Is No Credit Better Than Bad Credit?

Casey Bond

No credit means you have no credit history. But bad credit means you have made some mistakes and are paying the price. You may not be able to get a credit card or loan, and if you do, you may need a co-signer or to pay a sky-high interest rate.

How does having bad credit compare with having no credit score? In short, both present problems, but having no credit is better than having bad credit because building good credit from scratch can be easier than rebuilding credit.

Here's more about the difference between no credit and bad credit.

[Read: Best Credit Cards for Bad Credit.]

Is Having No Credit the Same As Having Bad Credit?

A person with no credit and a person with bad credit face similar challenges stemming from different issues.

"No credit means you have not yet established any credit -- so you have no credit file with the credit bureaus," says Sanjay Baskaran, CEO of One Technologies, which owns the credit monitoring service ScoreSense. "Bad credit means you have (a credit file), but you've made some major blunders."

Consumers with no credit fall into two camps: those with no experience using credit and those with no credit record, or "credit invisibles."

Sometimes you might have a credit history but lack sufficient data for the credit bureaus to calculate a score.

How does this happen? FICO, the most commonly used credit-scoring model, requires you to meet three criteria to generate a credit score:

-- At least one account must be open for at least six months.

-- At least one account should report activity to a credit bureau within the last six months.

-- Your credit report can't indicate that you're deceased. Sometimes this can happen if you share an account with someone who has died.

If you're new to credit or haven't had credit or loan accounts reported to the credit bureaus in the last six months, you may not have a FICO score.

But you could have a VantageScore. Because the FICO competitor's scoring includes accounts as soon as they're reported, you can establish a credit score faster.

If your credit file isn't robust enough to generate a credit score, your score will not be zero.

"If you have no credit, you won't have a credit score generated. FICO and VantageScore will simply provide a message along the lines of, 'There is not enough information to generate a credit score,'" says Shiva Bhaskar, consumer credit attorney and co-founder of Tier One Credit, which provides legal resources for credit building.

If you have bad credit, on the other hand, it means you satisfy the requirements to generate a score but have misused your credit in the past.

"Bad credit means you have some history of not meeting credit obligations," Bhaskar says. "You've somehow proven that you're a credit risk. This could be due to late payments, collections, foreclosures, repossession, charge-offs, bankruptcies or more."

Essentially, a bad credit score tells lenders that you have a greater chance of becoming delinquent or defaulting on payments.

Credit scores range between 300 and 850; if you have bad credit, your score will fall somewhere below 580, which FICO considers the cutoff for "fair" credit. Among those with credit scores, only about 16% fall within the "poor" range.

[Read: Best Starter Credit Cards.]

Is No Credit Better Than Bad Credit?

With no credit, you have a clean slate and must prove you can handle credit responsibly, explains Patrick Beckman, contributing finance editor for the review blog Rave Reviews.

"Think of (no credit) as trying to be friends with a new person you just met or (bad credit as) trying to be friends with somebody whose trust you broke in the past," Beckman says.

Bad credit can be harder to overcome than no credit, Baskaran says, because lenders have seen your past troubles with managing credit. You'll have to be patient and avoid falling into old bad habits while you wait for negative items to drop off your record.

Beckman adds: When you have no credit, expect creditors to show a healthy bit of skepticism when you apply for a loan or credit card. In some cases, they may not approve your application.

"You will need to build credit, which can be done over the course of one to six months, depending on which model you target," Beckman says.

[Read: Best Secured Credit Cards.]

How to Build a Credit Score From Scratch

The main way to build a good credit score is to use credit responsibly over time. But if you fall in the "no credit score" camp, you might face a chicken-and-egg situation where you can't get approved for credit because you don't have any.

Never fear: You may be able to build credit quickly.

Some strategies include:

-- Getting a secured card or credit-builder loan

-- Using a co-signer for a credit card

-- Becoming an authorized user on someone else's card

-- Checking whether your rent and other payments can be reported to the credit bureaus

Casey Bond is a seasoned personal finance writer and editor. Her work has appeared in a number of major national publications including U.S. News & World Report, Yahoo Finance, MSN, The Huffington Post, Business Insider, Forbes and others. Follow her on Twitter @CaseyLynnBond.