"Living debt free" is a nice slogan, and beyond that it's something we should
all aspire to. Unfortunately, some people couple this concept with living credit
free. That is a far different story.
For most people credit still represents something that happens to us, rather
than something we can build, nurture, manage and protect like an investment
portfolio.
A lot of folks simply don't like the idea of credit or the fact that banks
and other organizations
collect information about us in order to determine whether or
not we are worthy borrowers. It feels unfair -- like they are having
conversations behind our backs, and when they make mistakes, it can be difficult
to fix the problems.
Nevertheless, credit and the evolving system that shapes it -- whether it's
the creation of new credit scoring models or the changing standards of lending
institutions -- can either stifle or advance economic growth and is (for better
or worse) a reality in our lives. While it is not impossible to live without a
credit score, the unforeseen consequences of doing so can have a real impact,
particularly for people in a crisis.
Consider these instances where having a credit history can enhance our
lives:
If you're just starting out, or have chosen to immunize yourself from credit
and don't have a credit score (or a credit file so thin you are impossible to
score), your options are limited. Dreams of owning a home may well be premature
or unrealistic. Your only play will be the rental market.
Many
landlords check potential tenants' credit reports and scores
before renting out an apartment. The practice is especially common for recent
college graduates and young adults, whose incomes rarely equal 40 to 50 times
the monthly rent, as some landlords require. Therefore, you may well have to:
- Put down a gargantuan cash deposit (perhaps 3-12 months).
- Find one or more roommates (whom you may or may not like).
- Convince a friend or family member with a fair amount of spare credit or
assets to co-sign for you.
- Enroll in a rental guarantee program like Insurent, which charges between 75
percent and 110 percent of a month's rent. In New York City, where the average
rent is $2,902 a month, that could cost you as much as $3,192. The average rent
nationwide is $804 per month, which means a deposit program (if you could find
one that covers rentals in your area) could cost the average renter an extra
$884. Another company, RentSecure, blocks out enough money on your credit card
to cover a half-year's
rent. In Los Angeles, where the average monthly rent is $1,389, that could
load your credit card account down with $8,334 in unusable credit, which then
can't be used to buy necessities or cover emergencies. However, if you're a
"cash-only" true believer you may not have a credit card, which means this
option is not available to you anyway.
So riddle me this: Why tie up
your cash in rent security, when you could deposit the same dollars into an
investment account and build for your future?
More on Credit.com:
Can
You Really Get Your Credit Score for Free?
If you lose your job, get hit with a huge medical bill, or suffer another
financial emergency you can't immediately afford, with a solid credit score you
have options. Maybe you get a home equity line of credit, or put some of the
bill on a credit card? At current fixed rates and depending on your score, the
first option would about 6.25 percent in annual interest; the second would cost
about 13 percent. There is the possibility that a hospital will work out a
payment plan with you, though that could come with an interest rate, and not
everyone will work with you. If you don't have access to affordable credit when
an emergency strikes, then the only alternative is expensive credit. Consider a
car title loan, in which a company gives you money up-front in exchange for the
title to your car. Such loans come with an average annual interest rate of 300
percent, according to a recent study by the Center for Responsible Lending. One
in six people who obtain a title loan come to face repossession of their cars.
Then there's the infamous payday loan. The average APR on a payday loan is 417
percent. These are often the only options for people with poor credit.
More on Credit.com:
The
Ultimate Guide to Credit Scores
Try booking a hotel reservation, or
renting a car or even a video without a credit card. It's very
difficult and may well require a large deposit, or a significant "block" on your
debit card, tying up precious cash in your bank account.
Millions of Americans are unemployed and looking for work. Like it or not,
some employers are asking job applicants to permit them access to their credit
reports. Although a number of states have enacted laws that limit employer
access to credit reports, it is an emerging trend that cannot be ignored.
Unless you were born in the right bed, have friends with money who love your
concept, have made prudent investments in the past few years, or capture the
imagination of the right venture capitalist, it will be extremely difficult to
leave your job and start your own business if you don't have credit. Further, a
strong credit profile enables you to pay less for access to money leaving more
disposable income to invest.
What to Do If You Need to Build Credit
No doubt, many people use credit like a 17-year-old, borrowing to the max and
not worrying about the consequences. It's also possible to drive a car like a
17-year-old, flooring it all over town and occasionally ramming into people, but
that doesn't mean no one should buy a car.
In adult hands, treated like an asset rather than a vehicle for irresponsible
behavior, credit can be a powerful life enhancement and wealth building tool.
An auto loan can help us better afford a reliable car to drive to a
better-paying job. A mortgage enables homeownership, which for most Americans
has been the cornerstone of wealth and long-term financial stability. When paid
promptly every month, credit cards can make it easier to track spending, earn
rewards (even get cash back), build a more solid credit profile and help smooth
out the ebbs and flows of income and expenses during times when cash is tight
and running a balance is unavoidable.
More on Credit.com:
5
Credit Rules Everyone Should Follow
Every one of these life events, each representing another financial building
block, is made more possible when you have a solid credit report and a good
score. Building a strong credit history requires constant maintenance and
attention lest it become a rap sheet and not a resume. (If you're not sure where
your credit stands, you can use Credit.com's
free Credit Report Card for a clear breakdown of the
information in your credit reports, as well as your credit scores.)
Building good credit also requires that you spend responsibly; that you don't
use credit cards like money because they're not money. Golden Rule: If the cash
isn't there to pay for what you've charged, you'd best think twice before
swiping. Our friend and cash-only guru Dave Ramsey is dead right about that, and
many other things, but
even he acknowledges that sometimes "life happens." Fact: Not
everyone has a five-figure emergency fund, and for many people access to
affordable credit is the difference between financial struggles and financial
ruin.
Managing credit indeed requires hard work, but the payoff can lead to a
richer and fuller life on a number of levels; pretending it doesn't exist limits
our options.
This work is the opinion of the columnist and in no way reflects the
opinion of ABC News.
Adam Levin is chairman and cofounder of Credit.com and Identity Theft 911.
His experience as former director of the New Jersey Division of Consumer Affairs
gives him unique insight into consumer privacy, legislation and financial
advocacy. He is a nationally recognized expert on identity theft and credit.
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