What Happens if You Don’t Have a Credit History?

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You don’t technically “need” to have a credit history. If you live a minimalist lifestyle, spend only cash and don’t ever take on debt, you may be able to get by just fine.

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However, there’s no denying that living without a credit history can throw up a lot of financial obstacles for the average American. Here’s an overview of the importance of having a credit history and ways you can go about achieving a solid credit history and score.

Why Is a Credit History Important?

Your credit history is a record of how you’ve handled debt in your life. Since it is recorded by third-party credit agencies, it’s considered a reliable record of the debt you have taken out in the past and how you’ve managed your payments.

This is invaluable for any potential creditors who have no firsthand knowledge of how financially responsible you are. Without a credit history, all they would have to base their lending decision on is your word, which doesn’t usually get you very far in the business world.

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Even if you don’t anticipate borrowing money anytime soon, you’re likely going to want to get a credit card, buy a home or even rent an apartment at some point. As it usually takes a credit history to get new credit, you’ll want to build yours up as early as possible.

How Do Credit Scores Affect Your Finances?

Your credit history documents all of the current credit accounts you have open, along with any ones that you closed over the past 10 years. From this information, the credit agencies derive your credit score. While your credit history may help determine if you can even open a new credit account, your credit score will likely determine how much you will have to pay in interest on your new loan.

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The industry-standard FICO score, for example, runs on a scale from 300-850. The meaning of your credit score is divided into broad ranges, as follows:

  • Less than 580: Poor
  • 580-669: Fair
  • 670-739: Good
  • 740-799: Very Good
  • 800 and above: Exceptional

As you might expect, the higher your credit score, the lower the interest rate you can usually get on your loans. According to data from FICO, for example, here are the types of interest rates you can get for a mortgage as of Feb. 28, 2023:

  • 760-850 6.336%
  • 700-759 6.558%
  • 680-699 6.735%
  • 660-679 6.949%
  • 640-659 7.379%
  • 620-639 7.925%
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While the differences in interest rates based on credit score may seem relatively small, they actually translate to huge amounts over time. For a $300,000, 30-year mortgage, for example, a 6.336% interest rate will result in $371,027.06 of interest over the life of the loan. However, that same mortgage at a 7.925% interest rate will result in a whopping $486,826.37 in interest paid.

That’s an increase of over $115,000 in pure interest costs just for having a low credit score.

How Can You Build a Credit History?

There’s an old expression in financial circles that “it takes money to make money.” The same thing is true in the credit world: it takes a credit history to build a credit history. This age-old dilemma means that you should work on building your credit history as early as possible, because the more extensive your record, the better your chance to raise your credit score.

The first step is to get some type of credit, whatever it is. At a young age, it may be hard to get a credit card without a credit history, although college students are often targeted by credit card companies. 

One option is to get a secured credit card through a bank, in which you put up a deposit which becomes your “credit line.” After six to 12 months of responsible usage, secured cards often turn into traditional unsecured cards. 

Another option is to become an authorized user on an existing credit card of someone you trust. As an authorized user, the credit line and payment history of the primary owner will appear on your credit report. This can be a great benefit if you pick someone with a good credit history. Bear in mind, though, that any negative credit activity on their report will now also show up on yours.

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Once you’ve established some type of credit, you’ll want to make sure that you manage it responsibly. This means not taking out too much debt relative to your credit line and making all of your payments on time. Over time, you should both build a credit history and increase your credit score.

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About the Author

After earning a B.A. in English with a Specialization in Business from UCLA, John Csiszar worked in the financial services industry as a registered representative for 18 years. Along the way, Csiszar earned both Certified Financial Planner and Registered Investment Adviser designations, in addition to being licensed as a life agent, while working for both a major Wall Street wirehouse and for his own investment advisory firm. During his time as an advisor, Csiszar managed over $100 million in client assets while providing individualized investment plans for hundreds of clients.
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