No credit vs. bad credit: Key differences

Whether you’re a young adult branching out on your own or you’ve been managing your finances for years, it’s important to know where your credit stands. Things like your credit history, credit report and credit score may affect whether you’re approved for an auto loan, a mortgage or a new credit card. 

But what if you haven’t established any credit yet? Or your score isn’t quite as high as you’d like? Knowing the differences between bad credit and no credit may help you assess your situation. From there, you can make strides toward a brighter financial future.

Having no credit and having bad credit can both come with challenges. So you may want to consider ways to start establishing and building a good credit history. 

Simply staying informed about your credit is one step in the right direction. And if you can take additional steps to build your credit, you may look more trustworthy to potential lenders. 

A credit score is a measure of how likely you are to pay back a loan on time. It gives lenders a general idea of how financially responsible you are. Your score is derived from a variety of factors, including payment history, unpaid debt, length of credit history, types of credit and new credit applications.

Equifax®, TransUnion® and Experian® are the three major national credit reporting agencies. Generally, credit scores range from 300 to 850 points. But each credit reporting agency uses different scoring criteria, so having multiple scores is normal. 

Some people may find they don’t have a credit score. Without a credit history, there’s nothing for the reporting agencies to assess.

It’s a common issue known as credit invisibility—and it affects 26 million adults in the U.S., according to the Consumer Financial Protection Bureau (CFPB). And there are an additional 19 million adults who have insufficient or dated credit histories that are deemed unscorable by credit reporting agencies.

Lower credit scores, or bad credit, may be the result of a number of factors. Things like repeatedly missing payments, using too much of your credit or defaulting on debts may negatively impact your score.

About 12% of adults in the United States have a FICO® credit score of 550 or lower, according to Experian credit data. But no matter where your score stands, with a bit of patience and discipline, getting back on track is possible.

Bad credit can be frustrating, especially for people who don’t know how they got there. But there are ways to learn what’s impacting your score—and what potential lenders are seeing.

In the same way actions like late payments can lead to bad credit, there are factors that can contribute to good credit. Paying your loans on time, avoiding your credit limit and maintaining a long line of credit history are all ways to get and keep a good credit score. But just remember, you have more than one credit score. And scores can vary based on a variety of factors. 

One common credit score is the FICO credit score. Experian reported in 2019 that 21% of Americans had a FICO credit score that could be considered good. And an additional 58% of people had scores that might be considered very good or exceptional. 

But what does it mean to have a good credit score? With a strong credit score and history, you may increase your chances of being approved for a mortgage, a car loan or a new credit card.

Before making assumptions about where your credit stands, consider checking your score. You can do this for free with CreditWise from Capital One. CreditWise is a free tool that helps you identify key factors that may affect your VantageScore® 3.0 credit score, another type of score, provided by TransUnion®.

Free credit reports are also available from each of the three major credit bureaus. You can get yours at AnnualCreditReport.com.

Evaluating the details of a credit report can help provide clarity about lower scores. With credit details and account information all in one place, it may be easier to see what’s causing the biggest impact.

Regularly checking your credit for mistakes or errors is a great habit to form. And if there are any errors, dispute them. Keeping an eye on the information in your reports can also be a way to monitor for possible identity theft. 

You may have heard that checking your credit too often can hurt your score. But it depends on the type of credit check and whether it’s a soft or hard inquiry.

A hard inquiry occurs when you do things like apply for credit or a loan. Housing and job applications could also trigger a hard inquiry. Hard inquiries will affect your score, according to the CFPB. That’s because most credit scoring models take into account how often you apply for credit.

But soft inquiries, the CFPB says, will not change your credit score. With tools like CreditWise, you can access your weekly credit score update for free, without negatively impacting your credit. 

Building and establishing credit may take some time. But implementing good credit habits can make getting on the right track feel easier. Here are a few ways to start, according to the CFPB:

• Use credit cards responsibly: A credit card is one way to start building a credit history. Use it responsibly, and pay your monthly bills on time.
• Stay under your limits: Some credit-scoring formulas account for how often you “max out” your card. So avoid hitting the maximum credit limit on a credit card. And be aware of how much of your available credit you use.
• Become an authorized user: If you have no credit history, explore becoming an authorized user on a trusted friend or family member’s account.
• Check your credit report: Keeping tabs on your credit score can help you spot opportunities for improvement and even catch mistakes.

Whether you’re building or rebuilding credit, Capital One can help provide tools and products to improve your score. You can compare cards to find the right fit for your life. Even if your credit score is a work in progress, there are still credit cards for less-than-perfect credit.