Hearing stories of people with high credit card debts might lead others to avoid building credit all together, but will it really help in the long run? This article by Kali Hawlk of Trulia explains why avoiding credit could actually cause more problems than having a low credit score.
What’s wrong with no credit?
When you don’t have any credit, it means you haven’t done anything to establish your credit history. Maybe you haven’t taken out any loans in your name and you don’t have a line of credit. That can be a good thing considering you have no debt either! But having no credit can hinder you if you’re looking to get a loan on a major purchase. A bank or other lender has nothing to go on when evaluating how likely you are to pay back the borrowed money. There’s no history to analyze, which turns you into a large question mark for them. Essentially, they’ll have to guess at how likely you are to repay the loan. And unsurprisingly, most lenders don’t want to play guessing games when it comes to approving large financing decisions.
How to responsibly build a good credit history
It’s smart to plan ahead if you don’t have a credit history (or if you have a very short history). Just note that it can take awhile, so make sure to give yourself plenty of time to build a good credit score before you plan to make a big purchase. Start by opening a credit card at your bank. Your bank can connect your new card to your existing checking account, so you can view and manage everything in one place and get into the habit of paying off your monthly balance.
Repairing the damage from a bad credit score
All things considered, a bad credit score isn’t ideal. Bad credit can also hurt in the form of increased costs over your loan’s lifetime — if you’re able to secure one in the first place. You can check your credit by pulling your report for free, once a year. Check it for errors and contact any or all of the three credit bureaus if you find a mistake.
It takes some time to improve bad credit, but it’ll pay off in the end (no pun intended). Having a good credit score — and some positive credit history — can go a long way in helping you secure a loan at the best interest rate available.
[Read the full article here]
