Having No Credit Is Better Than Having Bad Credit?

Some people are so suspicious of credit that they advise giving up credit cards and living on a cash-only basis. They acknowledge that most people need mortgages and auto loans, but they feel the best way to impress a lender is by living a credit-free life.

Unfortunately, there are holes in this theory. The credit scoring formula is designed to judge how well you handle credit over time; if you have no credit, or you don't at least occasionally use the credit you have, the formula won't have enough information to make an assessment. You don't have to live in debt to get a decent score, but you do need to use credit.

In the past, some people were able to get high credit scores without having much credit. Earlier incarnations of the FICO credit score gave scores over 700 to some people with just one or two recently opened accounts. The newer versions of the formula, however, make it much tougher to get a lofty score if you have a thin credit history.

It's too bad that conscientious people who simply don't like debt should be punished with higher premiums and some states have even banned insurers from using a lack of credit history as a reason to raise rates. If your state hasn't prohibited the practice, though, you might want to dust off your credit card and use it once in awhile.

Roy Chan, CPA
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