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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
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It's a toss-up whether no loan or one with a higher interest rate is the worse option for consumers, says Janet Garkey, an editor of the Credit Union National Association's Center for Personal Finance.

The difference in the rate on a $100,000, 30-year, fixed rate mortgage for someone with a 520 (poor) score and a consumer with a 720 (borderline good) could be 3.45 percent, says Garkey. That translates to $235 per month in payments, and $85,000 over the life of the loan.

Breaking in
Living with no credit can be severely limiting. But there are ways to get into the credit system. Some lenders "will try to work with you," says Sweet. "But what it means is much more work for you." That could include digging up copies of proof of rental payments, old power bills and the like.

One good option: Join a credit union. Because of the relationship that is established, it's easier to get help accessing traditional credit options -- and advice on entering the credit game, says Garkey.

Another option: Get a secured credit card to start building up a positive credit history. The way it works: You apply for a card and make a deposit that will be equal to your credit limit. You use the card as normal, pay the monthly bills and the lender keeps your deposit for the life of the card.

If all goes well, the lender may issue you a regular credit card after you've established a record of good payment, and you'll get your deposit back

However, some lenders do not report payments to the credit bureaus, which means you're not building credit. Consumers should make sure the credit history will be reported before accepting the card.

If you have some credit history but not much, known as a 'thin file," you might benefit from a lender using a FICO Expansion score. Scaled like a regular FICO score (from 300 to 850), the formula is designed so that the lender can incorporate additional information that might not be in a traditional credit file.

For an Expansion score, Fair Isaac will go to "boutique credit repositories" that may have data not traditionally reported (like the payment record from a book or record club), says Watts. The company might also look at how often you use checks, or how often you have to access overdraft protection. In addition, if lenders can obtain additional information (like rental payment history or utility payment history) that can also be factored into the formula.

"It's going to help the people with no credit, and it could also help the people with poor credit," Garkey says.

Curtis Arnold, founder of CardRatings.com, agrees. "I think it's a positive thing. With rental histories and power bills you've proven that you can pay your bills."

People without credit are "a large segment of our society," says Arnold, "and the risk is that they are not being judged fairly."

-- Updated: June 16, 2008
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NATIONAL OVERNIGHT AVERAGES
$30K HELOC 4.74%
Personal loan 15.53%
$30K Home equity loan 5.25%
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