Surviving With Bad Credit or No Credit

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These days, your credit score can affect more than just your ability to get a home loan. A bad credit report can drive up your insurance premiums, cost you a business loan and possibly ruin a job opportunity.

But not everyone makes credit king. In fact, FICO, the company that came up with the model used to determine one’s credit score and dependability, estimated that 20 million to 25 million Americans have little to no credit score on file. Another 30 million to 35 million have poor credit ratings. This means that more than 50 million Americans have to get by each day without much access to credit.

For some folks, this is a conscious choice, based on a belief that credit cards create more problems than they solve.

“I am against the use of credit cards,” New York resident Scott Gamm told MainStreet. “Credit cards allow us to spend money frivolously. By not using credit cards, you don't have to worry about late fees, inactivity fees, high credit card interest rates and, most importantly, accruing debt.”

Other readers agree.

“Businesses and banks keep pushing their credit cards, but I tell them it is a form of slavery,” California resident Phyllis Shamoon wrote on MainStreet’s page. “I have notices posted at the bank, phone co. and cable to not offer me anything. If I want it, I will ask what they have.”

For others, a creditless life is the product of one or more financial missteps. California resident Tanya Payne saw her credit score plummet after she lost her job and, as a result, was evicted from an apartment. 

“Having poor credit is like walking through life dragging a ball and chain,” she says. “Sometimes I feel like I've been marked. Finding a landlord willing to rent to me, even with a stable job and more than decent income, was a painful and humbling experience. Being rejected for credit hurts. I always expect to pay the highest deposit required, and I really try to avoid applying for credit altogether.”

Your Options

The trials that Tanya experienced are not unique. However, many Americans make it through apartment hunts, job searches and car financing with bad or no credit – but it’s not easy.

“It’s challenging, but doable,” Bruce McClary of Clearpoint Credit Counseling Soultions says. “Those who live credit-free essentially need to stick to a cash-based system and stay away from the need to refinance things.”

McClary explains that there are ways to get around not having a credit card, whether you choose to live without one or simply can’t get approved for a card. Here are some of his tips:

  • Use a money order when making large purchases (such as buying a new entertainment system for your living room) as opposed to keeping a big wad of cash in your back pocket.
  • Prepaid Visa, Mastercard or American Express gift cards can be substituted for a credit card in instances where plastic is the only payment method accepted, like renting a car. You can buy these types of cards in cash at most banks and/or participating locations. American Express gift cards, for example, can be http://www.aetclocator.com/wheretobuy/landing.jsf purchased at Walgreens, Duane Reade and Office Depot.
  • Many car dealerships are willing to sell used cars to prospective auto owners with very little credit.
  • You can also rent an apartment in lieu of owning a house, though, in the current housing market, many properties in short sale or foreclosure can be purchased by the credit-less buyers who have enough for the down payment. However, McClary does point out that those without credit can be left in a lurch if the sudden need for financing should arise.

The Catch

Not having any credit or having a low credit score does put you at a disadvantage, however.

“The problem with not having any credit is that, if you do need a loan relatively quickly, you can be faced with getting it from the most subprime of subprime lenders,” he says. 
This is why other industry experts are quick to caution against opting for a creditless existence. 

“You would need to buy a log cabin on Loon Lake and live in a forest,” Adam Levin of Credit.com says. “People need to stop thinking of credit as a crime and punishment enabler and, instead, look at it as a builder of stability.”

Levin points out that those who have bad or no credit often need to rely on payday lenders, pawn shops and title lenders when they need to get their hands on large sums of money. This is problematic since these types of subprime lenders aren’t held to the same rules and regulations that banks and credit card companies are. 

Payday lenders in particular are known for issuing loans with extremely high interest rates. According to McClary, some of these cash advance centers can charge borrowers up to 600% interest on a loan, essentially making them “little more than a loan shark with a storefront.” What’s worse is that a person looking to remain creditless can actually end up with bad credit should a loan from these type of lenders default and get sent to a collection agency.  This means that while using these type of lenders does nothing to increase your credit score, it can very easily destroy it. (Payday lending, we should point, will be regulated by the New Consumer Protection Agency created by the financial reform bill.)

Peer-to-peer lending is another option for those with bad or no credit, but it comes with a different type of risk. “You can ask friends and family members for money,” Levin says. “They might not be able to say no to you, but that can totally destroy a relationship” in the event that things go bad. 

How to Make the Switch

Another potential complication is that those without credit are likely to have a hard time getting a credit card should they decide a creditless existence isn’t working out for them.

“In the old days, all you had to do was show that you could fog a mirror and they would give you a credit card,” Levin says, explaining that, under the new CARD Act, getting your hands on a card is markedly more difficult. For example, applicants under 21 cannot be issued a card unless they can prove they have a stable source of income or a family member is willing to co-sign onto the account with them. 

If you have no credit, getting a family member to add you to an existing account is the fastest way to build your score. Of course, this also carries the risk of ruining a potential relationship since any bad credit you incur while using this account belongs to them as well. Those looking to eliminate potentially tangled family ties can sign up for a secured credit card, which allows customers with little or damaged credit to put down a sum of money upfront that will equal their line of credit (and, therefore, minimize their default risk).

However, McClary says that those looking for a secured credit card need to check out their lender thoroughly before signing up for a credit line. Many companies, he explains, offer secured cards only so they can frontload them with fees that exhaust holders’ credit limits before they even receive the card. You can eliminate the opportunity for fraud by getting your starter card from a reputable big bank or trusted community lender. The establishments will often let you graduate to a non-secured credit line once you established a good payment history. This transfer in and of itself can greatly boost your credit score.

For more ways to build or repair you credit, you can read this MainStreet article “More U.S. Credit Scores Below 600.”

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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