...and how to build good credit from scratch.
If you don't have a credit score, you're not alone. A recent study on credit scores done by The Ascent shows that nearly 1 in 5 Americans are "credit invisible" or "credit unscorable". This means they either have no credit history with the main credit bureaus or there is insufficient information to generate a credit score.
Unfortunately, having no credit score makes your life harder in a number of ways.
1. It's difficult to buy a car
Without a credit score, it'll be hard to qualify for anything other than predatory auto loans with sky-high interest rates. Unless you can provide a cosigner or pay in cash, you'll end up paying a premium to buy a car.
What's worse, because cars depreciate in value quickly, it's easy to end up upside down on an auto loan. If you take a loan with a high interest rate, you could wind up owing more money than the car is worth. If you were to wreck your car in this situation, your car insurance would only cover the current value of your car, meaning you'd be stuck paying back an auto loan for a car you can no longer use.
2. It's almost impossible to buy a house
Having no credit makes it nearly impossible to buy a house unless you can afford to make a huge down payment and pay astronomically high fees. At the very least, the process of getting approved for a home loan will be extremely lengthy and involve lots of additional documentation, as you don't have a credit score to prove to lenders that you can borrow responsibly.
These barriers make it much harder to invest in property, meaning folks with no credit score have limited access to one of the most popular methods of asset building and wealth generation.
3. You might struggle to cover emergency expenses
We all have to deal with unexpected expenses from time to time. While it's always best to have cash reserves on hand to cover them, sometimes it's not possible. People with good credit can access low-cost financing tools in these situations, such as low-interest loans and 0% APR offers on credit cards.
People with no credit, on the other hand, will have to rely on secured credit cards or high-interest loans, which are extremely costly. They can even start your credit score off on the wrong foot -- high interest rates make it more likely that you'll miss a payment -- and with no other credit history, bad marks will be hard to combat. If you have no credit score, it's even more important that you build a generous emergency fund.
4. It can be harder to find a place to rent
Landlords usually run background checks on potential renters, and these often include a check on your credit history. Good credit shows you're likely to pay your rent on-time, while no credit provides no such proof.
If you have no credit, a landlord might require a bigger deposit or a cosigner. In bigger cities with high demand for housing, they might not give you a chance at all.
5. You won't be able to get a better rate on student loan debt
College students tend to have no credit as they've either never borrowed money before, or they're just getting started with student loans. The problem with graduating from college with a slim credit file and student loan debt is you won't be able to qualify for the best student loan refinancing.
If you build your credit throughout college, you might be able to refinance your student loans soon after graduation. This can lead to a significantly lower interest rate, which often means lower monthly payments and less money spent on interest fees.
6. It'll be hard to qualify for a credit card
You might not need a credit card now. However, there are situations where they come in handy. For one, some businesses, such as hotels and rental car agencies, won't let you make a reservation without a credit card.
Credit cards can also offer lucrative travel and cash-back rewards, and they're even more generous when you've got excellent credit. With a high enough credit score, you can even travel for free with credit card points.
7. Your insurance rates might be higher
Credit history is a factor for some car insurance companies when deciding how much to charge you for an insurance policy. While bad marks such as overdue payments are worse than not having credit at all, many still consider a short credit history to be a negative.
If you have no credit, be sure to shop around for the best rates on car insurance. Some policy providers take credit scores into consideration more than others.
8. You might have to pay a security deposit on utility contracts
Utility companies typically run credit checks before offering you a contract. This includes companies offering electricity, water, gas, cable, internet, and phone service, so it's not something you can simply forgo.
If you have no credit, you'll likely be required to pay a security deposit before signing up for utilities.
9. You won't get the best deals on cell phone contracts
Most cell phone providers will check your credit before offering you a contract for a cell phone and/or cell phone service. While it's still possible to get a new cell phone with no credit, you might not be offered the best deals on new phones.
Many carriers will also require you to put down a deposit of a few hundred dollars on a cell phone contract if you don't have good credit.
How to build a credit history from scratch
One of the easiest -- and cheapest -- ways to consistently build credit is to use credit cards regularly and always pay them off. Secured credit cards are one way that people with no credit can gradually build up a payment history. They require you to put down a deposit, which is usually equal to your credit limit, and allow you to spend and make payments. The best secured credit cards have low or no security deposit requirements and no hidden fees. Just make sure to pay off your bill in full each month to avoid interest charges.
There are now a number of credit cards that will approve you, even if you have no credit history at all. While there are many downsides to not having credit, the good news is that building credit has never been easier.