Cash only policy=Low FICO score
Cash Only Policy=Low FICO Score
The title of this essay may be a little bit misleading because a strict cash only policy would mean no FICO score for someone who never used credit. Use credit or lose it. People who abide by a cash only policy are usually very proud of the fact that they feel like they are beating the system. After all they never have to pay interest or fees and can’t fall behind on any payments since they have no payments. If you want to thumb your nose at credit scoring be careful what you wish for.
If FICO Doesn’t Know You Exist…
You have no credit file at all. You may be sitting on a mountain of cash but you haven’t proved you can handle credit responsibly. FICO’s computers need to see 6 months of reporting with some activity within that 6 months to even start a credit file on any individual. You don’t need to use it much but you do need to use the credit system to prove your financial responsibility. This is usually done by applying for one of the numerous secured credit cards that are available and making timely payments on them. I recommend at least 2 of these cards, preferably 3 to those who are invisible to the system and want to get a credit score.
Most banks and Credit Unions will offer you a credit builder loan. This involves putting up a CD for security in order to take out a small installment loan against its value. Your regular payments on the installment loan are regularly reported to the credit bureaus establishing the kind of good track record you need in order to build up a good credit score. This system is especially desirable because it shows you with an installment loan in your mix of credit which enhances your credit score in and of itself.
An even faster way to get started in the credit scoring system is to become an authorized user. An authorized user is someone who is added to an existing credit card with authority to make purchases with it. Ideally the account should be old and carry a low debt to available credit ratio at all times with a perfect history of on time payments. If you know someone who will do this for you you can tell them you don’t even want to possess an actual card to ease their concerns. This won’t violate your cash only policy!
Don’t Wait Until you Want to Buy a House
It takes time to build a good credit score. Average age of your accounts counts for 15% of your score. Timely payments on credit you do have counts for 30% of the score. Debt to available credit ratio counts for another 30%. Debt to available credit ratio refers to how much of your available credit you are using at any given time. If you have a secured credit card with a $500.00 deposit the scoring system will treat that as your credit limit. If you owe $100.00 of that $500.00 limit you will have a good debt to available credit ratio of 20%. Pay another $50.00 and you have a very good ratio of 10%! As you make timely payments your score will go up as time passes. After a period of time as you establish a track record you can then apply for an unsecured card. Now you are on your way.
Secured Credit Cards don’t violate Your Cash only Policy
I say secured credit cards or a secured installment loan don’t violate your cash only policy because you are using your own cash really. You are just moving it around in a different way. If you like to brag that you never use credit you can do so without fear of contradiction. I say this because I know that a cash only policy has a strong psychological significance to many people. I respect that, I really do. I’m just urging you to be prepared for an unforeseen emergency. Everyone’s life has a rainy day or two in it. The further ahead we prepare for that rainy day the better we will be able to handle it. Knowing you’re prepared for that rainy day will provide comfort to anyone. Getting secured credit cards won’t start you down the path to credit abuse hell. It really won’t. The fees and interest are negligible because the card issuer has no money at risk. What little you pay in fees is just enough to cover the cost of the paperwork to report your timely payments on a regular basis. Having good credit is like knowing you have money in the bank.
cash only policy is not violated by secured credit cards and credit will be there for emergency