Use These Five Tips to Achieve Mastery Over Your No-Credit Life
After you graduate from college, the only grade that really matters is your credit score. And if you’re like most young adults, yours might not exactly be “killing it.”
In fact, people aged 18 to 24 have an average credit score of 630, according to Credit Karma. With the non-profit agency Credit.org defining “good” credit as 680 to 740, that means most young people in fact have credit scores that are, well… less than good.
If you’re a young adult, the reasons your credit score might not be up to snuff are almost too numerous to contemplate. Enticed by a free t-shirt or water bottle, maybe you signed up for a credit card on your college campus, bought some stuff, then forgot all about it. Or perhaps you’ve never even had a credit card, thus failing to build your credit at all. Or maybe you’re one of four Americans saddled with student loan debt.
These financial realities affect most of us. In fact, nearly 70 percent of Americans have committed a major financial mistake or “credit fumble” before turning 30, reports Credit Karma. These mistakes include overspending on credit cards, missing payments, having an account sent to collections, or defaulting on a loan.
If you haven’t prioritized building good credit history, a low credit score could hamper your ability to reach major adult milestones. But don’t worry. Here are five tips for navigating your beginning adult years without any credit at all.
Snagging an apartment without a solid credit history might seem impossible, but you can improve your chances by providing proof of stable income (even if you’re a freelancer) or a savings account balance. You can also help yourself out by paying a few months of rent upfront or providing professional reference letters. All of these actions can help demonstrate that you are a responsible person facing an unfortunate credit situation. If you’ve exhausted all these options, you could also ask a close friend or family member with good credit to co-sign on your rental agreement. At the very least, it’s an opportunity for them to pocket a pretty solid favor from you down the road—and when you’re on much more solid financial footing, no less. In our book, that counts as a “W” for both parties.
Okay, so you want a sweet ride—that’s not surprising since cars are awesome. And while buying a car with no or bad credit isn’t impossible, it can be difficult and financially burdensome. When deciding to approve you for a car loan, lenders look at your credit score as a gauge of whether you’re likely to make your car payments. If you do get approved, you might get slapped with higher interest rates since you would likely be seen as a riskier candidate—and be tied to those rates for the entire life of the loan, often as long as six or more years. The same goes for leasing a car—though you likely wouldn’t be approved for one without stellar credit in the first place. In contrast to these traditional options, Fair is able to offer customers—even those with no credit history—better payments for a very straightforward reason: Fair customers don’t borrow any money to get a car. As a result, Fair doesn’t have the same risk as a lender and can pass those savings on. With Fair, you just pay for your car month-to-month for as long as you want to keep it—and can even turn it in whenever you want if your situation changes.
All right, so you got a car. But guess what? You’re not through the credit gauntlet yet. That’s because insurance companies in the vast majority of states are free to use your credit score to decide whether to charge you a higher rate. Sound like a headache? Well, if you get a car through Fair and opt into month-to-month insurance, your credit rating doesn’t affect your insurance rate whatsoever. What does factor into your rate is your age, car choice, location, and driving history. So as long as you’ve followed the rules of the road, Fair insurance could be a good option whether you have credit or not.
Without credit, your choice of lenders is limited. However, you might be able to get an FHA loan—often the cheapest choice for many borrowers with lower credit scores—with down payments as low as 3.5 percent. If you go this route, make sure to compare quotes from various lenders, because credit requirements and rates can vary by lender. Also, keep in mind that all FHA loans require homebuyers to purchase mortgage insurance, which protects lenders against losses if borrowers default on their loan.
In the loans mentioned above, your credit score weighs pretty heavily in the approval process. But student loans are a different beast altogether. You can borrow money for college or grad school without good credit—or any credit for that matter. First, you need to submit your FAFSA (Free Application for Federal Student Aid) for federal student loans, which don't require credit to qualify. The FAFSA is the key to need-based financial aid in the form of grants, scholarship programs, and work-study. They calculate this need by subtracting your expected family contribution from the total cost of attendance. Sure, filling out forms isn’t terribly fun. But getting money for school? That definitely is.