Understanding the down side of avoiding credit

A stack of credit cards against a black tabletop.

Used responsibly, credit cards can help consumers build a credit history. (Photo Credit: CC BY/Andres Rueda/Flickr)

Many consumers looking to establish a credit history are denied credit because they don’t have enough credit to begin with. Even if a person has an excellent FICO score, it’s still possible to be denied something as weighty as a mortgage because the credit report reads more like a leaflet than a book.

Avoid being financially super-responsible with credit

People who are super-responsible can never enjoy their own parties, and the same is true for consumers who are financially super-responsible with their credit. Paying off student loans right out of the gate, avoiding excessive use of credit and generally living debt-free will save money in the long term, but some creditors do not view the credit-phobic kindly. Even for those who use credit but are choosy, an excessive number of credit inquiries can also have a negative impact on the credit score.

Having little credit history and being a serial credit card consumer can impact credit negatively, says Rod Griffin, public education director for the credit bureau Experian. Showing an ability to manage a reasonable number of open, active credit sources over time is paramount in illustrating credit-worthiness to creditors, including mortgage lenders.

Pay off loans, but keep some credit active

Griffin claims that contrary to what some so-called credit experts say, it doesn’t hurt to pay off loans early. Positive marks on the FICO report remain visible for approximately 10 years, whereas negative aspects generally only hang around for seven years. Paying off loans with excessive zeal can lead a consumer into the “No, thank you” zone with some potential creditors, however. If there aren’t at least three open, active accounts on the credit report that have been around for 24 months of more, it’s possible some creditors will pass on a credit application.

Use credit cards, but sparingly

It’s a myth that college students who are just beginning to build credit should take on multiple credit cards. Used responsibly and in moderation, having one credit card or two is a fine path toward building credit.

But the weather may be changing, says Griffin. Credit bureau insiders see the new Credit Card Act established under the Obama administration as a possible hindrance to young people’s ability to build a credit history. By restricting credit card company access to college students, some experts see more limited opportunities for building credit history.

Avoid the cash-only lifestyle if you want good credit

While you won’t rack up revolving debt by living a cash-only lifestyle, you also won’t build your credit. Maintain active credit accounts where you pay more than the minimum each month, and look to such products as installment loans and basic credit check loans when emergency funding is necessary. While such products do not traditionally report to the credit bureaus – and hence do not provide an opportunity to record positive marks on a credit report – they will enable you to avoid building up excessive revolving debt on credit cards.


MSN Money
U.S. News and World Report

Understanding the Credit Card Act

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