Ripping up all those credit card offers you get in the mail may give you a good feeling. But as silly as it seems, rejecting credit you don't need may actually hurt you in the long run.
Nowadays, your credit score tells you a lot more than just how much junk mail you're going to get from lenders. Your credit score not only helps to determine what interest rates you'll get from banks but also plays a role in many other aspects of your financial life, ranging from insurance premium discounts to whether you'll land your dream job or get the luxury apartment you want.
Old-fashioned responsibility
If you ask your parents or grandparents what their financial goals were when they were your age, they'll probably tell you their top priority was avoiding debt. Events like making the last payment on their mortgage were cause for celebration. Having suffered through major economic downturns in the 1930s and 1970s, your older relatives may measure their security by whether they're relying on banks for their livelihood.
By this standard, the perfect balance sheet is one that doesn't have any debt at all. Even today, the debt-free strategy isn't the worst way to go. If you can afford to pay cash for major purchases like cars, you may end up well ahead of those who have to take out car loans. And for teens and young adults, simply opting out of the credit card game entirely can keep you out of a mess of financial trouble.
You can't win if you don't play
Unfortunately, there's a big downside to avoiding credit entirely. If you never take out a loan or have a credit card, then you'll never have a chance to build a strong credit history. That may seem counterintuitive -- you might feel that the best credit history is one in which you've never needed credit at all. But that's not how lenders look at it. Without a credit history, banks have no idea how you're going to act if they give you a loan. And unlike the criminal justice system, lenders are apt to judge you guilty until you prove yourself innocent.
In addition, other uses for credit scores have become an accepted way of doing business. Insurance providers like Safeco
Given how many ways your credit score gets used, not having an established credit history can be costly. You can never be sure how prospective lenders, employers, or others looking at your credit will interpret a complete lack of information. By failing to lay the groundwork for a solid credit history, you risk not being able to get the credit you deserve when you need it the most.
Borrow, borrow, borrow!
Of course, that doesn't mean you should go out and get a bunch of credit cards and max them all out. All you need is a little credit, like a student loan or car loan. Just having a credit card or two and using them occasionally is all it takes to establish good credit behavior. If you pay them off every month and never make late payments, you'll quickly find yourself with a credit score that your friends and family will envy.
Having good credit isn't just something you need when you're young. This month's Motley Fool Green Light newsletter highlights the need for good credit throughout the stages of your life and includes an interview with a former insider at Fair Isaac
In addition, our Credit Center has tips you can use to evaluate and improve your credit. Learn the basics of how to calculate your credit score, how to read your credit report, and how to guard against identity theft.
Fool contributor Dan Caplinger recently discovered his wife has a better credit score than he does. It must be all those 0% balance transfers he took out a year or two back. He owns shares of Berkshire Hathaway, which is an Inside Value recommendation. The Fool's disclosure policy always gives you credit.
