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What Happens When You Need a Loan but You Don't Have Any Credit?

reditcards.JPG"Visa announced this spring that spending on Visa debit cards in the United States surpassed credit for the first time in the company's history," reports Nancy Trejos. "In 2008, debit payment volume was $206 billion, compared with credit volume of $203 billion."

I don't own a credit card. Never needed one. By the time I was old enough to carry plastic, the convenience of the card had been cleaved from the possible dangers of credit. The debit/ATM card allowed me to buy goods without holding cash, and did it without exposing me, particularly as a teenager, to the temptations of credit. As I got older, I had the money to live within my means, and so I did so. I figured this meant I had a good credit score. It wasn't until a few years ago, when I tried to open a Banana Republic credit card to get a few bucks off some fall purchases, that I realized it meant I had no credit score. Not a bad credit score. No credit score.

Then I tried to buy a house.

Without a credit score, Fannie Mae and Freddie Mac wouldn't hold my loan. That meant most big banks wouldn't loan to me at particularly favorable terms, as they'd have to carry the loan themselves. My other option was going through the Federal Housing Administration, which meant that the banks would require that I pay extra for private mortgage insurance.

Through all of this, I had all the characteristics of a good borrower. No debt. Steady job. Income in excess of my needs. Co-signers if I needed them. But I didn't have a credit score.

Luckily, I work with a lot of people who understand the loan system. A colleague explained that small banks hold more of their loans, which gives them more flexibility in assessing credit risks. It's more like going to an old-style bank, where you dress up in your nicest suit and try to present yourself as an upstanding and responsible citizen. I called up a credit union, and within a few days, I had my loan underway.

I tell the story for two reasons. First, when I was Googling "home loan no credit," I didn't get much that was very helpful. Hopefully, this will be. Second, Trejos's story suggests that a lot more people will be falling into my situation soon. The hangover from the debt bubble is leading to a preference for debit cards. A lot of young people will be started on a debit card rather than a credit card, and many of them will probably never switch over. That'll be fine until they need a credit score for a major loan.

Photo credit: By Mark Lennihan — Associated Press

By Ezra Klein  |  October 9, 2009; 12:51 PM ET
 
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Comments

"Without a credit score, Fannie Mae and Freddie Mac wouldn't hold my loan. That meant most big banks wouldn't loan to me at particularly favorable terms, as they'd have to carry the loan themselves. My other option was going through the Federal Housing Administration, which meant that the banks would require that I pay extra for private mortgage insurance."

=========================================

You should have bought a house a year or so ago when the directive from Freddie and Fannie was "we dawn need no steenkin' credit score".

Posted by: WrongfulDeath | October 9, 2009 1:16 PM | Report abuse

I paid mgtg insurance on my first loan. I think that's fair. Now my second one I didn't have to because by then I had a pretty good record.

I had my debit card de-activated. It doesn't provide the same protection in the event of identity theft. Also it doesn't provide any rewards (I like rewards) so I do American Express and just have the payment taken out automatically once a month. I earn $700 or so in gift cards a year that way. If I have an unexpected major expense I might put it on a credit card.

Posted by: luko | October 9, 2009 1:23 PM | Report abuse

These are what are called quality problems.

Posted by: bmull | October 9, 2009 1:29 PM | Report abuse

Well... yeah. If you're paying off your entire credit card balance every month, then being able to get a good rate on your mortgage is pretty much the only reason to bother with credit at all. Lots of people (me included) have credit cards for exactly that reason. I gotta say I thought that was fairly common knowledge. Glad to hear it turned out OK for you though.

Posted by: lilybelle2 | October 9, 2009 1:33 PM | Report abuse

As luko pointed out, you have less protection with a debit card than with a credit card. I ask the bank to give me a regular ATM card, and I make all my purchases with a credit card that I usually pay off every month, collecting rewards and building up a credit score.

I believe also that things like having utility bills in your name also contribute to your credit score. I find credit cards to be a better deal than a debit card, and it used to be that having a credit card -- not a debit card -- was required for some transactions, like renting a car.

Posted by: constans | October 9, 2009 1:49 PM | Report abuse

""Well... yeah. If you're paying off your entire credit card balance every month, then being able to get a good rate on your mortgage is pretty much the only reason to bother with credit at all.""

Well, no. I have a no-annual-fee credit card that gives me a pretty decent (1-3%) refund on all of my purchases, and furthermore because I pay my bill every month in a timely fashion I collect (laughable) bank interest on the money I use on all my purchases from the time of the purchase until the end of the month - because no interest is charged unless I'm carrying a balance.

In short, I am what the credit card industry refers to as "a freeloader". And it's a nice thing to be, until they change their rules to require annual fees or some such.

Posted by: WarrenTerra | October 9, 2009 2:05 PM | Report abuse

Ezra,
I'm glad things worked out for you. I agree that your situation will be a problem for lots of young people in the next few years. But if & when there does turn out to be a large contingent of young, college-educated, gainfully-employed people like you with no credit history, and you all start going to local banks instead of the big boys ... well, it shouldn't take long for the big banks to do a quick pivot and change their policies. They're not going to just ignore a big pile of money like that.

Posted by: tomveiltomveil | October 9, 2009 2:13 PM | Report abuse

*I agree that your situation will be a problem for lots of young people in the next few years*

How many young people don't have college loans, voluntarily did without a credit card, never financed a car, and THEN decided they wanted to buy a house.

Is this the subset of college graduates with well-off parents who never got a credit card or non-college-educated blue-collar young people who are extremely frugal and old fashioned when it comes to money? Either way, that doesn't sound like a large population.

Posted by: constans | October 9, 2009 2:26 PM | Report abuse

Get a credit card and set it up to auto-pay from your checking or savings account. Earn rewards, be protected if someone steals it, build credit, earn interest. There is no good reason not to do this, if you are a responsible person.

Posted by: Drew_Miller_Hates_IDs_That_Dont_Allow_Spaces | October 9, 2009 2:52 PM | Report abuse

"I don't own a credit card. Never needed one."

Isn't the whole point of this story that he *did* need one, if only for the future?

Posted by: tomtildrum | October 9, 2009 3:33 PM | Report abuse

I had that Catch-22 problem for a decade until one day I saw a plastic doohickey on a gas pump filled with applications for the gas company credit card. I applied, they signed me up, and after a year of paying the credit card bills on time I started getting unsolicited credit card apps in the mail.

Posted by: wkiernan2 | October 9, 2009 8:30 PM | Report abuse

Drew Miller touches on why I have a credit card, despite being a similar age as you. I like rewards for nothing - I spend about as much as I would have, pay my balance every month. I also like building credit. But to me the most important thing is the way fraud is "felt" by the consumer.

I had my debit card account number stolen somehow while I was stationed in Iraq last year, and someone went on a 4-figure shopping spree until my checking account was cleaned out. Sorting that out was difficult and a huge pain without access to normal telephones or easy access to internet. The bank immediately returned my money while they investigated, but some mail was lost and then they took it back a few months later until I got it sorted out in person, when I came back to the U.S. I didn't really need the money immediately, but I'd rather have my credit run up by fraud than my real money stolen.

Trying to get an ATM card that is NOT a debit card is fairly difficult. Last year, I explained why I wanted an ATM card over the phone and got a debit card in the mail again. The guy at my bank probably just didn't understand what I was saying.

Posted by: shanehuang | October 9, 2009 9:34 PM | Report abuse

Yet more ... with a credit card, your losses against fraud are legally limited to $50. With a debit card, the associated account can be totally wiped out and it is your responsibility completely.

Posted by: pj_camp | October 9, 2009 11:47 PM | Report abuse

A debit card is like a credit card but without any of the benefits or protections. Just pay your balance off every month.

Posted by: simpleton1 | October 10, 2009 12:06 AM | Report abuse

Looks like many people beat me to the point that you have better protection against fraud with a credit card than with a debit card; plus, they made additional great points on rewards, credit ratings, and interest earned.

I would add that since debit cards with credit have become so commonplace, (and with the rise of identity theft) those federal fraud protections need to be extended to debit cards. Right after we get health care and cap and trade.

Posted by: punchaxverulam | October 11, 2009 1:01 PM | Report abuse

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