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Are you one of those people who avoid credit at all costs, just to save yourself from debt? If so, you may very well be considered a wise money manager. With this in mind, your savvy saving practices may not work in your favor over time if you ever need a line of credit. Having never used a credit card or borrowed money from a bank may put you in worse shape than someone with terrible credit.
If none of this makes any sense to you, we may need to break things down from a creditor's perspective. They see the situation a lot differently than you might, and that is why they usually give preference to those with some sort of credit history. Here is an overview of why you may want to start building your credit.
The Problem with No Credit
In this day and age, we live in a debt culture that is based on excessive borrowing habits. Lenders routinely base decisions on the track record of your credit history. Not having any credit history because you have never needed to borrow money may be a fantastic testament to your character and to your ability to make wise financial choices, but it also means you are a total mystery to credit card companies and credit bureaus who rely on credit history.
To them you are like a person who cannot explain where he or she has been for the past 10 or 20 years or what you have been doing with your life. You probably wouldn't go out on a date with someone who could not answer those kinds of basic questions, nor would you rent to him or hire him to work for you. In the same way, those who depend on credit scores to evaluate your ability to pay back borrowed money will not want to enter into a relationship with someone who has no history. Most of them would prefer to hire someone who has lousy credit, but a good explanation for their credit problems. You won't be able to qualify for much of anything due to lack of credit history.
How to Safely Build Credit
To avoid this kind of ridiculous and paradoxical problem, talk to your banker about ways that you can establish credit without compromising your principles or risking your money. For instance, you could put money on a prepaid card and use it like a bank card. Keep paying back your balance after you use it and you will slowly build up credit. You could also put money into a CD and then use the CD as collateral for a loan. You risk nothing if you miss a payment because the money is just taken out of the CD. Yes, you will lose something in interest this way, but the trade off should be well worth that.
Once you create a documented paper trail of your excellent credit history, your creditors will be able to verify and validate the fact that you are trustworthy, reliable and capable of handling your money well. These are the qualities lenders look for that can improve your future lending opportunities.
* Editorial Note: This content is not provided or commissioned by the credit card issuer. Opinions expressed here are the author’s alone, not those of the credit card issuer, and have not been reviewed, approved or otherwise endorsed by the credit card issuer. This site may be compensated through the credit card issuer Affiliate Program.
*The content in this article is accurate at the publishing date, and may be subject to changes per the card issuer.