Having no credit can sometimes feel like a challenge, but do you really need to build credit? And what happens when you have no credit score?
Well, if you’re like millions of Americans, you’ve probably heard that you need to build credit. In fact, “You need to build credit so you have a good credit score!” is very common advice. You hear it everywhere: in commercials, from your mom, you name it.
And while your mom means well, it’s no wonder the message has spread.
The advertising budgets of credit card issuers are huge, to put it mildly. (Over $1 billion in 2018 alone, according to Statista.)
Do you think credit card companies are making a profit off people borrowing money, if they’re spending over $1,000,000,000 to promote their products?
I’d say that’s an easy yes. They have a vested interest in making you believe that your 3 digit number matters an awful lot.
Everywhere you turn, articles repeat the idea that building credit is smart, and that it’s important to check your credit score.
Americans have fallen hard for the notion that building good credit is key to a life of financial success — or even the basics.
Relentless corporate advertising and media exposure spread the myth that good credit is a financial must, and that borrowing is a smart decision.
Ask anyone whether it’s important to build credit, and you’ll almost always get a big yes.
But is that true? Do you really need to build credit?
Let’s take things step by step. Have you ever stopped to think about exactly what you need to build credit for?
Typically, you’ll hear people say you need to build credit so you can get a good credit score. And then they’ll say you need good credit in order to:
- Rent a place to live
- Buy a house or car
- Get a job
- Pay lower insurance rates
- Borrow money
Well, you may not hear that last one put quite like that. Most people don’t flat out say that you need a good credit score in order borrow money.
(Even though the true purpose of that number is to automatically judge how likely you are to repay money you borrow.)
Those may seem like reasons that you can’t live without credit, but they’re not. You can do those things by being in good financial shape.
So the short answer is no, you don’t need to build credit.
You can do ALL of those things with no credit score.
If you want to borrow money in order to build credit, that’s your choice. We all get to handle our money the way we think best.
But that’s different from getting sucked into the prevailing mindset that says you have to build credit or that you have to have a credit score. You don’t have to do those things. And you don’t have to make the choice out of fear or a lack of information. You have options!
It’s also different from wanting to improve your credit score if you have bad credit.
Let’s talk about those differences real quick.
There are three basic choices when it comes to credit scores. Essentially, you can have:
- No credit
- Bad credit
- Good or excellent credit
Now you might think those are listed in order from worst to best, but they are not. Worst is having bad credit. Best depends on your point of view.
Keep in mind that none of these are moral judgments of you. You are not a good person or a bad person because of having or not having any kind of credit score. They are just numbers that reflect a few of the things you do with your money.
What does it mean when you have no credit?
No credit means you don’t have a credit score at all. You don’t have a credit score because there is nothing in your credit report for the credit scoring companies to look at. They can’t rate you automatically, so there’s no score.
You could be GREAT with money and have no credit score because you don’t use debt. You could be 18 and wondering how to build credit (or whether you even need to.) Or you could be a recent immigrant who has not had anything reported, etc.
Not having a credit score is not a bad thing, and at the very least it means there’s no report of you paying bills 30+ days late. That’s a good thing!
You might also have what’s called a thin credit file and not be able to be scored. That’s where you don’t have very much that has been reported, but you also don’t have any bad things that have been reported.
What does it mean when you have bad credit?
It’s worse to have bad credit than to have no credit, for sure! When you have bad credit, it likely means that you paid bills late or not at all. Or maybe you have a bankruptcy, judgment, tax lien, or collections against you. From the lenders point of view, it means you are a bad risk and they may lose money if they lend to you.
Generally, a bad FICO® score is anything below 670. If you want to dig down further, 580-669 is called “Fair” but labels you as a subprime borrower. That means people will charge you a lot if they lend you money. 300-579 is called “Very Poor”, and you may not be able to be automatically approved for a loan at all. If you are, you’ll probably be charged a lot for it.
Things are similar for the VantageScore 3.0, with a score of 700 or more being thought of as good. 601-660 is considered fair, 500-600 is poor, and 300-499 is very poor.
You don’t want to have bad credit, because it means there are some problems. Often, the solution to that is to fix your finances over time. Pay bills on time, reduce debt, check your credit reports for errors and have them removed if you find any, etc.
What does it mean when you have good credit?
Basically, it means you are good at borrowing money and paying it back as agreed. You pay back what you owe, you don’t pay late or use too much of your available credit, and you have had several kinds of loans/debts in the past. (For example, a credit card, mortgage, and student loan.)
The credit scoring companies have decided you are probably going to pay people back when you borrow, so they mark you highly for that. The lenders will probably make money from you vs. being stuck with a loss. That’s all it means.
It doesn’t mean you have a lot of money in the bank, or enough money to go on fun trips, to send your kids to college, etc. You may or may not have those things, but they are not a part of your score either way. Having good credit just means you use debt and are good at repaying what you owe.
Now let’s hear about what it’s like to have no credit score (from someone who lives that life.)
Podcast editor Steve Stewart is a huge fan of living debt free. He’s managed to get rid of his credit score by paying off all his debt and then not borrowing again. (That’s right, he doesn’t even use credit cards.)
Here’s what he has to say about life with no credit score:
I get so angry when people are like “Oh you have to build your credit!”. No, you don’t have to build your credit. Build wealth.
I have no credit score and I’m living just fine. People are so focused on getting their 700 credit score to 850 by doing all this wild stuff. It’s time better spent making more money and building your net worth.
If you’re going to live debt free, and you’re not going to have a credit score, people are going to think you’re an anomaly. They’re going to say “oh I can’t get a phone because I don’t have I credit score”. No, you just put down a deposit.
And I think that’s the key. You’ve got to have some money. You can’t live that close to zero if you’re going to live a cash lifestyle.
But if you’re living a cash lifestyle, you’re probably not living that close to zero anyway unless you are just starting out or something traumatic has happened.
He’s also got a few things to say about the built-in bias of a credit score:
There are things that we do that would prove that we’re credit worthy that are not included in a credit score. So that makes the credit score biased against people like me who pay for things.
Suppose we rented our house instead of owning. Rent doesn’t help my credit score at all, unless you use one of those special rent payment services that reports to the credit bureaus. Then the rent might be added to your payment history which does help.
Your electric bill that you pay every month doesn’t help your credit score. Your cell phone bill doesn’t help your credit score. All these things that are good for you to pay on time aren’t helping your credit score.
Now if you don’t pay them, guess what? Now it does go on your credit report and it hurts you. That’s another reason why I hate the credit score. It’s one-sided, and it doesn’t measure non-debt products.
So it’s clear that credit scores do not always give a complete picture of things. Credit scores are ever-changing snapshots in time based on your credit reports, and they only reflect some of your money-related activities.
Having money instead of debt truly is key.
Debt (aka credit) is often viewed as a solution, but the problem is that when you ARE just starting out or are in a bad situation and you use it, the debt just piles on.
And then your situation is worse, not better. Because how can you pay more when you were living close to the edge to begin with?
So don’t feel like you have to build credit as part of being an adult. You don’t, and it should not be the main focus when it comes to managing your money.
Focus instead on things that will help improve your situation going forward. For example, you might:
- Build an emergency fund
- Pay your bills on time and in full to avoid late fees
- Create a budget
- Track your spending
- Spend less than you earn
- Keep your skills up to date and learn new ones
- Make more money
- Find friends and family you can count on
Those things will benefit you a whole lot more than worrying about a credit score.
But since many people do worry about what to do if you have no credit, let’s go over some common concerns.
Common concerns about living without a credit score
If you have no credit score, you might wonder how to do things like:
- Renting a place to live
- Buying a house or car
- Getting a job
- Paying lower insurance rates
- Booking a hotel and renting a car
Well, you don’t need a credit score to do those things. You need money, and you need to be responsible. And if you do want to borrow for some of them and start to build credit, you need to be able to show that you are a good risk.
There are ways to do those things. Let’s talk about each of them one at a time.
Renting a place to live with no credit
You may not be able to rent from big rental complexes when you don’t have a credit history, but you’d need to talk to them if you want to find out for sure. The standby answer if you’re just starting out is to get a cosigner, but there are other options too. If you have someone cosign for you, it means they are responsible for your debt too. So if you don’t pay, they are on the hook. This is a big thing to ask someone to do, and I don’t recommend that people cosign.
So don’t forget about other ways to get a rental. This article has some good tips on how to rent an apartment with no credit.
Going with an independent landlord (someone who rents out a small number of places) or having a roommate who does have credit are probably the easiest routes to go. This is especially true if you have someone who can vouch for your character to them. A short term/trial lease is also a good idea.
As a small landlord myself, I will say that I don’t look at people’s credit scores. I don’t even check their credit normally unless it’s part of a background service, but if I did I’d be more interested in their credit reports than their scores. What I do look at are their likely ability to pay the deposit and rent easily, and I get feedback from previous landlords. If I can also see where they are living now that’s a bonus, especially if they have pets.
In general, working with an individual landlord vs. a big complex and being able to pay your first & last month’s rent plus a deposit up front is likely your best bet.
Buying a house or car with no credit score
Another big concern people have about not having a credit score involves buying high priced items like a house or car.
For example, what about getting a mortgage with no credit score? In that case, you use manual underwriting. That’s where lenders manually look at your information and history instead of relying on a credit score. (The linked article has more on that. It’s by someone without a score who got a mortgage.)
For other large purchases like a car, first know that there’s no rule that says you have to pay $36,718 for a new car — the average price in 2019. You can save up, start small, and move up gradually. If you think you can pay a monthly car payment and insurance with no problem, pay that amount to yourself first for a few months to save up.
If you do want to borrow but have no credit, you can use the “shoebox” credit provision of Regulation B. That says that if someone is going to use a credit score to decide whether or not to lend to you, they have to accept other information as well. You can show them documents and payment histories to help prove you are credit-worthy. Once you do get a loan that is reported to the credit bureaus, you will start to have a credit history.
Getting a job with no credit
Will having no credit affect getting a job? Let’s talk about what pulling credit means in this case.
Some employers do get credit reports on people they are thinking of hiring. According to Experian, “Federal law allows potential and current employers to view a modified version of your credit report for employment purposes such as hiring and promoting.”
- They don’t check your score. Instead, they check that special version of your credit report.
- Not all employers pull your credit, and not all employers do it for all jobs. It’s most likely to happen for jobs that deal with finances or that need security clearances.
- They have to tell you they want to do this, and get written permission from you.
- They have to tell you if they don’t hire you because of that, and give you a copy of the report in that case.
And according to the National Conference of State Legislatures, 11 states limit employers’ use of credit information in employment. These states are: California, Colorado, Connecticut, Delaware, Hawaii, Illinois, Maryland, Nevada, Oregon, Vermont and Washington.
Also, remember that having no credit score is NOT the same as having bad credit. If you have bad credit, you will have a credit score and there will be negative items on your credit report. Having bad credit might stop you from getting some jobs.
But if you don’t have a credit report at all, that means you don’t have bad credit. You just cannot be scored, and there would be nothing negative to find on a report that doesn’t exist. Finding nothing bad about your finances seems unlikely to be a problem, especially if you can show them good things too.
What about insurance rates?
Getting charged more for car & homeowner’s insurance is often a fear of people who are getting out of debt. They worry that their car and homeowner’s insurance rates will go up when their debts are paid off.
But that doesn’t mean your rates will go up because you get out of debt, or that you’ll have a higher rate if you don’t have a credit score.
Why? There are a few reasons.
First, paying off your debts usually makes your credit score go up, at least for a while. It’s only when you no longer use credit at all going forward (like Steve) and enough time has passed that you will finally no longer have a credit score. That takes quite a bit of time, since your credit history still exists and items usually stay on your credit report for 7-10 years.
Second, if you have no credit because you are young and just starting out, your car insurance rates are probably going to be high. But that’s probably because you are thought of as a new driver until age 25. Insurance companies usually charge more to new drivers, because their stats show drivers under 25 are more likely to have claims. So that’s not because of having no credit.
How your credit score can affect insurance rates
Insurance companies are often allowed to use credit information as part of deciding on rates, whether to offer a policy, etc, but that’s not always the case. Some states limit or don’t let them do so. And insurance doesn’t use the same credit score that would be used to apply for a mortgage, for example.
Instead, they use special insurance-based scores AND other things (like your driving history, your claims history, where you live, you age, how old your house or car is, etc.)
And according to the Fair Credit Reporting Act, if an insurance company uses your score to take an “adverse action”, they have to tell you. For example, adverse actions could include not insuring you or charging you more than people with an average score.
So chances are that having no credit (which again, is not the same as having bad credit) will not cause your rates to be higher than a similar person in a similar situation who has an average score. If it did, they are supposed to tell you, and then you could take action.
Booking a hotel
If you do not have a credit score at all, you don’t have a credit card so that’s really where this comes into play.
You’ll probably use a debit card if you stay in hotels. When you do that, be aware that hotels will usually put an authorization hold (sometimes called an incidentals hold) on your card. Except because your card is a debit card, they’re really putting a hold on money in your checking account.
This money is held for the hotel to use. It can’t be used for anything else until the hold is released, which may not happen until several business days after your stay ends. (Check with the hotel to find out their policy on how much they hold and when they release it.) Basically, you can’t spend the money until after the hold is released and any actual charges have gone through.
For example, when you check into a hotel they may run an authorization on your debit card for the cost of the entire stay including any resort fees and taxes, plus a nightly incidentals fee (say, $50 a night). So in this case there would be $600 of your checking account balance set aside for the hotel’s charges.
So, when using a debit card to pay for hotel charges, it’s a good idea to have extra money in it to account for those holds. That way you’ll still have money available to spend.
Renting a car with no credit score
Some car rental companies will require a minimum credit score, so you wouldn’t be able to use those companies. However, you can use the ones that don’t. For example, Dollar does not run a credit check. Like hotels, some will also place a hold on a certain amount in your checking account when you use a debit card. You may be able to avoid that by being a loyalty member or meeting other terms. To make sure of what they accept, contact the car rental company you are thinking of using.
Regarding renting a car, Steve Stewart uses his debit card. He says, “Especially at the airports they are much more lenient. They know that you’re coming back with the car. Provide them with your return flight and they know you’re coming back so there’s less risk there.”
He adds, “I did have a problem renting a car with a debit card once with an off-site Avis. I was rejected because all they were basing it on was my lack of a credit score. So Avis is no longer on my list of companies I can do business with. I use Alamo, Hertz, Budget, and National. National even has signs at some airports saying they will take your debit card.”
The bottom line when you have no credit score?
You don’t need to have credit to succeed in life. If you want to build credit, that’s one thing, but don’t buy into the idea that doing so is a must. It’s much more important to develop good money habits and build a good financial cushion for yourself.
You don’t want to have to count on debt to bail you out if you’re out of work, for example. (Even if you do have a credit score!) Start to build your money management skills and your bank balance now. Good financial habits will keep you from ever needing to have a credit score.