consistent with your good credit behavior and your credit will recover just fine.”

Are you having trouble with your credit score? Check out our other blog posts on this subject, and tell us if there’s a question or topic you’d like us to answer in a future piece! You can find us on Twitter at @OppLoans.

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Contributors
Liran Amrany (@LiranAmrany) is the co-founder and CEO of Debitize, a personal finance app that gives users credit card perks without the risks of debt, interest, or late fees. Debitize (@Debitize) is compatible with any credit card and works by automatically paying off your purchases every day – just like a debit card. Liran has a Masters in Financial Engineering from UC Berkeley and, prior to founding Debitize, spent 9 years as a derivatives marketer at JPMorgan.
Ian Atkins (@FitSmallBiz) is an analyst and staff writer for Fit Small Business. He covers small business finance with a focus on traditional and alternative small business lending. Ian has over 9 years working in personal and small business finance.
Kerri Moriarty (@CinchFinancial) is part of the founding team at Cinch Financial, a Boston-based startup building autonomous fiduciary software. Prior to Cinch, she worked as a financial advisor helping individuals plan their financial lives in the long and short term. Being one of those mysterious millennials, she manages most of her life across 5-6 apps on her phone and recognizes no such technology exists for her everyday financial decisions. Big companies have CFO’s working for them – why shouldn’t you? That’s where Cinch comes in.
Natasha Rachel Smith (@TopCashBackUSA) a Personal Finance Expert at TopCashback.com, is based in Montclair, NJ. Natasha’s background is in retail, banking, personal finance and consumer empowerment; ranging from sales to journalism, marketing, public relations and spokesperson work during a 17-year career period. She’s originally from London, UK, but moved to Montclair, New Jersey, USA, several years ago to launch and run the American arm of the British-owned TopCashback brand; a global consumer empowerment and money-saving portal company.
Simon Zhen (@SimonZhen) is a research analyst for MyBankTracker (@mybanktracker), a website that focuses on helping people find the best banks and financial accounts based on their unique relationship with money. He is knowledgeable in consumer banking, deposit accounts, credit cards, and general personal finance topics.