Here’s a question that lands in my inbox or slides into my direct messages on Instagram every time I talk about the importance of building a strong credit history and score.
“But I thought I should try not to have a credit score at all?”
Best I can gather, this line of thinking comes from personal finance experts who refer to a credit score as a “debt score.”This attitude avoids all shades of gray when it comes to credit history. And it fails to acknowledge that you can build a healthy score without paying a penny in interest.
You’ll need a loan someday
It would be just swell if we could all make it through life without ever borrowing a penny from lenders. Everyone could buy cars and finance college from their bank accounts and put down cash for a home. But that’s not feasible for millions of Americans. At some point, most people need to take out a loan. (And sometimes it’s because the interest rate is so low it makes more sense to have the money in the market than buy the house or car in cash!)
The other consideration for a healthy credit score: Lenders aren’t the only ones interested in your money resume.
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Credit history isn’t just for creditors
Many adults will rent an apartment or house at some point. As a renter, your credit score may help a landlord decide if you’d make a reliable tenant. After all, the best indicator of whether you’ll make on-time payments in the future is whether you made them in the past. That’s why payment history is the most heavily weighted of the five factors comprising a FICO credit score.
Potential employers and insurance companies may also care about your credit history. It’s common for a truncated version of your credit report (not score, just report) to be pulled during the job application process. For some employers, it’s as simple as seeing if you could handle a company credit card. Others may want to evaluate if you’d be likely to experience financial duress and perhaps make poor decisions.
Insurance companies can use credit reports as part of the underwriting process. Specialized versions of your credit score, known as credit-based insurance scores, may be used to determine your rate.
How to build a credit history
While it’s certainly true that auto loans, mortgages and student loans help establish and build credit history, a “free” option also exists: credit cards. Open one with no annual fee, make one or two small purchases each month and then pay off the card on time and in full. Rinse and repeat.
If you make your payments on time and keep the amount of available credit you tap low, you’ll build a healthy credit history and never pay interest. That way the process is completely debt-free. You can justify a credit card with an annual fee if the perks offset the price tag, but no-fee is the true way to build a “free” credit score.
Your financial life insurance policy
Think of a healthy credit history and a high score as an insurance policy on your financial life. Do you want to be in a position where you have to borrow money? No. But if you do need to, then you certainly want access to the best products and at the lowest possible rate.
Erin Lowry is the author of “Broke Millennial Takes On Investing” and “Broke Millennial: Stop Scraping By and Get Your Financial Life Together.”