Do credit scores matter if you avoid debt?
Some people care nothing about their credit scores because they live debt-free and never plan to borrow money again. Could you pull it off?
This guest post comes from J. Money at Budgets are Sexy.
A long time ago I told my friend Brad Chaffee from Enemy of Debt that not paying attention to your credit scores is dumb.
I refused to listen to his thousand and one reasons why he couldn't care less, and I thought his claim that he had a score of 0 (yes, zero) was cockamamy. I'm pretty sure I told him it wasn't even possible, which I later came to find out was kinda sorta untrue. (It's possible to have no credit score, which in essence is kind of like zero, even though it's not.)
Here I am, though, three years older and wiser, and I'm starting to come around to the idea a bit more. Not that I'm sold completely on the whole thing -- I'm not, and I'll totally continue to monitor my own credit scores because I think it's smart. But I do see where Mr. Brad is coming from more now. His stance can be simply summed up like this:
"If you're never taking out a loan again, why does your score matter?"
It's an interesting take on the whole score game for sure, especially if you've never really thought about it before. Why do your scores matter if you don't have any loans or credit to your name at all? Is your cash worth less depending on what your scores read?
It's a cool way to think of things mainly because it's so drastic. When was the last time you decided to never have a loan or credit card?? (For me, it's probably been a good 25 years, like when I was 7.)
And just like I thought three years ago when I first started debating with Brad, some of the same questions remain for those who believe it's just not that possible:
- How do you rent an apartment without a credit score?
- How do you buy a car without being able to take out a loan?
- How do you get a house without taking out a mortgage?
All of these are common occurrences in our lives that we're just used to now -- something Brad says is part of the problem: Society has deemed taking on loans and credit debts as perfectly normal, so people rarely stop to consider the alternatives or the consequences.
But what about the questions above? What do people like Brad say about them? I picked apart an email he shot me a couple weeks ago where he was doing a Q&A with one of his readers, and he answers all three of those questions as he is always known to do -- with passion and vigor.
Renting an apartment without a credit score. He wrote:
"You can definitely rent an apartment without a credit score. You can check out a service called eCredable.com that allows you to build a payment history to show landlords that you are financially reliable. It allows you to track your payments for utilities, rent, etc. It is a great resource. It's also great to have an emergency fund savings statement showing how much you have saved up.
"If you have no debt, can prove you are reliable, and can show you have savings, most landlords would be glad to have you. As a former landlord myself, I know for a fact that a credit score really isn't a reliable indicator as to how good of a tenant someone will be -- financially or otherwise."
Buying a car without a credit score:
"Buying a car is certainly possible without a credit score, assuming you are planning to buy one without going into debt. Having a car payment is one of the worst ways to own a car. You do not need a car payment to own a car as long as you buy a gently used two- to three-year-old car that's had one owner who took care of it and can prove it. I do not recommend getting a car using debt -- ever. Therefore your credit score doesn't really matter when buying a car."
In other words, if you're paying cash for something, your credit doesn't even become an issue. And I'd even tack on here that you could get a car for less money if you presented the all-cash option during your initial negotiations, whether you buy it from a dealer or from an individual.
Buying a home without a credit score:
"If you're looking to get a house via a mortgage one day, then you can do so without a credit score. It's not as popular as other routes because society is so attached to their credit scores. It's called "manual underwriting" and there are places that will take your real-life information (renting receipts, eCredable reports, credit history (different than credit score), savings, income, and how much debt you have to evaluate your ability to pay a mortgage. . . . My wife and I are paying cash for our next house so we don't even need that."
While pretty extreme, you can see it is possible to function in this world without worrying about your credit and/or credit scores. It mainly becomes an issue whenever you need to take out a loan or get approved for something like a lease or a job. If you have no plans to ever get a loan, though, why should it matter if you can get an excellent interest rate or not?
Brad ends his email to his reader like this:
"Chasing a credit score is a slippery slope and many experts still believe that it's the only way to function in today's day and age. It's not true, though, and there are plenty of people living debt-free without a single worry or care about their credit scores. It's just a matter of how much you really want to be, stay, and live debt-free. You don't have to play the credit score game. The choice is yours."
Interesting stuff to think about either way. Could I do it? No way. I enjoy taking advantage of my credit cards and loans to better leverage my money and (more importantly) my time, and I also like trying to compete for the best score. As possible as the non-credit lifestyle may be for some, it's just not that practical in my world. And I'm totally OK with that as long as I don't make any stupid mistakes.
I'll gladly take on a car loan if I can do something better with my cash instead, and I definitely don't want to wait 100 years to save up enough to buy a house cash-free either. But I'll gladly give Brad mad respect for doing so, as it takes a lot more restraint and patience that I'll ever have, that's for sure.
At the end of the day, I choose practicality and convenience. I know myself well, and I'm confident I won't get into much trouble using credit to my advantage. If you don't trust yourself or you're bad at managing debt/credit cards/etc., by all means stay away! Maybe give Brad's approach some serious thought and slow things down a bit. There's nothing wrong with choosing either side here as long as it's the right one for you.
Thoughts? Questions? Concerns? I know that Brad appreciates a good debate, so let's see what you've got.
More from Budgets are Sexy and MSN Money:
You may as well call me 'Brad.' I have never checked my credit score in my life. I have neve had a checking account in my life. I have one Master Card credit card from BOA with which I buy a meal once every three months to keep the card alive for emergencies. When I get that one bill I drive my 18 year old used car (paid for with cash) to the bank, buy a money order and pay the credit card balance in full to my credit card issuer. I have rented small apartments since graduating college 35 years ago. Every month I withdraw $700 and put in an envelope for my spouse to buy our family groceries. I also give her a cash allowance and myself a cash allowance. I pay the rent in cash to my landlord. I pay the utilities with a money order and I pay my car insurance with a money order.
I am now one pay check away from having $1million dollars in cash in my savings and CDs. I retire in two years with a full pension. I will buy my retirement home with cash and my first brand new pickup truck with cash. I was patient and went the distance. I have NEVER owed a dime to anybody in my adult life. End of Story
Ranger5621's way of saving for a secure future is one way to do it. I do wonder why the paying everything with money orders though. Alot of work and extra cost. Sounds like he has a bank account for savings and cd's. So why not a checking account to pay normal monthly recurring bills?
But the secret to saving is not really a secret, nor really difficult. You just have to live beneath your means. That's it. And save/invest the difference. My wife and I have been independently wealthy for the past 10 years or so. A great feeling. We both still work, but less than full time and we still live beneath our means. Why spend money on things you really don't need or want just because you can?
I too live a frugal life on about 1/2 of my income. I do have mortgages on invenstment properties, but never carry a credit card balance and have no car payements. (It helps to keep an extra old beetter for when repairs are needed.)
However, there are certainly reasons for being concerned about your credit score, even when living debt free. First, auto insurance companies use your credit score as one variable in determining rate. While it is not nearly as important as age, gender or driving history, it is a factor.
Second, some employeers use your credit score to evaluate canidates. My employer requires us to have a credit card for official travel and so has a legitimate reason for ensuring employees are credit worthy.
So like Ranger 5621, I keep a credit card and pay it off after each use.
For.....Ranger5621..........................I feel everyone should use their money and personal time in the manner in which is most comfortable for them. I personally consider my personal time with family and friends to be of more value than running around purchasing money orders, stamps and worrying with mailing bills. Long ago I established an account with a credit union.......no fees. All my income is directly deposited to the account. I have a couple of credit cards with no fees and pay rewards, 1 - 2 cents cash back. All bills, cable, phone and etc., that will allow use of credit cards are charged to the cards. Those that don't, along with my credit cards, debit my checking account for the monthly payments. This has eliminated worry about getting money order and making a payment and saves me several dollars per year on postage, money orders and vehicle expense. However, the biggest reward is more time with family and friends.
However I am upset with a system that is constantly trying to find ways to force people to participate in a credit system that is flawed. Credit scores should only be used to issue loans and credit and maybe rentals but it is wrong for our government to allow it to be used to set insurance rates or get a job. They come up with all kinds of bogus reasons why it is necessary but things worked just fine before they did it. It upsets me that someone who loses a job and can't pay their bills is then prevented from getting a job to pay their bills. It is kicking people while they are down and punishing them anew for having suffered misfortune. It is mean and unjust and in the past would have been considered un-American. It makes people afraid to take chances and risks like they used to because now if you get knocked down the credit system puts it foot on your neck and tries to keep you down.
Another peeve of mine is the loads of incorrect information in the credit files,and also the huge exposure to possible identity theft that makes it difficult to relax even if you feel you are doing everything right and taking care of your obligations. I wish we could create a system based on Brad's principals but we don't like difficulty or inconvenience so we give more and more of our power away and the more we use it - the more the credit system becomes our master. Next we will need a credit score to get our driver's license as they will no doubt prove that people with good credit are better drivers and it will be acceptable to deny licenses to those with poor credit. They are already making it mandatory to show a driver's license to vote so if they can link credit scoring to licenses it will only be a shot step to dis- enfranching people. Most likely poor and minorities who always get the short end of the stick anyhow. I am trying my best to get out of debt and I hope people like Brad keep pushing their position loudly and often as we can all benefit from his perspective even if we can't fully adopt his position.
I can't believe you wrote, "I'll gladly take on a car loan if I can do something better with my cash instead..." I respect your right to make that choice, but please stop blogging about finances. Your pen name should not be J. Money, it should be I. M. Foolish!
if the fed gov. put all the money taken from the Taxed into a investment fund we would prospur generously....
NO MORE TAXES....ITS AGAINST THE CONSTITUTION......1913 AMENDMENT IS BOGUS TO THE CONSTITUTION BECAUSE THE PEOPLE OF AMERICA DID NOT GET THE FAIR OPPURTUNITY TO VOTE ON THAT AMENDMENT!
SUPREME COURT 1895
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