Credit Cards – Can't Live With Them, Can't Live Without Them

What happens when you have no credit score at all? Without a credit card it turns out being responsible is not enough

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At 24, Josh Waldron thought he was ready to buy a house. He paid off his college debt, only two years after graduating. He saved enough for a down payment. All in all, he and his wife were ready to leave a life of renting behind.

Then his plans ground to a sudden halt. Waldron’s credit score had disappeared.

“How did this happen? It just didn’t make sense to me that I’d have a nonexistent score,” says Waldron, who is now 28. He had applied for a mortgage loan a few months earlier and found his credit score to be a robust 718.

So what happened? How could a person who was financially responsible and paying his bills on time just wake up one day with no credit score?

The culprit turned out to be his debit card. Waldron, eager to avoid debt, used his debit card to pay his bills and buy what he needed. He had never used credit cards.

The catch: no credit cards meant no credit.

Since Waldron applied for mortgage more than six months after he paid off his student loans, his credit score would not be generated, says myFico.com spokesman Anthony A Sprauve, because his “only activity in the last six months is using a debit card, and debit card usage is not reported to the credit bureaus.”

Waldron is not the only millennial who has hoped to make a go of it without a credit card. According to recent FICO study, in the last seven years the number of those 18-29-years-old living without a credit card increased by 9%, going from 7% in 2005 to 16% in 2012.

Ken Lin, CEO of Credit Karma, sees cases like Waldron’s – called “thin files” within the financial industry – all the time.

“They are extremists. You can have a credit card and not carry interest. Pay them off in full. Otherwise, it becomes a bad situation when you want to buy a home. That’s when you get in trouble. No one will underwrite you.”

Having a FICO score – that key to financial maturity – requires having at least one account that reported to a credit bureau in the past six months. Yet a lot of millennials are walking around among the 50 million people with no credit score, and thus, no access to credit.

What makes it worse is that anyone under 21 is 18% less likely to get a credit card, according to a study on young borrowers by the Federal Reserve Bank of Richmond. Under the Credit Card Act of 2009, anyone under 21 cannot be issued a credit card without a co-signer or proof of a job; creditors want evidence that card holders can repay potential credit card debt. The act also prohibits credit card companies from soliciting students on campus.

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