Many people want to avoid carrying debt, and of course, this is completely rational. No one wants to be burdened by chunk of debt when they are trying to stay ahead to make ends meet. However, by not having an established credit history, financial institutions will have nothing to go off of to determine your risk as a borrower. Here are some situations that you may run into where having no credit can make it harder than having bad credit.
Leases, Cars, and Loans
Financial institutions analyze your credit history to determine your ability to pay back the money you borrow for a car or a loan. It is also used to determine if you can handle the monthly payments for an apartment or the mortgage if you are buying a house. When there is nothing for them to go off of, this puts them in a precarious position. As a result, lenders will more often than not decide to pass on lending to someone in this situation because they don’t want to take the risk with so many unknowns.
On the flip side, if you have a credit history, even if it is bad, this is still something for them to work off of. In most cases, this will mean you will have to pay a higher interest rate, but at the end of the day, you can still get approved. By building a great credit score, you can get better rates and deals than you would with no credit or bad credit.
Building Credit As A New Borrower
Back in July, we wrote an article detailing how new borrowers can start building credit. To read the full article, here is the link. In the meantime, let’s summarize some of the aspects of that article to give you an idea of what you are facing as a new borrower.
Ironically, to get a credit card you have to have an established credit history. This leaves many wondering how they can break into the credit world when they don’t have an established history. Some of the things that can get you started include the following:
- Cosign: You can have someone cosign with you, but make sure they understand if for some reason you can make the payments they will be on the hook for it.
- Secured Credit Card: This is secured with a cash deposit. So, if you put down $500, your credit limit will be $500. You will make payments and handle an interest just a like a normal credit card. When you close the account, you get your $500 back.
- Authorized User: If you have good spending habits, you can see if you can become an authorized user on someone’s credit card, whether that be a close friend or a family member. Obviously, there is a lot more trust involved with such a partnership, so make sure that both parties understand the terms and that you pay your fair share to cover what you use.
In The Long Run, Its Better To Build Credit Than To Have None
For your financial future, it is in your best interests to start building credit. Start small, and from the get go, establish good spending habits. Always pay down what you use from your credit line on time, and as a rule of thumb, keep your outstanding balance below 30%. By having it above this mark, you can potentially damage your credit score.