If you don’t plan to borrow money, what difference does your credit score make? Why even sweat it?
As counterintuitive as it seems, you could end up spending more money because you don’t have a credit history. (Though like any other tool, credit used irresponsibly can do more harm than good.) But let’s say you’re a responsible person who wants to avoid debt. Why isn’t it reasonable to avoid credit altogether?
There are several answers to that.
1. Buying a Home Will Be Pricier
If you want to finance a home, you will have more difficulty getting a mortgage, and it will likely be at a higher interest rate than for someone who has a similar financial profile, but has a good credit score. And it may be more challenging to find a lender who is willing to work with you.
2. Renting Isn’t a Cake Walk Either
So you’re not planning to buy a house soon? You may have trouble renting, too. We had a reader reach out to us last week for help because her recently widowed mother was denied an apartment because she didn’t have a credit history (everything had been in her late husband’s name). It is not impossible to rent without a credit score, but you may have fewer choices. Landlords will likely want to check your credit before renting you an apartment to ensure you’re likely to pay them on time and in full. Payment history is the biggest factor in your credit scores, so a credit score or credit report can be helpful in spotting a good tenant.
3. You May Have to Give Up More for Security Deposits
And whether you buy or rent your home, you’ll pay more in deposits. Whether you’re connecting utilities, getting cellphone or cable service, or putting down a deposit to rent, not having a credit score means there’s less information available to judge how likely you are to honor your financial obligations. And without that information, businesses often cover their risk by requiring a larger deposit. While most of these deposits will be refunded, it still means putting up more upfront cash that you may not have.
4. Insurance Will Cost You More
You may pay more for both car insurance and homeowners insurance, because credit score is a factor in determining rates. How big of a factor? We recently heard from Loretta Worters, vice president of communications for the Insurance Information Institute, who said, “Credit score is a really, really good predictor – better than a driving record.”
5. Get Ready for Travel Hiccups
Traveling will be more difficult. You won’t have a credit card to guarantee a hotel room or make reservations for air travel, for example. And if you don’t carry enough cash to pay for gasoline, using a debit card (which you can also do to guarantee a hotel room) “freezes” enough of your balance to cover a large purchase and can leave you without the use of a good chunk of your money. For example, if you use a debit card to put $20 worth of gas in your car, you could be subject to a temporary “block-hold” of $100 and lose the use of your money for up to a week.
How to Build a Credit Score If You Don’t Have One
Most people do have credit scores. If you have student loans, you have a credit score, for example. If you’ve ever had a car loan or mortgage (even if now paid off), you may still have a credit score. But the further those things fade into the past, the less impact they have. And eventually, you may have no credit report or credit score — you are a credit ghost. The same may also be true if you are in a relationship and the other person has everything in their name and nothing in yours. If you’re unsure what your credit profile is like, you can see a free credit report summary, updated every 30 days, at Credit.com.
A credit card, used responsibly, can help boost your scores, and you don’t have to go into debt for that to happen. You can use a credit card strictly as a payment tool that you pay off in full every month, accruing no interest charge. You could use it exactly as you would a debit card, for example, and then immediately make a payment to cover the amount charged. (You can get some expert tips for picking a credit card with no credit history here.) If you have no credit history, a secured credit card is a good place to start and can help you “graduate” to a standard credit card in a year if you use it wisely.
You may be concerned about what will happen if an employer checks your credit and you have no file or a thin file. This is actually something you do not have to worry about. While negative information could hold you back, the absence of any information (and hence the absence of any derogatory information) shouldn’t hurt you.
More on Credit Reports & Credit Scores:
- What’s a Good Credit Score?
- How to Get Your Free Annual Credit Report
- How Do I Dispute an Error on My Credit Report?
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