Why You Need Credit Cards?

As someone in the mortgage industry, I have the luxury of looking at about 15 credit reports a week. A credit report is an intimate look into someone's life. If the report is heavy with student loans, the person most likely has a professional degree. See a credit card from a jeweler, an engagement ring was purchased. A credit report can tell me a lot about a person.

If I take an application from a person of the millennial generation, I can guarantee that the person will have little to no revolving credit or lots of credit debt. As previously written here, many people in the millennial generation distrust credit cards. Their distrust is rooted in a fear of accumulating debt.

www.ourfinancialsecurity.org

While this is the correct mindset to hold, not having any credit cards is dangerous. One of the problems I encounter with millennial borrowers is that they have lower credit scores or sometimes not enough credit to be approved. Typically, a person needs three credit trade lines to be approved for a conventional mortgage. Most of the time, millennial borrowers cover the three credit trade lines requirement by student loans. However, the lack of revolving credit cards can hold down a borrower's credit score.

MyFico.com

A borrower with the near perfect score (800+) tends to have a good balance of installment (loans) to revolving debt (credit cards, line of credit). In addition, the borrower's history of having credit tends to be longer. For my younger borrowers, their lower credit score tends to be for two reasons (lack of history and variety of credit). Due to their age, the lack of history is somewhat outside their control. However, the variety of credit aspect is something that you can change. Open a line of credit on your checking account or get a credit card with no annual fee. Eventually, the no annual fee credit card will help with the lack of history as well.

A few months back, I was talking to Limited Credit Boy about this issue. Up until a month ago, Limited Credit Boy only credit card was one that he was an authorized user on due to his father. I encourage him to get a credit card. Any credit card with no annual fee would be fine, just get a credit card. My reason? The credit agencies have change the way they count the credit card history of authorized user. Previously, a parent would add their child to a credit card and the child would automatically get their parent's credit history for that particular card. For instance, say the parent opened the credit card in 1985 and then adds their child to that particular credit card in 2005. In the past, the credit agencies would count the 20+ year history on the child's credit, boasting the child's credit history. Funnier if the child was born in 1990, 5 years after the card was open! Now with credit agencies discontinuing this practice, the only way to build a credit history is actually have credit for a long period of time.

www.lowcards.com

My goal in writing this post to encourage people to think about their future. Your credit score is one of the most valuable assets that you have. While I have written frequently about how credit card debt can hurt your credit score, I have neglected to talk about how a lack of credit can equally hurt it. My generation's dislike of credit cards I fear will result in a large segment of the population unable to get mortgage financing in a few years.

I am not advocating people go out and apply for 15+ credit cards like me. That is a little extreme. However, I believe every person should have 1 or 2 credit cards. Credit cards to help buy plane tickets, rent cars and build your credit score. The decisions you make now can drastically effect your ability to buy a car, home or even get a job in the future.

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