As a teenager, I was repeatedly told that establishing credit and using it responsibly to build a high score was paramount to my long-term financial success. Too bad I completely ignored the latter part of that advice and found myself in a mountain of debt by the age of 21. And it’s around that time that I decided to complete a self-study course course on financial literacy by a well-known expert. A bulk of the information shared seemed practical, but there was one section that left me scratching my head.
It was the part about debt-management; the instructor insisted on avoiding debt at all costs or it could be detrimental to your long-term financial health. While there is some truth to this statement if debt is not managed responsibly, I’ve found that ditching credit altogether in favor of cash can come back to haunt you.
1. Potential Lenders Can’t Properly Evaluate Your Application
Turns out having no credit is just as bad as having poor credit. Reasoning: lenders use your credit profile to gauge your credit risk based on several factors, such as payment history. But if nothing’s there, chances are your application for credit will be denied or even worse, you may only qualify for the inferior products.
2. Exorbitant Security Deposits
If you just moved into a new place and need to activate cable, internet, electricity, water or any other utilities, the provider may require a hefty refundable deposit if you have minimal payment history. The same rule applies with cell phone providers: they’ll want to collect a lump sum upfront to be used as collateral in case you default on your monthly payment for services later on down the line.
3. Limited Credit Card Options
Those irresistible credit card offers you see on television or internet advertisements are usually reserved for consumers with excellent credit. While lenders evaluate an array of factors to determine if you qualify for the most competitive offers, having a score on the higher end of the spectrum will definitely boost your chances. Until then, you’ll have to settle for a secured card or one with an outrageous APR should you decide to apply.
4. Good Luck Securing Travel Reservations
It’s practically impossible to make travel arrangements without some form of plastic. And if you use debit for lodging or rental reservations, don’t be alarmed if a large hold is placed on your card and remains intact for a week or so following the trip.
5. Limited Options When Renting
Need to rent an apartment? The landlord will want to run a credit check, even if you’ve proved you can afford the monthly payments. If you have little to no credit history, don’t be alarmed if they require first and last months rent along with a security deposit, or reject your application altogether if there are more qualified applicants on the waiting list.
6. Increased Insurance pPremiums
Lenders, creditors and landlords aren’t the only entities that may want to take a peek at your credit. “Approximately 95% of auto insurers and 85% of homeowners insurers use credit-based insurance scores in states where it is a legally allowed underwriting or risk classification factor,” according to the National Association of Insurance Commissioners. And the lower the scores, the higher the premiums. The good news is if you reside in California, Hawaii, or Massachusetts, you aren’t subject to this screening.
Bottom line: I’m not suggesting you apply for every credit offer that comes your way or else you could end up buried in a sea of debt, struggling to stay afloat. However, you shouldn’t completely ban them or you will have to fork over more dough than you initially bargained for should you need to borrow cash later on down the line.