It’s hard to imagine that someone in their 30’s might not have a credit history or a credit score but recently I began working with a member who was rejected for a $3000 personal loan. He wanted the loan in order to pay off an automobile loan for which he’s paying 29%! (more about that in a moment) The reason: “no trade line history or open credit accounts.” Wow, I was stunned when I saw his report. He literally had no credit cards, no automobile loans and no mortgage…nothing reporting on his credit history. As a result he also had no credit score.
The Importance of Developing a Credit History
We would all like to believe that we’re an “exception” and that if we avoid “playing the game” we can operate financially without having a credit history. There are some rare cases where certain communities pool their resources to help each other with loans and financial assistance. They avoid being involved in the banking or credit systems, sometimes out of mistrust or fear of the system, but they are the exception. And yes, there are those people who have damaged their credit so badly that their only choice is to ask family or friends for loans. Most of us will need to develop a credit history (and hopefully a good credit score) in order to operate more easily through life’s financial challenges. Let’s take a look at those entities who might scrutinize your credit report.
Who Looks at Credit Reports?
Essentially, anyone who has a “permissible” use can obtain and view a copy of your credit report. If you’re curious you can find the definition of permissible use by reading The Fair Credit Reporting Act. Suffice it to say that anyone viewing your credit history must have permission to do so; however, be aware that many applications and documents out there have language that gives companies permission to pull your report. Remember, your credit report is presumed to be a measure of your character so here are the main people who scrutinize your history:
- Lenders/Creditors – We’re all aware that any time you want to open a credit card account, purchase a car or home or obtain a loan from a financial institution, they are going to view your credit report.
- Auto Insurance Companies – Most of the 100 largest personal automobile insurance companies use credit information to underwrite new business. They also use the information to set rates. Also, be aware that insurance companies also use their own proprietary insurance scores (in conjunction with the credit history) to make decisions.
- Landlords – In Washington State, landlords have the legal right to pull your credit report in order to determine if they want to enter into an agreement with you. They also have the right to pass the cost of pulling your credit report onto the applicant. Here’s the section of the Residential landlord tenant act that details the law, http://www.thelpa.com/lpa/landlord-tenant-law/washington-eviction-law.html.
- Employers – This is a touchy subject for many people. It is becoming more common for employers to screen job applicants by viewing their credit reports. In fact, a recent study showed that 60% of employers associate good credit with responsibility and discipline. Not all employers pull a credit history but individuals working in government, financial institutions or in fields where proprietary information is important can expect their credit report to be a factor.
About that 29% auto loan
I want to return quickly to the 29% interest rate loan I mentioned above: There are two important things to keep in mind when you or someone you know is paying off a loan like this. 1) If your credit score is under 600 you may be forced to acquire lending through a sub-prime or “hard-money” lender. They are going to make you pay dearly for the loan. 2) As in the case of our member, they may not report your payments to the credit bureaus in which case your payment history may never reflect that you’ve been paying the loan! This defeats the purpose of taking out a loan in the first place. For a quick overview of sub-prime auto loans I found this excellent article, “MYCARLADY’s 10 Rules of Bad Credit Sub-Prime Auto Loans
So, what are we doing about our member with no credit history?
Our member has got a couple of years of “credit work” ahead of him. Anyone who is starting with no credit or damaged credit isn’t going to transform a credit history in a short period of time; however, there are things one can do to start:
- I am working with our member to contact the hard-lender who holds his auto loan to get a payment history. Even though his consistent payments haven’t been reporting to the credit bureaus, he can present this history to the credit union as evidence that he is paying according to the contract.
- I will also ask the member to start putting together a history of his rent and utility payments so that he can document these payments as well. Remember, landlords look at credit reports but don’t report rental payments to the bureaus (unless you’ve been evicted). Utility companies don’t report either.
- After we put this information together (called “unconventional credit”) I intend to present his file to our lending department to see if they might reconsider him for a loan. It’s not a sure thing; however, I believe we may be able start the member out with a secured credit card or small line-of-credit to help him start developing a credit history.
I hope this presentation helps you better understand the importance of having a credit history. I think many parents should sit down and explain to their teenagers how the world of credit works and how important it is to start and maintain a good credit history.
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