Here’s the Worst Credit Mistake You Can Make

I have a friend, and I’m completely jealous of him. Financially jealous, that is. You’ll probably be jealous of him too. This is a guy who made it through college and grad school without a cent of debt through a combination of scholarships, working, and some support from his parents. Now, only in his late 20s, he has a great job making close to six figures at a huge defense contractor. The only debt he has is a car payment, which he’s paying off in big chunks.

Need a little schadenfreude to make yourself feel a little better? Don’t worry, I’ve got some for you. My perfect financial friend has hit a big financial wall. He can’t get a home loan. Well, to be more accurate he can’t get a home loan for anywhere near what he wants and what he can truly for afford.

The reason? He made a huge credit mistake – he never actually built any credit.

No Credit Means No Loans

You see, my friend has always been financially responsible to a fault. The very idea of paying interest was an insult to his very being. That is why he worked so hard during college instead of taking out student loans. It’s why he refused to ever get a single credit card and instead relied solely on his debit card. (He should have read this article about how to never pay credit card interest again.)

He got lucky when he qualified for his car loan just last year and finally submitted to the idea of paying interest, but when it came time to ask a bank for a home loan, that one single bit of credit for such a short period wasn’t enough. It didn’t matter that my friend was steadily employed, made great money, and had a good job. His lack of credit history meant that the loan he qualified for could barely buy him a trailer out here in the expensive San Diego market.

Now, my friend has to keep paying an arm and a leg to rent his one bedroom apartment (the average price of a one-bedroom unit in San Diego is $1,634) while he works on building his credit history.

Don’t Be Afraid of Credit

We’re all aware of how easy it is to abuse credit cards and end up in a hopeless hole of debt. (Here’s a great article if you need help cleaning up your credit.) However, being afraid and avoiding credit cards and credit-building loans can put you in a different kind of prison – locked out of loans right when you need them. In fact, landlords and even employers often look at credit history when making important decisions like whether to let you rent from them or whether to hire you.

Credit doesn’t have to be scary as long as you use it responsibly. For instance, if my friend had taken out a credit card when he got his first job and paid off his balance every month, he would have spent five years building up a fantastic credit history. That might have helped him lower the interest rate on his car loan and made it possible for him to qualify for a home loan that would actually let him buy a house he wanted. Heck, he could have even enjoyed lots of travel miles, free cash, or other credit card bonuses. Instead, he’ll be using his money to keep paying rent instead of building equity in his home for the foreseeable future! (Want to know whether you should buy or rent a home? Read this.)

(Note: The best way to build a great credit history is to use credit responsibly!!!)

Want to learn how to get on the path to great credit and to become a financial wizard? Join a local Money Club or create your own!