Personal Finance Advice

There is no denying that an excellent credit history will serve you well when it comes to obtaining new credit, applying for a lease, or in some cases getting a job.  What happens if you don’t have any credit? Some people don’t have credit because they are just starting out as an adult, but there is a growing population of people who are deciding to not pursue credit as a matter of principal.  Some people are simply attracted to a lifestyle that does not include debt, and while this is certainly an effective way to manage personal finances it can lead to some frustrations when a potential employer or landlord pulls a credit report for review.

There are ways to show your history of paying bills without actually having any active credit accounts.  You don’t need to have a long list of credit cards and personal loans on your credit report to prove that you can stay on top of your bills, although you’ll have a harder time proving it without a credit history. 

Here is what you need to do in order to prove your ability to pay bills in a timely manner without getting involved with credit cards and loans:

Open accounts in your name.  You don’t have to open credit accounts, but do open utility accounts and other similar accounts in your own name.  This includes cell phone service, electricity, water, Internet service and anything else you’ll have to sign for.  Without a credit history you might have to put deposits down on utility accounts, but by consistently paying them as scheduled you’ll build up a solid payment history that you can reference.

Pay your rent on time, every time.  A reference letter from a landlord singing your praises for always paying your rent on time will be invaluable to you in the event that you have to prove that you have the ability to manage your money.

Open and maintain bank accounts.  Having a long history with a bank or credit union as a valued account holder is a great way to prove that you can manage your money.  You don’t have to get a credit card through your financial institution - although they’ll try really hard to get you to apply for one - in order to become a valued customer.

Keep records of everything.  If you get a loan from your uncle and pay him back, keep record of your payment history.  If you have to close your utility accounts because you move to another home, keep the records from the old utilities.  You want to have records that indicate that you have held accounts that have been paid on time.

Keep this in mind:  There is a big difference between not having any credit and having old delinquent accounts on your credit report but nothing recent.  If you fall into the latter category then you don’t have No Credit; you have Bad Credit.  There is a big difference.

If you decide to apply for something like a mortgage loan then find a lender who offers manual underwriting.  This means that an actual person looks at your application and reviews your payment history instead of your application getting churned through a computer and automatically rejected due to a lack of credit history.  Present all the various forms of proof that you have paid your bills and you may find yourself approved for a loan without anything listed on your credit report at all.

Then again, if you avoid credit and manage your money effectively then you may not ever need to apply for a loan.   

Chances are you’ll receive at least one or two gift cards this holiday season.  Whether you receive a $5 card for the local grocery store or a $500 card for a store at the mall, you need to keep in mind that gift cards should be treated just like cash.  Sometimes it’s hard to remember that the cards are valuable, but if you were given a $5 bill or $500 in cash, would you simply toss it aside and never use it? Gift cards have value, and you should use them.

Here are some important things to remember when shopping with gift cards:

The cards have value.  Protect the card just like you would protect cash.  Merchants love when gift card recipients forget to use the cards because it’s sheer profit for them.  Put the cards in your wallet and plan on using them, otherwise you’ve wasted money.

Know the terms of the card.  The back of the card should list any expiration date, fees, and anything else you need to know about the card.  Check to see if you can register the card online.  Although this may seem like a hassle, it may allow you to request funds replacement if the card winds up lost or stolen.

Use the card until the balance is depleted.  You wouldn’t throw away two dollars in cash, so why toss a gift card that has a two dollar balance on it?

Shop wisely.  For one reason or another, shopping with a gift card makes some people forget to look for sales and low prices.  You should still look for the best deal on an item when you purchase it, whether you’re paying with cash, credit card, or gift card.

What do you do if you receive a gift card for a store that you don’t frequent? You have a few different options:

Re-gift.  As long as the card doesn’t have an expiration date or inactivity fee you can hold on to it and give it to someone else.

Give it away.  You don’t shop at a certain store at the mall but you have a gift card.  If there is absolutely nothing you want to buy within the store, consider donating the card to a charity or instead walking into the store and handing the card to a random shopper.  It can be a really fun experience to give something to someone for no reason at all without asking for something in return.  If you haven’t yet tried it, giving away an unwanted gift card is a great opportunity.

Sell the card.  There are plenty of websites online that offer gift card swaps and sales.  Just keep in mind that you won’t get 100% of the value of the card, but at least you can either get some cash or swap it for a card you will actually use.

What happens when the person you cosigned for stops making their payments?

It’s not usually something a person really thinks about before cosigning.  Cosigning is usually a quick process that most people don’t really think twice about doing even though there are major financial repercussions.  For instance, imagine that your brother - who has bad credit, by the way - asks you to co-sign for a car loan because he can’t qualify for a loan based on his credit alone.  Without your signature he’ll need to make a huge down payment and pay a whopper of an interest rate, but with your signature he’ll qualify for a loan at a decent interest rate with a low down payment.  He asks you to do him this favor, and since he’s your brother and a nice guy you agree.

Fast forward to a year or so down the road.  Your brother hits hard times after losing his job and misses a payment on the car.  The lender calls him and asks for payment, and when he says he can’t afford to make the payment the lender calls you.  You’re surprised because you had forgotten all about co-signing for the loan, and you’re even more surprised to suddenly have a lender calling you out of the blue asking for a payment.

Are you liable for the payment? If you co-signed for a loan then the answer is yes, you are.

Co-signing for a loan is rarely a good idea.  It’s like you’re telling the lender that you’re willing to be liable for unpaid balances even though you can’t enjoy any of the benefits of the loan.  If you co-sign for a credit card, you don’t get to use the card but you’re still liable for the amount due if the primary account holder doesn’t keep up on the payments.  Since you never know when a person’s finances are going to take a hit, you can never be assured that you won’t wind up paying for someone else’s debt if you’re a co-signer.

Someone may have all the intentions of keeping up with payments but then suddenly something happens and the person simply can’t meet the minimum payment due.  This makes for a real mess when a co-signer is involved.

So what can you expect to happen if the person you co-signed for stops making payments? If you’re lucky, the person will contact you before falling behind on the payments and ask for your help.  On the other hand, what usually happens is the person is too embarrassed to admit that there is a problem…or simply forgets that you co-signed in the first place.

You’ll get a letter or phone call from the lender asking for payment.  By this time there is a chance that your credit report already has a late payment listed on it, so your credit score has suffered as a result.  If you don’t make the payment, and the other person doesn’t make a payment either, then the next thing you know you’ll get notices in the mail of collection efforts that may lead to legal action.  If the amount is large enough you might find yourself going to court. 

You will encounter the same situations as though the debt was your own.

How do you avoid this situation? If you do co-sign it’s a good idea to stay in direct contact with the person and make sure that payments are made.  In an ideal situation you will have the money set aside to pay off the debt should the need arise.  Or you can just choose to never co-sign, which is a pretty solid financial decision.