If you’re anti-credit score or just plain afraid of credit, you might want to rethink that stance. You’re hurting yourself financially in the long run.
As of 2015, there were 26 million people who were “credit invisible” — meaning they had no credit history on file — and 19 million people who were “unscorable,” according to the Consumer Financial Protection Bureau. This means that they had a thin file, an insufficient credit history or a lack of recent credit history.
There are three minimum requirements to generate a FICO score. First (and my personal favorite), you need to have a credit file that doesn’t suggest you’re deceased. If you’re able to read this, you’re alive and kicking, so this requirement is a breeze, right?
Second, you must have at least one account open for six months or more. And third, you need to have at least one account that’s been reported to the credit bureaus.
If you have zero or limited credit, you can satisfy the “at least one account” requirement with something as simple as a secured credit card or maybe a credit-building loan from your bank or credit union.
Choosing to avoid credit puts you in a compromised position. Read on to learn why having a credit score helps you become independent, a little bit richer and even more employable.
[Read: The Best Balance Transfer Credit Cards of 2018.]
Renting an Apartment
When you want to rent an apartment, the landlord or manager usually checks your credit report. Even without requesting your credit score, a landlord can tell from your report if you’re likely to be a tenant who pays on time.
If you don’t have a credit score, then your credit report probably looks like a ghost town. This situation tends to spook landlords.
There are ways to get around this, but it costs you. You can offer to pay a few months’ rent as a security deposit to show your good faith. If you’d had a good credit score, you’d probably get by with one month’s rent as a deposit.
Now, you also need utilities. Guess what? Utility companies want to look at your credit report, too. You’ll be asked to pay a deposit for utilities if they think you’re a credit risk. You might be able to get by without a deposit if you can find someone who will agree to pay the utility bill in the event that you don’t pay. Unless your mom or dad is willing, I wouldn’t count on using this strategy.
Buying a Home
If you don’t have a FICO score, it could be difficult to find a mortgage lender. And since it takes time to earn an excellent credit score, the longer you wait to start working on it, the more interest you’re going to have to pay on a mortgage.
I checked out the Loan Savings Calculator on myFICO.com. My credit score is high, so I clicked on the 760-850 range. On a $300,000, 30-year, fixed-rate mortgage, my monthly payment would be $1,477. My annual percentage rate would be 4.255 percent, and the interest I’d pay over 30 years would be $231,611.
Now, let’s look at the other end of the credit spectrum. The lowest range offered on the calculator is 620-639. With the same loan, I’d pay $1,768 per month. My APR is now 5.84 percent, and the interest I’d pay is a whopping $336,447.
That’s a difference in interest of $104,836. You can pay all or at least most of your child’s college education with that. Also, notice that your total interest exceeds your original $300,000 loan. Unless you have $300,00 sitting around somewhere, you need a great credit score to make buying a home affordable.
[Read: The Best Starter Cards for Building Your Credit.]
Refinancing Student Loans
According to the Institute for College Access & Success, the average student loan debt at graduation in 2016 ranged from $20,000 in Utah to $36,350 in New Hampshire.
And the average monthly student loan payment for those between the ages of 20 and 30, per the Federal Reserve Bank of Cleveland, was $351 in 2015. That’s a big chunk of your budget.
If you’re already making payments on your student loans, here’s your chance to build a credit score. Once you develop a good credit score, you can consolidate your student loans and maybe get a better interest rate than what you currently have.
So, over the long haul, you’d be paying less interest on the loans. Don’t underestimate the power of a good credit score when you have student loan debt. It can help you create more room in your budget for savings.
Getting a Credit Card
If you’re a supporter of the anti-credit card crowd, I understand where you’re coming from. You worry about debt. I’m anti-credit card debt all the way.
But as long as you can use a credit card responsibly, you won’t get into debt. The key is keeping low balances and paying your bills in full by the due date.
A credit card is nice to have for emergencies or for renting a car. And using a credit card is the safest way to shop online. Sure, you can use your debit card online, but why would you want to do that? If your account number gets stolen, your account can be drained before you realize what’s happened.
And yes, you might get most or maybe even all of your money back. But in the meantime, how will you pay your bills while you wait for the bank to sort out this mess?
With a debit card, your losses range from zero to $500, depending on how quickly you report it. Under the Fair Credit Billing Act, if an unauthorized person uses your credit card, your maximum liability is $50, but most major issuers offer zero liability.
Here are some options for first-time credit card holders:
Student credit card. If you’re still enrolled in college, you might qualify for a student credit card. Not everyone is mature enough during the college years to handle this well. So, make sure you’re ready to be self-disciplined before taking the plunge.
[Read: The Best Student Credit Cards of 2018.]
Secured credit card. A secured credit card works just like an unsecured card. The difference is that you put a deposit in a bank account to “secure” the card. You then get a credit card, and you use that to make purchases. Pay your bill promptly, and since the issuer will report your payment history to the bureaus, you can develop a credit score.
Authorized user. If you’re ready to build credit but can’t qualify for a secured card (this can happen), then ask a parent or close relative who has great credit if you can be an authorized user on one of their credit card accounts.
Getting Your Next Job
To be clear, a potential employer will not be looking at your credit score. But an employer might look at your credit report. And as already mentioned, if you don’t have a credit score, you’ll have a pretty bare credit report.
A desolate-looking credit report could make you appear a little suspect to an employer. When an employer sees that you can use credit responsibly, it sends a message that you’ll be responsible at work, too.
Is this fair? No, not really. But this is the reality you have to deal with.
This is less of an issue for someone who has just graduated and only begun to build credit. But if you’re well into your 20s and 30s, then you may need more on your credit report than your student loans if you want to impress a prospective employer.
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5 Reasons You Need a Credit Score originally appeared on usnews.com
