7

I found the following article which said

If you don’t use a card at all, you have no credit history. That’s almost the same as bad credit history.

1) Do they mean the same?

2) If YES, why?

3) For no other reason than to make good credit history, does a person really need to use a credit card and pay off high interest?

  • 6
    You don't need to pay interest to get a credit history with a credit card. You just need to put things on it and pay them off every month in full. – JohnFx Jul 21 '12 at 14:37
  • but using credit cards is not free. right? even though they offer 1 year fee waiver etc. – kitokid Jul 21 '12 at 14:53
  • @kitokid: Choose your cards wisely and they don't cost anything if you pay them in full. I have a ~800 credit rating and the only actual interest that involved was two mortgages and a car loan. – Loren Pechtel Jul 21 '12 at 15:45
  • Loren is right. They can be free if you pick one with no annual fee and pay them off every month. They typically make more money off the merchant than the credit card holder anyway. – JohnFx Jul 21 '12 at 18:04
  • While the question isn't tagged as US-specific, and there are plenty of other countries that have credit history schemes, I do feel that this is US-specific. E.g. because the question implies card = credit. – MSalters Jul 21 '12 at 23:06
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It is almost the same

A bad credit history means based on your past, you are likely to make bad decisions with credit and a lender should beware, as you are known to be untrustworthy. Whereas, no credit history means we don't know. It is risky to loan money to you because we aren't sure you will pay it back, but we can't say you won't.

Since many credit unions have programs to help people with no credit start a history, I can say for sure that there are more people willing to loan money to no credit history than there are will to lend to bad credit history

You must use credit to establish a credit history

But there is no requirement that you actually pay interest at all. Lender like it when you pay interest, they make it easy to pay interest, but from a credit history standpoint, there is nothing saying that you must.

  • I guess those same banks have programs to fix your bad credit.. so maybe my argument isn't a good one. – MrChrister Jul 21 '12 at 18:43
  • Those "programs" are usually scams. FTC is shutting those things down left and right. – Travis Webb Jul 29 '12 at 19:08
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    @TravisWebb - do you have a citation? Credit Unions often allow a person to open a CD or a savings account with the same amount of credit they issue. It is common and it is not a scam at all. I believe you are thinking of a different program? – MrChrister Jul 30 '12 at 7:06
  • No citation is needed, because most people aren't pedantic enough to misinterpret what I mean to say. Everyone knows I'm not talking about legitimate credit union programs -- but in terminology, they are indistinguishable from the "pay us $500/mo and we'll magically fix your credit!" scams. – Travis Webb Jul 30 '12 at 13:22
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    If you took the time to type up what you meant to say, then visitor to the site who aren't already highly literate in personal finance have less chance of being confused. I have no problem with you making an edit to my answer if you feel something isn't correct or could use improvement. Please don't feel I am attacking you, I am just looking to improve this answer =) – MrChrister Jul 30 '12 at 14:51
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As others have said, you do not have to pay high interest for using a credit card. But the credit card companies try to get you to pay interest with a variety of tricks. Many people have no idea as to how credit cards work, and so fall for these tricks.

If you have a credit card, the card companies emphasize the minimum payment that you have to make to keep your account "in good standing." Lots of people like the idea of keeping their account in good standing and so happily make the minimum monthly payment. But what happens is that once you do so, interest starts getting charged on the unpaid balance every month until the unpaid balance is reduced to zero. For lots of people, this means never and so they live their lives in the belief that using a credit card means paying high interest: they have no idea that a different modality of existence free of credit-card interest is possible. If you ignore the credit card companies' blandishments and pay the total amount of the monthly balance every month by the due date you will not be charged interest: no interest at all if you follow this practice each and every month after you open the account. But if you have been carrying a balance and decide one day to pay off the balance in full, there will be a minor hiccup of one month when you will be charged interest again. Don't fall off the wagon and resume your bad habit of making the minimum payment or partial payment each month because of this hiccup. Keep at it and religiously pay off the full statement balance every month and you will not have to pay interest again.

Your question in the comments about one-year waivers also has a double meaning. Many credit cards come with annual fees, and some of these are waived for one year. Many other cards are available without any annual fee too. If you have no credit history, you might not qualify for some of these, but look around: your local bank might be more helpful than a large issuer like Citibank. The other kind of one-year waiver is for a "Transfer your balance now and pay no interest for a year" deal. There usually are charges for the balance transfer that are not called interest, but are in effect prepaid interest. There also are "Use these checks like cash to pay your other bills" that are actually cash advances on which you pay interest. Be very cautious in accepting such deals.

  • How does this answer the question? Unrelated questions in comments should be addressed in the comments, right? – coleopterist Jul 26 '12 at 15:50
  • @coleopterist The third question asked whether it is necessary to use a credit card and pay high interest if one is not interested in establishing a good credit history. Many people (perhaps including the OP) do not understand that using a credit card does not automatically imply paying high interest, though the credit card companies try every possible method to make it so. Regardless of whether one wants to establish good credit history or not, credit cards, if used sensibly provide valuable services without necessarily having to pay high interest. I stand by my answer as being relevant. – Dilip Sarwate Jul 26 '12 at 17:35
  • @dilipsarwater Well, it doesn't answer the question in the title and 2 of the three points in the body; hence my comment. – coleopterist Jul 26 '12 at 17:42
  • Good set of warnings and info to the OP, who was in need of such a lesson. Too much detail to fit as comment. +1 today. – JoeTaxpayer Dec 4 '12 at 0:26
  • @DilipSarwate, If you really need cash for one particular month and thus repaid that debt one month later (with interest of course), how does that affect the credit card rating? Does it get stained? – Pacerier Nov 27 '13 at 10:24
1

It is not exactly the same. But it isn't good either. A bad credit history implies that you do not manage your money properly and that you are unreliable. No credit history indicates that you are an unknown and that they do not know if you manage your money properly or not.

No credit history is also not the same as never having had a credit card. You could have had a bad credit rating, then closed your card. Over time (I'm unsure of the exact period), your data will expire from the database. It is important to keep in mind that your credit rating is used by just about all lenders, who are not just card companies. These also include banks and other institutions that provide loans and so on.

Here's a random link which appears to explain some of these facts quite well, albeit with a hint of bias.

1

A good credit history simply means that you are "good" at acquiring debt and paying it off.

A bad credit history means that you are "good" at acquiring debt but bad about paying it off.

No credit history means that you haven't acquired debt.

So, no, no credit history and bad credit history are not the same thing. However, if you are going to live like a "normal" person and have debt most of your life, then they can have very similar implications.

0

If you have no credit, the fastest way may be to get a very cheap monthly phone contract. Even the cheap ones usually work out as good as pay as you go, and it will count towards credit without paying any interest.

You can also make purchases on a credit card and then pay it off with your current account (especially easy in the present day with online/mobile banking - I can pay off the credit card before leaving the shop). I tend to leave £50-100 on the credit card so that it accrues a couple of pounds interest a month. I spend far more on pasties, I figure it's worth letting the credit agencies see that I'm not quite perfect - they stand to make a bit of money off me but I keep control of my debts and consistently make repayments.

-1

It is not almost the same. It's completely different. Two years ago when I bought my house I had no "credit" at all, yet I got an awesome rate (well, for 2 years ago: 3.875%. Rates are lower now). If I had bad credit, I likely wouldn't have been approved for any rate.

The only way you get "good" credit is by going into debt. Those of us who can do math don't consider this good. And you'll never meet anyone who went bankrupt because they didn't borrow enough.

EDIT: When you buy a house, you are marked against if you have zero balance on all your cards. The typical behavior of a new homebuyer is to run up their cards doing decorating and such. It hurts your credit, relatively, to have many cards with zero balances. I'm making an assumption here: This mostly applied to buying a house, but this is what most people are usually interested in "building" their credit for. Fortunately, only a small part of your home lending qualification relies on the credit score. Other things like income, work history, and down payment size are more heavily weighted. Like I said, I had zero credit when I bought my house and I got the same rate as everyone else.

If you're interested in getting credit in order to spend money you don't have on toys and cars and crap, then this discussion doesn't apply.

-tjw

  • Thanks for updating the answer with your assumptions. Based on them, I can't say your answer is inaccurate, but I don't think it speaks to the question asked. – MrChrister Jul 30 '12 at 14:11

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