Why Having No Credit is the Same as Having Bad Credit

As someone who "successfully" went without using credit throughout his teens and twenties, I have a bit of advice to share: don't do what I did.

I learned the hard way that avoiding credit may seem like a smart way to save yourself from future hardships like debt and overspending, but it's much more likely to cause a different sort of hardship when you discover that having no credit history is the same as having a very bad credit history. And while it's completely reasonable (and advisable!) to be extremely cautious with credit, avoiding it altogether can be a recipe for disaster.

So here's what happened, what I learned, and why developing a healthy relationship with credit is a much better goal than never using credit at all.

The rationale for avoiding credit

I was a saver growing up. I liked having money, but not nearly as much as I was afraid of not having money. Even from a young age, I was predisposed to reducing risk and avoiding regret.

When I got older, that urge to avoid risk influenced how I managed my money. The financial education I received basically boiled down to "credit cards lead to credit card debt, which leads to shame, social rejection, and maybe even bankruptcy." There didn't appear to be a healthy middle ground, so I stuck to cash and debit cards for a decade-plus. It just seemed safer and it kept me out of debt, which had to be a good thing, right?

Good credit means proving yourself

While not being in debt was certainly nice, that continued avoidance of any and all credit and loan products wasn't actually a good thing.

Since we tend to think of credit scoring as demerit-based (because it seems like the only things on there are notations of the few times you messed up) there can sometimes be an assumption that by not using credit – and therefore not having any mistakes – our credit should be “good” (if not perfect). That was my thinking, anyway. As I desperately avoided credit card offers at all turns, I thought I was actually preserving a spotless credit history. Of course, that wasn't the case. 

That's because a credit score is a product, created by credit reporting agencies, and sold to potential lenders. The purpose of this particular product is to help lenders understand how risky it will be to extend credit to certain individuals (or companies). Credit reporting agencies, therefore, need that product (the score) to be as accurate as possible, or else lenders won’t use it.

What that ultimately means is that if you don’t have enough of a credit history, then credit bureaus don’t have enough information to assign you a score that they feel would be an accurate representation of your riskiness as a borrower. How can they know how risky it is to lend you money when you've never borrowed money before? 

Having no credit is expensive

My great credit awakening came when my car broke down for the last time and I found myself in a position all too familiar to many Americans: I didn't have enough saved. I wasn't prepared for such a singularly large expense. In fact, I barely had enough for a down payment on the cheapest used car on the lot.

The moment of enlightenment happened in the financing office, where an increasingly exasperated loan officer did his best to get me the funds needed to buy a truly underwhelming car. In the end, I got the loan and the car, along with an interest rate so embarrassingly high, I can't bring myself to share it here.

That's when the loan officer explained the issue at hand: "You don't have any credit history. Like, none. At all." 

Lending money is risky, you see. In order to mitigate that risk, lenders set standards and protocols for who they will and will not lend to. With no credit history and no credit score, I simply didn't meet the standards for a lot of creditors, who rejected me one after the other. (Seriously, I got at least a dozen different "Here's why we rejected your application for credit" letters afterward.) 

The lender that did agree to finance my car was required – by their protocols – to charge me an exorbitant interest rate in order to mitigate the risk.

That's how the cheapest car on the lot ended up costing me about as much as a new car.

Make credit an ally, not an enemy

Ultimately, my extremely expensive cheap car was a valuable lesson in why I couldn't ignore credit any longer. On top of maintaining timely auto loan payments, I opened a secured credit card, which I used regularly (and paid off immediately, thanks to the power of online banking). After the secured card graduated to a regular, unsecured card, I refinanced the car loan and opened a second card with a higher limit and better terms. 

To this day I make my payments on time and avoid carrying a balance. And that's basically it, but it's been enough to build a strong credit history and a high credit score. That credit score helped me buy a house and a new car (for my wife – the expensive cheap car, long since paid off, continues to be an inexplicably good investment).  

There are a lot of good reasons why you might want to avoid using credit. And if you've been burned by credit before, you may be especially inclined to live a plastic-free life from now on. But in the long run using credit responsibly will serve you much better. Take my word for it.

For more tips on improving your credit, check out our Ultimate Guide to Rebuilding Credit.