Guest Post From Lexington Law
Just 60 years ago, the credit score did not exist. Instead of having information run through a database, loan applicants were instead judged by their reputation and, often, their personal relationship with the local bank. It was not until the advent of the Diner’s Club card (the first credit card, released in 1950) and the first credit score (invented in 1956 by FICO
) that people were judged on the hard numbers of their credit history.
Today, the credit scoring system is such a fundamental part of life as an American, it has become difficult for those without credit — a state known as credit invisibility — to even obtain employment.
On the other hand, if you have no credit history, you have no debt. Living without debt can be extremely liberating, and being debt-free is a goal many people are pursuing. So, if you have no credit history, will it make your life more difficult? Let's take a look at the pros and cons of having no credit history:
Living debt-free has a lot of advantages. For one, all of your income goes to regular monthly bills, such as rent and utilities. This can make budgeting much easier. Furthermore, you will have fewer bills to pay, because everything you purchase must be paid in full at the time of sale.
No interest owed
Having no credit history means you will not be paying any money on interest. Interest can cost frequent credit users hundreds of thousands of dollars over a lifetime. For example, the average mortgage holder (assuming a 20 percent down payment) will pay roughly $169,000 in interest over the life of the loan.
Decreased likelihood of identity theft
The more frequently you use credit, especially on the internet, the easier it becomes for criminals to access your information, which can sometimes lead to multiple accounts opened in your name and thousands of dollars owed. When you have no credit history, you are less likely to catch the eye of a hacker who is just waiting to charge up your credit cards.
One of the biggest problems with credit cards is the temptation to buy things you do not have the cash for, leading to increased cost over time due to interest. When you purchase everything with cash, you will actually end up spending far less over the course of your life, and you will never buy things you cannot afford.
Having credit cards and loans can be stressful for many people. The average American carries over $130,000 in debt
. Those with no credit have zero debt, which can lead to less stress and worry.
Inability to get a loan
The average American does not have $216,000 (the median price of a home in the U.S.
) sitting in the bank. If you are someone who does, however, then you may be in good shape. For the rest of us, though, buying a home, a fundamental part of the American Dream, might be out of reach. Additionally, you may not be able to finance a new car, remodel your home (assuming you have one), or even take out a small personal loan for incidentals.
Difficulty finding a job
An increasing number of employers are choosing to run credit checks in addition to background checks on potential employees. This can be a clue to your employer about the type of employee you will be and how responsible you are. Having a poor credit score
, or no credit at all, may keep you from getting the job you really want and deserve, because it may send a signal to the employer that you are not responsible with your finances, and will, therefore, be an irresponsible employee.
While you may have the money to spend on a lavish vacation, it will be difficult to purchase plane tickets, reserve hotels, and book tours without a credit card number. Even renting a vehicle might not be possible without a credit card. While a debit card might work in these instances, it could cause hundreds of dollars to be put on hold in your account.
No emergency fund
It is difficult for the average American to save money. In fact, the median savings account balance is $5,200, and this doesn't include the many people who do not even have a savings account. In the event of an emergency such as sudden illness, job loss, or necessary car repairs, do you have the means to pay for what you need? If not, credit can come in handy.
Having credit, and especially credit cards, can make your life easier. When making a large purchase, it is easier and safer to carry one small piece of plastic than a large wad of cash. Stuffing $500 in your wallet for a new TV can be slightly more annoying than just carrying a small piece of plastic to the store.
For those without credit, renting an apartment or even opening up a utility account can be difficult. Some of these companies use your credit score to determine how much of a risk you are. Without any credit history
, they will have no way of knowing your risk level. This may cause them to ask you to pay high deposits or even get a cosigner.
Bottom line: having no credit is not the end of the world. We have been taught that it is expected of us, but that simply is not feasible for everyone. Some believe that having no credit is a choice. While this is true to an extent, some people are unable to build credit due to lack of credit, and these people may end up in a vicious cycle of credit invisibility.
If you can build credit, it is a good idea to begin doing so. There are more advantages to having credit history than disadvantages. It is never too late to begin the process.