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Looking around at the number of people struggling with debt, it’s easy to see why someone might think the best route to staying out of trouble is to avoid credit altogether. On the surface, this may seem like a good plan; without taking on any debt, it is certainly impossible to be buried by it. Unfortunately, for the majority of people, the credit-free lifestyle simply isn’t an option.
From car loans to home mortgages, most consumers will need to use some sort of credit in their lives, and, thus, take on some type of debt. Furthermore, when it comes time to get that big loan or mortgage, not having a well-established credit history can make the process much more difficult — and, often, more expensive.
Consumers without a credit history are an unknown risk
Whether taking out a loan or opening a credit card, when a borrower receives a line of credit from a creditor, that creditor is faced with the inherent risk that the borrower will default on (fail to repay) their debt. To help mitigate as much of that risk as possible, creditors rely on a consumer’s credit history to determine the actual likelihood of the consumer repaying the debt.
Borrowers with well-established credit histories showing consistent, on-time payments to a variety of credit types are considered to be good credit risks. These consumers will be offered the best interest rates and lowest fees when they seek new credit.
When a potential borrower does not have an established credit history, however, the creditor is left without any information on which to base a lending decision. While some creditors are happy to give an unknown borrower the benefit of the doubt and assume they are more likely to pose a good risk than a bad one, other creditors are less optimistic.
Of course, even when creditors are willing to take on the unknown risk of an unestablished applicant, they rarely extend that optimism too far. Borrowers without proof they can pay back their debts in full — and on time — will pay higher rates than their established counterparts.
Most consumers looking to begin establishing credit will have the best luck starting with a credit card, and there are a good number of options for consumers who need credit cards for no credit. All of the major credit card issuers report to the three main credit bureaus, and many also offer cards with no annual fees.
Having no credit is bad (but bad credit is worse)
From the time of the first credit card bill or loan payment, consumers start establishing their credit history. Each payment made to a creditor according to the credit agreement (that is, at least the minimum amount, by the due date), counts in the consumer’s favor when reported to one of the three major credit bureaus, and is the best path toward developing a good credit history.
At the same time, when a consumer makes a late payment, misses a payment, or defaults on a debt entirely, those actions are also reported to the major credit bureaus. Where those without an established credit history are considered to be an unknown risk, those who demonstrate a pattern of missed or late payments are considered to be high risk, and more likely to default. This, of course, is reflected in your credit score.
In the case of high-risk applicants, creditors know there is a greater chance of not being repaid; they attempt to mitigate some of the increased risk by charging those consumers much higher interest rates. For consumers with extremely risky credit profiles, the only option for new credit may be to turn to a creditor that specializes in subprime credit cards and loans. The easiest credit card to get with bad credit will be a secured card, which requires a cash deposit; that said, some unsecured options are still available.
Depending on the types of negative accounts impacting a consumer’s credit report and score, some may benefit from going through credit repair. An experienced credit repair specialist, such as those at Lexington Law, will have the tools necessary to find any disputable accounts on a credit report and may be able to have some or all qualifying items removed.
Don’t hide from credit, build it
Anyone who has watched a loved one struggle with debt, or been through it themselves, may be tempted to swear off any type of credit. Unfortunately, credit has become a necessity for many people, especially those interested in one day owning their own home. The best way for a consumer to ensure they will qualify for an important loan in the future is to establish a good credit history early on.
Whether they have no credit or bad credit, every consumer’s path to a healthy credit profile is the same: use credit, in moderation, and make all payments as required by their credit agreement. The best credit histories are built over years, not days or months. With a little patience and a lot of diligence, even a blank or bad credit history can be made creditworthy.