Friday, October 09, 2009

Get credit   posted by Razib @ 10/09/2009 10:31:00 AM

I don't usually post this sort of stuff, but I suspect that this might be of interest to readers of this weblog, What Happens When You Need a Loan but You Don't Have Any Credit?:
I don't own a credit card. Never needed one. By the time I was old enough to carry plastic, the convenience of the card had been cleaved from the possible dangers of credit. The debit/ATM card allowed me to buy goods without holding cash, and did it without exposing me, particularly as a teenager, to the temptations of credit. As I got older, I had the money to live within my means, and so I did so. I figured this meant I had a good credit score. It wasn't until a few years ago, when I tried to open a Banana Republic credit card to get a few bucks off some fall purchases, that I realized it meant I had no credit score. Not a bad credit score. No credit score.

Then I tried to buy a house.

Without a credit score, Fannie Mae and Freddie Mac wouldn't hold my loan. That meant most big banks wouldn't loan to me at particularly favorable terms, as they'd have to carry the loan themselves. My other option was going through the Federal Housing Administration, which meant that the banks would require that I pay extra for private mortgage insurance.

I talked to another GNXPer recently who didn't have a credit card. Until last year I didn't have one either. My theory was that I lived within my means, have few expenses, was healthy, etc. etc. I know plenty of people like me, young, intelligent and not too interested in signalling with positional goods and such, who didn't get caught up in the real estate craze, and so made a calculation that there was no need for credit (at least for the time being).

And then you run into issues like above. At some point you may need credit, and you're a "credit ghost." I actually wasn't a credit ghost because I had had credit cards in college (when my cash flow was a little more unpredictable, if you get my drift), and for some reason two of the accounts remained open (though with no activity in nearly 10 years). I found this out after checking my credit score after hearing about this problem in early 2008.

There are many ways your credit score is calculated. Here are three variables:

1) the amount of credit you have access to matters (i.e., add up your credit lines)
2) the amount of utilization of that credit matters (i.e., how much of your lines are you drawing on)
3) the length of time you've had an account matters

So one easy way for people who don't live beyond their means to increase their credit score is apply for a card every 6 months and barely use them (but enough so that they won't close the account for lack of use). A problem with compulsive spenders is that if they have more cards, they spend more. But for people who shy away from credit this isn't an issue (presumably), so this is an easy way to increase your credit score. The reason to apply every 6 months is that if you apply for too much credit at the same time you get a bunch of "inquiries" and that drops your score, and you might simply get rejected because it seems like you're hard up for money and so a bad risk.