I recently had an email exchange with a young man . He was aiming to voluntarily have a credit score of zero. Yes, you read that right. He wants his credit score to be so low that the credit reporting agencies might otherwise assume he’s dead. When I first read this, I thought this guy has gone off the rails. Most of us are always trying to raise our credit scores.
The credit system may be a strange (and somewhat backwards) system. You essentially have to prove that you don’t really need the money in order to borrow more money. Still, it’s the system that makes our modern society go ‘round. Unfortunately, I look at individuals trying to live without credit in the same way I view freegans. That is, I sympathize with the cause but I think they’re taking it to crazy and unreasonable lengths.
In the interest of fairness, however, I decided to really look at what non-credit using individuals were doing. Just like any other behavior, living entirely without credit has its pros and cons. If you’re interested in living “off the credit grid,” here’s what you can expect.
The Pros of No Credit
Let’s start with talking about some of the positive aspects of living without credit.
Living without credit means that you must live within your means. You can’t possibly buy more stuff, more car, or more house than you need when you have to save up for you purchases before you make them. Many people who shun rampant consumerism prefer this more minimalist approach to spending — only buying what you absolutely need with money you already have.
Saving More Money
If you commit to a life without credit, you’ll be forced to give yourself an emergency cushion of real money. You can’t simply rely on a credit card in case of an emergency. This can be helpful in upping your net worth but it also gets you in the habit of saving money. We’re talking about a stash of cold, hard cash. This can make it easier to save for major purchases, emergencies, or vacations. You also won’t head into retirement with massive debts.
Forced Financial Responsibility.
For some individuals, the presence of a magic plastic card that you can swipe in exchange for goods and services is far too tempting to avoid using. So if you need extreme measures to be able to live a financially responsible life, going credit-free may be the way to go. You can’t bury yourself in debt if you never acquire the debt in the first place, right?
While these things might make living without credit sound like an attractive option, there are also some serious downsides. Here are the biggest cons when it comes to not having any credit at all.
You Can’t Get Any Credit (If You Need It)
If you are hoping to live a completely credit-free life, this is the point of the exercise, rather than a downside. However, not having a credit score can even affect your ability to rent an apartment. It will definitely make it hard to buy a house. There are methods of working around these issues, though.
For example, if you would like to rent an apartment and have no credit score, you can offer more money as a security deposit. Or you can sign a shorter-term lease at a higher rate until you have proven your reliability. You could also rent from a private owner who doesn’t have the same pre-requisites as a property management company might.
Similarly, there are different ways to buy a house with no credit history. You can go through a mortgage lender who does something called manual underwriting. That focuses on your assets and net worth, rather than your income or credit score. Considering how difficult it can be to secure a typical home loan, this likely isn’t an easy alternative.
With these work-arounds you have to do a cost-benefit analysis to see if living without credit is really worth the extra hassle. You’ll also have to decide whether you are truly living without credit or you are just trying to hit some head turning goal. I mean, are you really living without credit if you’re trying to get a mortgage? Or even renting?
You’ll Pay More For Loans
Again, if your goal is to completely disconnect yourself from the credit industry, this is not an issue. If you never need a loan, it doesn’t matter what your credit score is. However, things change and you never know when you might need to try and borrow money. If you ever need to purchase a car or take out a small business loan, for example, your lack of credit will hurt. You’ll have a much higher interest rate than someone who maintained a decent credit score. It’s easy to say that you will never need to borrow money. However, there are a number of reasons why it might be a good idea to keep that option open.
How to Start Building Credit If You Have No Credit History
What if you do want to access credit but you simply have no credit history? Maybe you’re a teenager who is just starting to build your financial history. Or you just immigrated into the country and needed to establish some credit? When I came to the states in my twenties, I had no credit at all — despite coming from Canada, which has its own credit system very similar to the United States. I didn’t really think about it at the time, but it was extremely inconvenient. I needed to pay a few hundred dollars deposit at the cell phone provider, for example, because I didn’t have a credit history. Ditto with every utility company I needed to access. All told, the process probably cost me thousands in extra deposits.
I also couldn’t get a credit card. I was considered “high-risk” because I basically had a credit score of 300. But my credit wasn’t really bad. It just didn’t exist yet. Luckily, there was a way for me to get started. All I had to do was walk into a bank and ask to open a secured credit card. It’s another deposit to make, but worth it for the positive impact it will have on your credit score.
I initially fronted the card $500. That meant that I had to hand over $500 to the bank and my credit limit became $500. At the end of the month, I paid the bill off in total. My credit profile started building up with the secured card. My score reflected someone who was normally using credit after about a year.
It was hugely inconvenient but I just didn’t want to put in more money to up my “credit limit” at the time. It still paid off though. After a year, I was able to go to all the companies that held a security deposit and get the money back.
The Bottom Line
I told the young man from the start of this article that he actually can’t have a credit score of zero, no matter how hard he tries. FICO score, for instance, range from 300 to 850. So it’s just not possible to get anything below 300.
The more important question, though is why anyone would live without credit. Maybe you can’t stand being in debt. Or you have a misplaced sense of distrust in the banking system. However, credit is one of many tools that you can use to maintain healthy finances. As long as you use the tool responsibly and mindfully, you definitely want to keep it available. Living without credit is like owning a toolbox that only has a screwdriver inside. Yes, you can probably still find ways to hammer in nails with it. But you’ll work a lot harder than you need to.
So unless you can’t trust yourself with credit, it’s probably more trouble than it’s worth to try to work without it.
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