Does Paying Cash for Everything Create a Credit Problem?
Are you someone who does not believe in using credit cards? You’ve probably heard that it’s important to build a strong credit history. Is this true, or can you get a good credit score just by paying cash, building up a nice savings account and having no negative credit history?
Unfortunately, if you’ve paid cash your entire life or have no credit history, you may not have "good credit" in the eyes of lenders or banks.
Now, whether that matters depends on your life goals. But you need to have a substantial credit history if you ever want to buy a house or get a car loan. And even if you can get credit, a poor credit history will cost you thousands of dollars because you’ll be saddled with higher interest rates on your loans.
Even if you’re very responsible with your money, you could be surprised to discover that there’s little reward when it comes time to buy a home or lease a car. The reason is that lenders like banks make credit decisions — and determine your interest rate — after assessing your risk. They do so by examining your credit report or credit score. Your three-digit credit score is used to determine your credit worthiness for nearly all applications for credit, insurance, rental units, and even utility companies. Credit scores were designed to predict the chances that you won’t pay your bills in the future. Scores are based on payment history, amounts owed, length of credit history, mix of credit, and new credit.
So if you always pay cash and have no — or very few recent —credit accounts, you may have a lower credit rating than you imagine — even if you have a very high income and have never been late paying a bill. You’d think that paying cash for everything shows that you’re financially responsible, but the credit risk system doesn’t work that way.
Building Your Credit History
The good news? There are a number of legitimate ways to build up a solid credit history over time (none of them involve paying someone to "boost" your credit score or other such trickery). They include obtaining credit cards or store charge cards (there are "secured" cards for those who don’t qualify), getting listed as an authorized user on someone else’s card, getting a parent or guardian to co-sign, and getting utility service. There are also credit unions or banks that have programs to help people establish their credit.
When you’ve always paid cash, the best strategy to prepare for your long-term financial needs involves three basic steps: start building your credit history long before you need it; be patient; and, of course, pay your bills on time.
