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Credit Ghost – Having No Credit

Posted by J.S.

June 29, 2008

Having no credit can actually hurt you. One would think that having no credit would be better than having bad credit. This is not necessarily the case.

Not long ago, an acquaintance decided she wanted to purchase a home. She believed she would be easily approved because she had no debts other than the normal monthly utility bills, car insurance, and her cell phone. Her income and employment were solid. She had saved diligently for years in order to have a substantial down payment to purchase a home. She had plenty of assets, including a newer vehicle that was paid for, all of her antique furniture; a 401k she regularly contributed to and she owned several stocks, which were doing well. It appeared on the surface, she was a mortgage lenders dream.

In reality, she was a mortgage lenders nightmare. Because she had absolutely no debt, she also had no credit rating. Everything she owned, she paid for with cash or check. She had not developed a history of credit. She was what is termed, a credit ghost. From a creditors standpoint, she did not exist.

Because she had no credit history, one had to be created and established for her. Letters had to be obtained from each of her utility, cell phone, and insurance providers, as well as her landlord showing a full two-year history without any late payments. The lender required three open lines of credit in good standing. She did not want any lines of open credit, however after serious negotiations they agreed on one.

The one requirement non-negotiable by the lender, it had to be an unsecured, revolving line of credit, preferably a credit card. The credit card or credit line had to be maintained for a minimum of six months prior to the lender approving her home loan.

Although she was eventually approved for her home loan, it was a far more complicated process because she had no credit. Speaking to several mortgage lenders during the long process, she learned that it would have been easier for her to obtain the loan had she had bad credit than with no credit. As absurd as that sounds, apparently when one leaves no credit marks whatsoever, there is almost no way to track their habits or patterns. At least with bad credit, the lender can visually see where a persons strengths and weaknesses are. Usually bad credit is a result of an unexpected illness, job change or divorce. The blemishes can be explained away, by looking at the rest of the history prior to when the unexpected situation occurred.

A situation where there is no credit, because a person chooses to pay all of their bills upon receipt does not leave a history for the lenders to look at.

Multiple mortgage lenders recommend there be a minimum of three open credit lines. They should be revolving, preferably unsecured and maintained for at least six to twelve months prior to applying for a home loan. Of course, each person should discuss their own personal credit situation with their banker, accountant or tax expert before making any decisions about how to change or improve his/her private credit rating.

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