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Debt Management Guide 2008
How credit works
It's tough to manage debt if you don't know how credit works. Learn about good credit and living with no credit.
How credit works
Life without credit: tough and expensive

What do you need to get a loan or credit card? These days, it takes a good credit history, of course.

And how do you get a good credit history? Usually by getting a loan or a credit card and paying on time.

Sometimes life can seem like a giant exercise in Catch-22, and that's especially true when it comes to credit, says Maxine Sweet, vice president of public education for Experian, one of the three major credit bureaus. "If you don't have credit, you can't get credit," she says.

Pretty much like the vicious circle of employment: You can't get a job without experience and you can't get experience without a job.

But, Sweet explains, you can work your way into the traditional credit system and some lenders will work with you.

There are 20 million to 25 million people living without any credit in the U.S., according to figures from Fair Isaac Corp., the company that pioneered credit scoring. In addition, another 30 million to 35 million have "very little" credit on record, says Craig Watts, public affairs manager for the company.

That's as many as 60 million people -- close to one-fifth of the population -- who will have trouble accessing traditional credit.

With the current credit crunch, more and more businesses are looking at credit histories and credit scores. Many insurance companies and employers routinely check credit. So do mortgage and auto lenders. And, these days, apartment complexes and utilities often run credit checks before accepting new customers.

So who is living outside the credit system? It's hard to say because attempts to classify them haven't been that successful, says Watts. "The data doesn't match up," says Watts.

In other words, the financial services industry is having a tough time getting a handle on exactly who is outside the system because they are outside the system.

But credit industry experts agree there are two main groups that comprise the largest segments of the group: the very young (particularly those who have not gone to college) and the immigrant population.

College students are usually bombarded with credit card offers. They often have little or no credit history but lenders see them as a decent risk because once they graduate they will likely have strong earning power. But lenders will typically offer them a low line of credit and a very high annual percentage rate, or APR.

Those who don't attend college could find themselves left out of the credit offers and in danger of falling into the little or no credit history category.

-- Updated: June 16, 2008
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