Why Do I Need a Credit Report?

How do you know if you have a credit report?  If you pay by cash or debt card and don’t own a credit card; or never had an installment loan, such as mortgage, auto or student loan; you probably don’t have a credit report.  If you haven’t used credit, there won’t be any credit information on you.   You could also contact www.annualcreditreport,com to get your credit report free from the three credit reporting agencies – Equifax, Experian and TransUnion.

It is great to have no debt and pay as you go, but is it?  When you need credit for a purchase for which you can’t pay in cash, such as a mortgage or card loan, you won’t be able to qualify for the loan.  Lenders base your ability to pay on your payment history in the both the present and the past.  If you don’t have any credit history there is no basis to make a decision on the loan.  You would probably have to get someone to co-sign for the loan and they would be responsible, if you can’t make the payments.  In addition without credit, you won’t be able to get the lower interest rates, which will cost you more for the loan.

There are many other companies that review your credit report to make business decisions: insurance companies, utility companies, cell phone companies, apartment complexes and employers. You may have to pay a higher deposit for utilities or apartment without credit.  Most car rental companies and hotels require a credit card to make a reservation.

If you don’t have a credit report, you won’t have a credit score.  Credit scores use credit data to generate a score.   Credit card companies, mortgage and auto lenders use credit scores to determine the interest rate to charge you.

If you don’t have credit, it is best to start with a credit card.  There are several choices – secured, authorized user and retail card.   Secured card requires a savings account which is usually the credit limit for the account. This is usually a small amount such as up to $500. As an authorized user you can use the card, but not responsible for paying.  A parent usually includes their child as an authorized user.  Retail cards are usually easier to get because you are limited to the places it can be used, credit limit is lower and interest is higher.

Having credit, shouldn’t be a bad thing, unless you abuse it.  You don’t charge more than you can pay, don’t get a loan for more than you can afford, don’t get behind in payments and   pay bills in full each month.  It is best to build credit; so that you have credit established when you really need it for an auto loan or mortgage.

Credit Expert, John Ulzheimer, is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.  Follow him on Twitter here.

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