Credit: Use It or Lose It

If you listen to certain famous financial advisers, some of them will tell you that you should never use credit, that you should pay for everything in cash, and that you should strive to have no credit score at all.  While it’s great if you can buy everything outright and never use credit for anything, it’s also not very practical in today’s world.  How many of us have an extra $25,000 around to pay cash for a car?  Or an extra $150,000 around to pay cash for a house?  Not very many people can do that, can they?

The truth is, almost no one can pay cash for everything.  And there are very few individuals in this world who have no credit score – to have no credit score, you would have to have been out of debt for at least ten years, and even then, I would almost bet you are listed somewhere on the credit scale… you just might not like where you’d be listed.

Is there an alternative to never using credit?

Actually, there is a smarter alternative to the no credit, no credit score myth, and that’s pretty simple.  You just have to use credit wisely!  Instead of having no credit cards, no car loan, and no home loan, you should strive to have a good balance of credit, which would also ensure that you have a good credit score!

You should have at least one or two good credit cards and your debt to credit ratio should always be below 33%. And no, contrary to popular belief, you don’t have to carry a balance.  Use your credit cards once or twice a year and pay them off monthly!  That way, you pay no interest and your debt to credit ratio stays around 0%.  And, make sure that the cards you carry are appropriate for your credit rating – in other words, don’t even try for a credit card that requires excellent credit if your credit score is Fair or even Poor.

When you’re shopping for credit cards, know your credit score and keep the inquiries at a minimum!  Hard inquiries to your credit report can cost you up to five points on your score and if you’re bordering between good and fair, or fair and poor, that five points can mean the difference between getting approved for that new car loan (or new home loan) and not getting approved.

(If you don’t know your credit score, you can get it for free at Credit Sesame.)

What if you don’t have any credit to start with?

If you’re just starting out and don’t have any real credit, consider getting a secured credit card, or even better, look at an online store card like Fingerhut – most people get accepted for a Fingerhut Credit Account issued by WebBank , and they have some pretty sweet merchandise at decent prices, so you won’t be disappointed with your purchases.

So, let’s dispel the No Credit Myth once and for all – remember, when it comes to your credit, Use it or Lose it!