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Having no credit is a pain. Why is credit history important?

Dahna ChandlerThe Mortgage Reports Contributor

Like it or not, having credit is important today

While there are millions of people who are “credit invisible” in the US, most of them are poor and the lack of credit causes considerable hardship. You need credit to:

  1. Buy a house with a mortgage
  2. Purchase a car without cash
  3. Even to rent a car or get a job in some cases

It’s not impossible to get credit with no credit. But you should start today.

Verify your new rate (Sep 21st, 2018)

Stop waiting to apply for credit

If you’ve been holding out on building credit, you’re holding your life back and making it harder. Having credit doesn’t mean you have to go into deep debt. When managed properly, credit can have huge benefits. That includes saving significant money on purchases and giving you options you don’t have now.

Related: Catch 22 (You need credit to get credit, and here’s how to do it)

Here’s what to consider when choosing to continue living with no credit versus building exceptional credit. Hint: One can make your life easier and make you wealthier.

Ask yourself why you’re avoiding credit

Maybe you’re one of those people who have lingering fears from the last recession. Or maybe you don’t want to go through the pain of applying only to be turned down.

However, there are products designed for new borrowers. Expect, if you have no credit history or score, to pay higher interest rates and fees, and to be offered lower credit limits. That’s okay; if you pay off your balance every month, it doesn’t matter what your interest rate is.

Related: Solve these 3 credit problems and improve your FICO score fast

Just avoid so-called “fee harvester” cards that put high up-front charges on your account simply to open it. And make sure, especially with secured credit cards, that your payment history will be reported to all three major credit bureaus.

Credit score needed to buy a house

When you have little or no credit, buying a house with a mortgage is much more difficult. Lenders have to underwrite your file manually instead of with mortgage software. Many programs require a higher down payment for manual files, and lenders are hesitant to make loans that could come back to bite them.

It behooves you to work on your credit rating by using small accounts and paying them diligently now. This could save you thousands of dollars on your mortgage when you decide to get one.

Related: First-time homebuyers (Getting a mortgage when you have no credit)

Those at the upper end of the FICO scale with credit scores of 760 or higher get the best mortgage deals. They secure the lowest interest rates and monthly payments, and save considerably over the life of the loan. That’s true regardless of the mortgage type you get, though the minimum credit score for a mortgage varies.

For example, there is no minimum score for a VA  loan, and the minimum FICO score for an FHA mortgage is 500 with 10 percent down. A USDA mortgage requires a 640 FICO score and a conventional mortgage from Freddie Mac or Fannie Mae a 620 FICO.

However, home loan applicants with minimum credit scores comprise only a very small percentage of approved mortgages. You’ll typically need to make up for a low score with a high down payment or very strong income and assets.

Getting a car with no credit is a buzz kill

You’ve seen the ads for buying luxury vehicles with zero down and very low interest. But you know those deals are for people with excellent credit, FICO scores north of 750 or at superprime FICO scores exceeding 780.

For most car loans, a FICO score of 700 or above is prime, meaning you’ll still get great deals and borrowing choices. The lower your score below that, the fewer your choices and the higher interest rate you’ll have.

Even if you can finance a car with no credit, it will be at a much higher interest rate than you’d like, and perhaps for a shorter term. Having no credit for car buying is much like having bad credit, where dealerships are the only option for financing.

Related: 820 credit score (How cheaper are loans when you have great credit?)

That’s subprime financing, a bad deal with much higher interest and car payments than average in most cases. Those who have bad credit and want to avoid credit checks at lenders or dealers buy from so-called buy-here-pay-here dealers.

There, it’s possible to find rates above 20 percent plus fees, some hidden. While the average rate on a new car loan was 5.2 percent in February 2018.

Also, you’ll often have a GPS tracker with a remote ignition kill switch on the vehicle if you fail to make payments on time, too.

Basic life activities get blocked with no credit

Since you need credit to rent most apartments and get the best jobs, having none makes those applications harder for most people. The minimum FICO score for apartment rentals is 620, or about the same as for a conventional mortgage.

With no credit, you might need a co-signer, or to put down a much higher deposit — two to three months’ rent.

Related: 5 ways to raise your FICO score today

Some landlords offer “second-chance” programs to people with no credit–the same ones people with bad credit use. As a potentially risky renter, you’ll get a conditional lease, in many cases. That usually means eviction proceedings start immediately after your rent is late.

You also need credit to get utilities in your name without a deposit, get the best cell phone deals and to rent a car or hotel room. As some businesses have stopped accepting cash, you’ll need a bank account to avoid costly prepaid debit cards. You need credit to get a checking account in some cases.

How to stop living the no credit nightmare

It’s too easy to build credit to continue living the stressful existence of life without it. Get started with a secured credit card and credit builder personal loan. Don’t miss payments on anything, especially those credit accounts, including rent and utilities.

Consider becoming an authorized user on someone else’s credit as long as they meet certain criteria, so the strategy benefits you.

Related: Mortgage with no credit score (Freddie Mac has new options)

When possible, finance a car and make your payments on time every month. Start saving, too, for a down payment on a home if it’s your time to buy and learn how to qualify for mortgages.

If you do this, you’ll be building your life on a solid financial foundation with your hard knock life without credit a distant memory.

Verify your new rate (Sep 21st, 2018)