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Why Having No Credit Can Be As Harmful As Bad Credit
by Yuwanda Black
TheSyndicatedNews columnist

Yuwanda Black has published 10 e-books, a freelance writing e-course and hundreds of articles on small business, real estate, freelance writing and marketing. Ms. Black wrote and self-syndicated a small business column to eight on- and offline outlets in 2002-2003, including Greater Diversity News; The Mississippi Link; The New York Christian Times; Houston Style; Caribbean Life; and

Many Americans have no credit history whatsoever, ie, no credit card accounts, no car loans, no student loans, etc. This can be as bad as having damaged credit because lenders like to see a history. They are as unlikely to extend a loan to a person with no credit history as one with a bad credit history.

Why is this? For illustrative purposes, consider this: If a stranger approached you on the street and asked you to loan them $50, would you do it? No, probably not.

Alternatively, consider this: if a friend you've known for three years asked, would you loan them $50? In this case, you happen to know that this friend borrowed money from another friend and always paid it back per their agreement.

In this scenario, you’d probably loan your friend the $50. Lenders work the same way.

How Lenders Work: Why You Need a Credit History

Lenders don't like to loan money to strangers. And without a credit history, that's what you are to them - a financial stranger. They have no background on which to assess your repayment ability. A person with no credit history is in essence asking the lender to trust them.

When you are applying for a mortgage, for example, lenders like to see at least three revolving accounts that are at least three years old. If the account is younger than this, they might want to see five accounts at least 24 months old. Note: Every lender is different; these are just general guidelines.

Lenders are not in the trust business. They assess, based on past behavior. They follow the old idiomatic expression, "the best indicator of future behavior is past behavior." So how do you rectify a nonexistent credit history?

How to Establish a Credit History

Open Revolving Accounts: What are revolving accounts? Revolving accounts are those that you pay every month, like credit cards, furniture accounts, car payments, etc. You can apply online for most revolving credit accounts.

If you can't get a standard line of credit in this fashion, apply for secured credit cards. Secured credit cards are those where you put money in an account and the lender issues you a credit line equal to the amount in the account.

So, for example, if you put $250 in an account, you can only spend up to that amount. No one will know that it's a secured card but you, and your card will look just like a regular credit card.

After a certain time with an excellent payment history, usually six to 18 months, the account becomes unsecured and the funds are released back to you. And, other institutions like furniture and jewelry stores will start to issue you unsecured credit lines.

Use Credit Judiciously: If you are new to using credit, be careful how you spend. It is very easy to get in over your head, reaching your credit limit before you even realize it. To combat this, use your new credit card for necessities only (eg, gas) and pay off the bill every month. Remember, your goal is to build credit, not destroy it.

Pay on Time: Be sure to make all payments in a timely manner all the time. Late payments ruin your credit almost as quickly as a judgment or even bankruptcy, which is about the most serious negative you can have on your credit report.

If you consistently pay your bills late (even one day late), your credit score will be low, making it extremely difficult for you to obtain credit of any kind. And even if you do, it will be at interest rates much higher than consumers with high credit scores, costing you thousands of dollars over a lifetime.

In this global economy, you need a paper trail (ie, a credit history) to prove your creditworthiness. Establishing one - and using it wisely - will go a long way towards helping you achieve your dreams.

Published: Aug 29,2008 14:03
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