Unless you’re independently wealthy, it’s going to be virtually impossible to accomplish any typical adult goals without credit.
Buying a new or used car requires credit. Buying a home requires credit. Earning a college degree often means obtaining a loan…which requires credit!
But there is a major difference between having bad credit and having no credit?
1. What it means if you have no credit history.
Simply put, you have never had a line of credit issued to you in your name: no credit cards, student loans, auto loans or anything else.
The trouble with this, as far as the banks are concerned, is you haven’t proven yourself capable of actually meeting your payment obligations. Seems sort of like a Catch-22, doesn’t it?
You can break free from this dilemma with three solutions:
- Open a line of credit with a cosigner
- Open a secured line of credit
- Take out a student loan that doesn’t require a cosigner
- The secret loophole
The trouble with taking out one of the aforementioned student loans is you won’t start making payments until after you’ve graduated, which could be years away.
You won’t start establishing a credit history until you’re making payments, so you’ll still have no credit.
Opening a secured line of credit can also be a good idea, but if possible, avoid secured credit cards. They tend to have excessively high interest rates and annual fees.
The best option is opening a line of credit with a cosigner.
“Bad credit is an evidenced history of a failure to
pay as agreed on the accounts you’ve opened.”
2. A loophole for those with limited credit histories.
Here’s a trick few people will ever be aware of without extensive research like you’re performing right now: You can actually establish a credit history without ever opening a line of credit on your own.
So how do you do this?
First, you need to know someone who already has good credit.
They also have to have a credit card that has room for at least one more authorized user (typically, credit card accounts can only have two authorized users). Your parents may be able to help you here.
Once you’re added to the account as an authorized user, any activity with that card will carry over to your credit report — good or bad.
At the same time, the original owner is actually on the hook for all of the charges you make with the credit card. Your parents might not be willing to add you to the account as an authorized user because of this.
So what can you do?
Simply have an agreement that you won’t have any true access to the card. You’ll be added as an authorized user, but you won’t ever physically receive the card or use it.
You’ll go about your life and eventually have an established credit history.
3. What is bad credit?
Bad credit is an evidenced history of a failure to pay as agreed on the accounts you’ve opened. It differs from no credit in that you’ve actually had accounts opened, but you’ve failed to pay on them.
Someone with no credit could have a high score (700+) but be denied for a loan based on an insufficient history. Those with bad credit are being denied for a line of credit because they have an established history of not paying.
All of the tips outlined above for establishing credit when you have none at all will have a positive impact for someone with bad credit, too.
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