Do you have a credit score? Probably so. Do you have any idea what your credit score is? Maybe you do, maybe you don’t. Do you really believe that it’s totally necessary to have a credit score? Most people do, and I think they are wrong.
you don’t need a credit score
First, let’s take a quick look at exactly what your credit score is and why you have one. Your credit score, also known as the FICO score, was created by the Fair Isaac Company (Thus “FICO”) to estimate a person’s credit worthiness. Your FICO score is really just a number that tells people how good you are at borrowing money.
Your score is calculated using these general guidelines:
- 35% is based on your debt history
- 30% is based on your level of debt
- 15% is based on how long you’ve been in debt
- 10% is based on how much new debt you have
- 10% is based on the types of debt you have
So what do all these factors have in common? They all say “Hey baby, I’m in debt!” The higher the score you have means that lenders can trust you more highly so that they can give you more debt and they know you’re more likely to pay it back.
But what happens when you don’t have any debt? Well if you’ve been out of debt for a long enough period of time, your credit score can actually go to zero, and in my opinion, that’s a good thing. You actually CAN win without a credit score. A zero or nonexistent credit score shows that you have actually achieved something that not many people have, and that something is freedom from the bondage of debt.
When you’re free from debt you don’t have to worry about making those payments every month that drag you down emotionally, physically, and financially. You’re not paying extra for all those things you buy with credit in the form of interest and fees. You become so much more free to live life the way YOU want to live it and you end up having less stress because you’re no longer a slave to the lender.
I can hear the questions now, “But Doc, what if I need to buy a house or even a car? How would I be able to buy those high dollar items if I don’t have a credit score?” Well, buying the car is easy. If you’ve decided to make the commitment to become debt free, or if you already are debt free, saving up for a car is very simple thing. You just keep driving your present car until its paid off, then keep driving it, start putting the payments in the bank to save for the next one, and in a few short years you buy another car.
But what if you want to buy a house without a credit score? Even If you’re debt free except for your mortgage, a house can be very expensive. Of course the best way by far to buy a house is with cash, but I’m not going to nail anyone for taking out a reasonable mortgage that makes sense.
This is where the technique of manual underwriting comes in. Many people don’t know about this process, and not every lender can provide this option, but manual underwriting is what you will need in order to get a mortgage when you have a zero credit score because you don’t use consumer credit any more.
Basically manual underwriting is a nonautomated, MANUAL process of figuring out how much a lender thinks they should loan you. Normally the process is automated, they just stick your numbers into a computer and it spits out a number based on what their software says. The manual underwriting process actually has a human being running the show to determine how much they should loan to you.
However, there are certain guidelines that you’ll need to meet in order to get a mortgage that is manually underwritten:
- You must be able to prove that you’re paying 4-6 regular bills in a timely fashion over an 18-24 month time period. Those might include rent, phone, cell phone, power, water, etc.
- You should choose a 15 year conventional fixed rate mortgage.
- You must have a strong employment history and predictable personal income history.
- You must be able to put at least 20% down on the home.
- Your previous credit history should have no red flags. Even though you have no credit score, previous history does matter.
So yes, you can buy a house with a zero credit score. It’s just a different process than most people use. Of course the best way to pay for a house is to pay cash (I know some people that have actually done it), but it usually does take many years of banging away at that mortgage payment to get the house paid off and eventually pay cash for the next one.
Remember, living with a credit score, whether it’s a good score or a bad score, is a choice that you make. Do you really want to be one of those people that creditors like to see coming? Don’t get me wrong, if you’re using credit you should always be trustworthy in how you use it, so don’t start stiffing your creditors and putting your credit score in the toilet.
However, the best thing you can do for yourself and your family is to change your mindset about money and work your plan to pay off all your debts and Celebrate Financial Freedomwith the rest of us who have already arrived at that awesome destination.
So nice to read some unconventional truth about credit scores. I don’t know my score–I’ve never bothered to ask for it–because I’ve never been able to understand how simply knowing my score will help me! Sure, I do what I need to do to optimize my credit rating, but the score ‘is what it is.’ The obsession with scores is a product I think of marketing by the companies that invent then make tons of money selling them.
It’s a great way for the credit card companies to encourage people to become “better borrowers”. If there are more good borrowers out there the credit card companies make more money, simple as that.
So many people have been led to believe that the credit score is a necessity in today’s society, but when it comes down to it, good old cash is still the best way to go and you can still get anything you want without that silly score.
They also like to mislead you in other ways too, using tools like the “minimum payment” to keep you perpetually in debt. I wrote a post about that here http://www.cfinancialfreedom.com/CFFwordpress/?p=1663
Hmmm. Well, I know that for a lot of people, having a credit account at all means they will soon be racking up charges they cannot pay and getting into debt. But there are plenty of other people for whom having a credit account doesn’t mean that at all.
So I guess in short, I disagree with some of your points. “Length of time account has been open” does not automatically equal “length of time you have been in debt”.
Personally, I like having a high credit score. It means I qualify for the best mortgage rates available, the best insurance rates available, and I get to carry a no-fee rewards card and earn cash back on purchases I would have made anyway, such as gasoline.
The thought of having no credit score at all is scarey to me. If I should need to borrow money, I don’t want a payday lender, a title loan, or any other high fee, high interest loan to be my only options.
Is that Jim Krasinski as Jim from “The Office” in the picture? He is hysterical, I love him.
I see your point, but most people don’t exercise the discipline it takes to use credit cards without it costing them in interest, fees, etc.
You don’t need cards if you have a proper emergency fund in place, thus eliminating the need for payday lenders, title loans, etc. All of my stuff is written from the perspective of working your way toward debt freedom and living a debt free lifestyle. When you are traveling down that road you are self insured and prepared for a financial emergency, so no need to borrow money. Just because everybody says you need a credit score to get by in life doesn’t mean it’s true.
Not having a credit score sound weird, but in reality it’s very freeing! We should all try it sometime!
Plus, most people don’t realize that even if you pay your cards off every month and never fail at it, credit is so easy and frictionless to use that, overall, you tend to spend 12% more than if you had used cash, so you’re still paying more than if you went cash only.
You can still get good insurance rates and such without a credit score, you just have to be proactive and tell them why you don’t exist in the credit scoring system and provide documentation if needed.
I wrote a funny post about when my friend’s mom, debt free for over 40 years, applied for a credit card, and what she experienced because she was not in the system. http://bit.ly/xG6Ilf
As for the pic, not sure if that’s Jim but it sure looks like him. I also have a pic on my “You Know You’re Broke If…” page http://bit.ly/KM8kcc that looks like Ed Helms, aka “Andy” from the office. Maybe they posed for stock photos before they became famous to pay the bills instead of posing naked!
Oddly enough I literally JUST wrote a blog post today on how it’s a good idea to keep an eye on your credit score just in case 😉 You def. have some valid points as well, but still a fan of keeping yourself in the loop.
My philosophy is that if you are working your way out of debt or have become debt free, you don’t need to keep an eye on the credit score because it just doesn’t matter anymore. At that point you have an emergency fund and are self insured in case of emergencies.
Also, can still get good insurance rates, a job, a house, etc. without a credit score, you just have to be a little more proactive and tell them why you don’t have a score so they won’t ding you.
All of my articles are written from the perspective of becoming debt free or living a debt free lifestyle. So I tend to come from a little different place than most PF bloggers. That makes me a little outside the norm when it comes to what I teach, because I believe in getting rid of credit completely.
Yes, I’m just weird that way.
I’m definitely a fan of relaxing on the credit score but there’s two reasons why I think it is important.
What do you think about renters though? I have really bad credit and was almost homeless because I couldn’t find anyone to rent to me. I had to beg the person kicking me out of her home (my mother) to co-sign for me. But she hates having the liability. If she hadn’t been desperate to get her house back (it wasn’t good for us to be living together any longer) then I would have had no one to cosign and then I wouldn’t have been able to rent anything.
Employment. I have been turned down for jobs due to my credit score. Clearly I can get a job else where but I think it is important to maintain an average credit score when possible. I do not think it is important to go into playing the credit card game to build your score up to the 800s or any of that type of stuff.
When it comes to a low or nonexistent credit score, if it’s because you use no credit and/or you’re out of debt, you can be proactive and provide documentation as to why you don’t exist credit wise. Any landlord, employer, etc. would be glad to have someone who has proven themselves responsible in that way.
However, when someone has a low score because you’ve messed up credit wise, then it will certainly hurt them in those areas. All the more reason, in my opinion, for people to get a plan together to pay off debts and start a budget so that those kinds of problems become a thing of the past.
If you’re caught in that situation during a time where your score is still low but you’re working your way out of debt, it could be a little tough. But providing documentation proving that you’re making your situation better could help. No matter what though, it’s always better to be moving forward and getting out of debt rather than relying on a score that tells creditors how talented you are at borrowing money.
Thanks for the comment Jessica, keep up the great work you’re doing!
I’ve just discovered your blog and it’s as though a light is shining down from the dark clouds over my head. We are raised in a world (maybe just in the USA??) where so much value is placed on your credit score. I, too, have always believed that I needed to keep taking out loans to keep my credit score up. Unfortunately, this last fall, I lost my job, my car was repossessed and I wasn’t able to pay my credit card, which have both been turned over to collections. I am now sitting on just over $10,000 worth of debt.
I have been raised to believe that your credit score is everything, so I panic at the thought of just paying off this debt and not trying to open another credit repair/ secure credit card account. Reading your series of blogs really help me understand one very important thing, and it’s something I should have just listened to my grandparents about: “If you don’t have the money to buy it, then don’t buy it.” My grandparents have lived by this motto their entire lives. I don’t know if they have credit, but they sure don’t seem worried. They save money and buy the things they need. No credit cards, no auto loans, no financial stress.
Sure, it will be hard for me to get this debt paid off, but I will do it. I am a single mom, and won’t likely have the luxury of having extra money to bank until my kids are older. I know I will have to wait a few years for the negative items to disappear from my credit and my score to be at zero, but I now know that is my goal. My experience over the last year has taught me that anything can happen at any moment, and when you depend on credit, it can all fall apart in the blink of an eye.
Thank you for the inspiration!
Thanks for the vote of confidence! It sounds like you’ve discovered the right attitude when it comes to getting your debt paid off, and that is the attitude that says “I WILL get it paid off and I WILL NOT go back into debt”. That’s exactly what you have to do and don’t deviate from it.
Even a single mom can do it. It may be a bit tougher because its just up to you but it’s definitely not impossible by any means.
At the moment I’m only writing one article a month here on Enemy of Debt. Keep reading the articles here on Enemy of Debt, and you may want to check out my blog “Celebrating Financial Freedom” at http://www.cfinancialfreedom.com. I teach how to become debt free and live a debt free lifestyle and I have many many articles that could be of great help to you.
If you elect to sign up for my email updates you can download my free budgeting course that can get you started getting control of your cash flow and on the road to clearing out that debt for good.
If you’re interested, I’m also developing a get out of debt course for single parents that I might be willing to let you preview in return for your honest feedback.
Thanks for reading!
Last night, I reread the section in Dave Ramsey’s book that deals with the same issue. This morning, I read your post. Hmmm . . . I think this lesson is meant for me. It’s incredible how saturated we are by messages of the need for a great credit score. The lens through which we view finances is very much framed by the companies that benefit from wide-spread debt. Thanks for chipping away at that frame, tilting the lens, and offering a fresh perspective.
Thanks for the kind words! Now go get out of debt and eliminate your credit score!