Q: I am retired, have no debts, pay my bills on time and live within my means. I have no credit rating since I have no use for credit. However, if I should require a loan (medical bills, new car, whatever) I'd be considered a bad credit risk. Why does this make sense?
A: Chalk it up to fear of the unknown. With no credit history, your financial record is an unknown as far as lenders are concerned. The history of how well borrowers have met their financial obligations in the past gives lenders some basis for judging how they will meet their obligations in the future.
Your frustration with this system is understandable. You pay your bills on time and do not run up debts, so why does that make you a bad risk? Well, having no record is better than having a bad payment history, but it does not leave lenders much to go on.
Think about this as if you were evaluating job applicants. Say you interviewed two applicants: Candidate 1 had an extensive work history with largely positive accomplishments, and Candidate 2 had no resume whatsoever. With this information, you would probably not feel as comfortable with Candidate 2 as Candidate 1.
It may well be that Candidate 2 was more talented and more energetic than the first. However, with Candidate 2's lack of a job history and a responsibility to make decisions based on more than a hunch, you would have a hard time favoring Candidate 2 over Candidate 1.
How to build a credit history without running up too much debt
The good news is that you have an opportunity to address the issue of no credit history. It sounds like you have no specific needs looming, but are simply concerned with what would happen if you did need credit someday. To prepare for that possibility, here are three things you should consider:
- See what your credit status really is. People tend to think that having a credit history is synonymous with having credit card accounts, but if you have had a mortgage or a car loan in the past, you may have a credit history on record. In any case, you should know what credit information is out there about you, so start by checking your credit report.
- Open a credit card account for cash flow purposes. If you find a no-fee card and pay your balance off every month, you can have the use of a credit card at no cost. This will help you maintain a credit history and can simplify your checking account bookkeeping because instead of several transactions a month, you can just have the one that pays off your credit card balance.
- Build up a reserve of savings. While savings accounts are not very rewarding these days, building a savings reserve can be an alternative to using credit if you feel you might need a chunk of money all at once in the future.
The bottom line is that having a credit history does not have to mean having debt. Building a positive credit history without building up debt helps keep your financial options fully open.
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