At one point, I had no credit history. I found out soon enough why building credit is important.
Living with no credit is tough and expensive. Up until two years after I graduated from college, I used to be one of the 20 million people in the US who lived without any credit. Although I received many credit card offers that had low credit rates back in college, I declined all of them because working within the credit system was against my political beliefs.
The Disadvantages Of Living With No Credit History
Later on, however, I realized that having a credit history is incredibly important. Although many people have been very happy living without credit cards, this arrangement may not be for everyone. I’m one of those people who struggled in this situation; maybe you’d like to read about some of the disadvantages I faced while living on a pure cash diet. Here are a few things I learned over time.
1. Credit histories and credit scores can influence loan rates.
Do you know that credit scores can affect your loan rates? The price of borrowing is influenced by your credit status and profile. If you’ve got a solid credit history, you’re likely to be able to borrow at much better rates than those who don’t have that history. I learned this the hard way.
2. Be prepared to make sacrifices if you don’t have credit.
Without credit, I had to use cash wherever I went. Well, it got tough for me as I ended up having to move into an empty, unfurnished apartment with only the bare necessities. I couldn’t afford much so I had to make do with very little. For instance, I slept on a mattress on the floor for a month until I could save up enough cash for a real bed. I also had to subsist on cheap Chinese takeout for a long time and do without many appliances and home amenities. It was clearly a hard time.
3. Having credit is used as a screening tool for many situations.
Did you know that credit histories are used to screen not just credit card or loan applicants, but job applicants as well? What finally pushed me to get a credit card was when the employers of the perfect job (okay, my dream job) turned me down because I had no credit history. I became a part of the credit system since then, and it was amazing how much easier my life became afterwards.
So how did I make the changes that would turn things around for me? I made the decision to turn to credit.
How I Built My Credit History
How to build credit? Here’s how I was able to establish credit for the first time.
1. I got a secured credit card.
My life was severely limiting and expensive back when I lived outside the credit system. When my job application got turned down, I finally decided to build positive credit history by applying for a secured credit card. A secured credit card requires you to deposit money that’s equal to your credit limit.
Some people I talked to feel that there’s a social stigma on those who have secured credit cards, but I think this is a rather unfair judgment. Banks report transactions made with secured credit cards to credit bureaus just like a normal credit card. Besides, it gives those outside the credit system a chance to prove that they can be responsible credit card holders who can pay their bills on time and who won’t go over their limit.
2. I eventually moved up to a regular credit card.
After several months of paying the monthly bills on time with my secured credit card, the bank finally issued me a regular credit card. It goes to show that with some time, patience, determination and discipline, anyone can achieve what they set out to do.
When Should We Start Building Credit?
I highly urge anyone who feels that they are able to commit to good and responsible credit card use and debt management, to seriously consider getting a credit card and establishing their credit history as early as college. This decision will entail a lot of self-reflection though, since it’s very easy to fall victim to credit card mistakes if you’re not careful with your spending and with adhering strictly to your bill payment schedules.
If you’re comfortable with getting a credit card at this early stage, then find out if your parents or a close friend will be willing to add you as an authorized user on one of their credit cards that’s in good standing. It will take longer to establish a credit history, but by the time you get out of college this will be enough to show that you have a good record.
For more on this discussion, check out this post called How To Manage Debt: Credit Management Tips For College Students.
So you stated that you didn’t have a lot of money. How would credit have solved your problem? It would have delayed it. It would have not only tied up your current income, but also your future. The only thing you need credit for is to buy a house, and for that some banks will do manual underwriting. They look at previous utility and rent payments along with job stability. Yes they do expect a 10-20% down payment, but should you really be buying a house if you can’t afford that?
I moved in to the US recently and it took me only few days to realize how much US way of doing things depend on credit history. I had to buy a car for over 11% interest (which would have been 3.9% if I had credit history), I had to rent furniture (which was very expensive) until I could save enough to buy piece by piece. Although I personally believe that it’s this credit driven habits which makes the US economy crunch every once in a while I also realized that all US systems are made with pre assumption that every person would have credit history. It’s easy to change yourself than change the world. 🙂