Remember - credit is not a bad thing. Successful living in
today's world requires the responsible use of credit.
Thanks to NFCC Certified Jeana M Breakingbury for this
informative article on the dangers of avoiding credit
entirely.
Source: Kimberly Palmer, US News and World Report, 2001-03-21
http://finance.yahoo.com/banking-budgeting/article/112152/dangers-of-avoiding-credit?mod=series-m-article-c
My 25-year-old coworker thought she had done everything right when
it came to protecting her credit. She paid off her student loans
early. When she does use a credit card, she pays it off in full
each month. And she's never been late on a monthly bill. Her credit
score was over 750, which is considered excellent.
Despite that stellar record, multiple lenders turned her down for a
mortgage earlier this year. The reason, they told her, was that her
credit record was simply too light. Since she had paid off her
student loans and didn't use much credit elsewhere, they had no way
of knowing whether or not she would be responsible with a mortgage.
In other words, she was being penalized for living a relatively
debt-free life. To make matters worse, one of the lenders told her
that because she was shopping around so much for a loan, the
multiple inquires into her credit report were starting to
negatively impact her score.
Her experience gets at one of the great weaknesses of our credit
reporting system: In order to borrow money, you have to have
already borrowed money. That's the only way you can demonstrate
that you are "credit-worthy," as the credit reporting bureaus put
it. To get to the bottom of this conundrum, I spoke with Rod
Griffin, public education director for Experian, one of the big
credit reporting bureaus. Here are two truths and four myths about
credit reports:
Truth: Having little experience with credit can make it
hard to take on a mortgage.
The first thing lenders look for when assessing whether or not they
want to give someone a mortgage is their credit history, says
Griffin. That means you need to have open, active credit accounts
in your name in order to demonstrate that you can handle
credit.
Truth: Comparison shopping can hurt your credit score (a
little).
For large purchases such as mortgages or auto loans, lenders expect
consumers to shop around, so credit bureaus lump inquires that
happen within a certain time period (usually 14 to 30 days)
together. That means they have only a minimally negative impact on
your credit report, says Griffin, so consumers don't need to worry
about shopping around, and in fact, it's probably a good idea to do
so.
But when someone -- such as my young coworker -- has a limited
credit history to begin with, that minimally negative impact can
make a bigger difference. And in fact, on her credit report, it
says she's been dinged for having "too many inquiries in the last
12 months."
So what can someone in that situation do? The only solution is to
wait it out, says Griffin. "You need to demonstrate over time that
you handle your debts well, and that will be reflected in positive
credit scores."
Myth: Paying off your loans early hurts your credit
report.
When you pay off a loan, your credit history is updated to reflect
that, but it is still considered useful information and, because
it's positive, typically stays on your credit report for 10 years,
says Griffin. (Negative information, such as a delinquency, only
stays on your report for 7 years.)
But lenders have their own criteria, which is the problem my
coworker likely ran into. Her lenders required her to have at least
three open, active accounts for 24 months or longer, and her
student loans didn't count since they were paid off.
Myth: Your credit accounts need to be in your name only to
strengthen your history.
You can build up your credit history with your parents' help if
they are willing to share a credit card with you, for example, or
add you as an authorized user onto their accounts. "That's a good
starting point," says Griffin. You can also put utility bills and
other accounts in your name, even if your parents are the ones
footing the bill.
Myth: College students should take out lots of credit cards
to build up their credit report.
While college is a good time to wade into the credit waters and
learn how to use a credit card responsibly, there's no need to take
on multiple cards, and in fact, taking on too much debt and failing
to make payments will hurt your credit report. Limited and
responsible use is probably best. That's why Griffin and others in
the credit industry are worried that the new Credit Card Act, which
places restrictions on college students' access to credit cards,
could ultimately hurt young people's ability to build their credit
histories.
Myth: You need to take on debt in order to take out more
debt.
It's not a history of debt that you need, but a history of credit.
That subtle distinction makes a big difference, because it means
you don't need to rack up credit card bills, you just need to use a
credit card and pay it off each month, for example. "Credit and
debt aren't the same thing," explains Griffin.
My coworker's story has a happy ending. She was able to eventually
buy a condo in the building she liked, but only with her parents'
help. Because of her limited credit record, lenders required a 20
percent down payment from her. It took her extra time (and her
parents' support) to save that much, but eventually she did, and
now she's a homeowner--with a beefed up credit record.
