If you don’t have a credit score, you are not alone. A recent credit score study by The Ascent shows that nearly one in five Americans has “invisible credit” or “unscorable credit”. This means they either have no credit history with major credit bureaus or there is not enough information to generate a credit score.
Unfortunately, not having a credit score makes your life more difficult in many ways.
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1. It is difficult to buy a car
Without a credit score, it will be difficult to qualify for anything other than predatory auto loans with sky-high interest rates. Unless you can provide a co-signer or pay in cash, you will end up paying a premium to buy a car.
Worse yet, because cars depreciate quickly, it’s easy to find yourself hanging upside down on an auto loan. If you take out a high interest rate loan, you could owe more money than the car is worth. If you were to destroy your car in this situation, your auto insurance would only cover the current value of your car, meaning you would be forced to pay off a car loan for a car you can no longer use.
2. It is almost impossible to buy a house
Without credit, it’s almost impossible to buy a home unless you can afford to make a huge down payment and pay astronomical fees. At the very least, the mortgage approval process will be extremely long and require a lot of additional documentation because you don’t have a credit score to prove to lenders that you can borrow responsibly.
These barriers make investing in real estate much more difficult, which means people without a credit score have limited access to one of the most popular methods of building assets and building wealth.
3. You may have trouble covering emergency expenses
We all have to deal with unforeseen expenses from time to time. While it is always better to have cash reserves on hand to cover them, sometimes this is not possible. People with good credit can access low cost financing tools in these situations, such as low interest loans and 0% annual interest rate offers on credit cards.
People without credit, on the other hand, will have to resort to secured credit cards or high interest loans, which are extremely expensive. They can even start your credit score off on the wrong foot – high interest rates make it more likely that you will miss a payment – and without another credit history, bad scores will be hard to fight. If you don’t have a credit score, it’s even more important to build up a generous emergency fund.
4. It may be more difficult to find accommodation to rent
Landlords typically perform background checks on potential tenants, and these often include a check of your credit history. Good credit shows that you are likely to pay your rent on time, while no credit provides such proof.
If you don’t have credit, a landlord may require a larger deposit or a co-signer. In big cities where the demand for housing is high, they might not give you a chance.
5. It will be difficult to qualify for a credit card
You might not need a credit card now. However, there are times when they are useful. On the one hand, some companies, such as hotels and car rental companies, will not allow you to 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 have great credit. With a sufficiently high credit score, you can even travel for free with credit card points.
6. Your insurance rates could be higher
Credit history is a factor for some auto insurance companies when deciding how much to charge for an insurance policy. Although bad grades such as late payments are worse than having no credit at all, many still consider a short credit history to be negative.
If you don’t have credit, be sure to shop around for the best auto insurance rates. Some policy providers consider credit scores more than others.
7. You may need to pay a security deposit on utility contracts
Utility companies usually do credit checks before offering you a contract. This includes businesses providing electricity, water, gas, cable, internet, and telephone services, so it’s not something you can just give up.
If you don’t have credit, you’ll likely need to pay a security deposit before signing up for utilities.
8. You Won’t Get the Best Deals on Mobile 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 always possible to get a new cell phone without credit, you might not get the best deals on new phones.
Many carriers will also ask you to deposit a down payment of a few hundred dollars on a mobile 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 build credit consistently is to use credit cards regularly and always pay them off. Secure credit cards are a way for people without credit to gradually build up a payment history. They require you to deposit a down payment, 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 you pay 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. While there are many downsides to not having credit, the good news is that building credit has never been easier.