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| How to Live Debt-Free With No Credit Score |
Many people see debt as a necessary evil, but it's still possible to live — and thrive — without using debt or worrying about your credit scores. The benefits of debt-free living are easy to understand, but it's important to know what challenges you face and how to overcome them if you stop playing a credit game.
CHALLENGES OF LIVING WITHOUT CREDIT
Not using credit means you 're not going to have a credit history, giving you a low credit score. This can make it more difficult to buy things and to re-enter the world where credit scores matter can be painful if your plans change because it takes time to build a good one.
One of the biggest challenges of a debt-free lifestyle is paying for everything in cash. It doesn't have to be paper money; it can be a debit card. If you don't borrow, it takes more time, more savings — or both — to make major purchases.
You 're going to have to save a substantial amount of money to buy a vehicle without financing it, and it's even more difficult to buy a home. Renters may be forced to pay more early to prove they 're a safe bet.
HOW TO SPEND WITHOUT A CREDIT CARD
Here are the strategies for living in an increasingly cashless society without a credit card:
Day-to-Day Expenses
You can use cash or a debit card to pay for your daily expenses — food, entertainment, meals, etc. Cash makes budgeting easy if you use the envelope method to separate your cash by purpose, but keeping your cash around is risky. A debit card linked to your check account offers the convenience of a credit card, and you're only going to spend the money you actually have.
Monthly Bills
If you've become used to paying monthly bills like your cell phone, utilities, or gym memberships with a credit card, it's easy to break. Switch to online billing payments so that your bank sends money to your billing machine by check or electronic transfer. As with a credit card, you can set things up so that payment is made automatically. Alternatively, you can use your debit card to pay these bills.
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| How to Live Debt-Free With No Credit Score |
Prepaid Cards
If you don't have a check account, you can use a prepaid debit card instead of a standard debit card. Prepaid cards are "loaded" with funds before you use them, and then you can swipe your card or make online bill payments out of your loaded balance. After you use up your balance, the card stops working.
Debit Versus Credit Cards
Debit cards and prepaid cards are riskier than credit cards on a daily basis. If someone steals your debit card number and charges, the money will come directly out of your account. You are generally protected from fraud and error, but you will need to notify your bank quickly for the best possible protection.
The real problem is that your account may be temporarily emptied, causing you to bounce off payments, and this may result in a domino effect of cleaning up messes. When your credit card number is stolen, the thieves spend the money of the card issuer, which gives you time to clean up everything without involving your credit card account.
Frozen Funds
Debit cards can also be problematic if the card is swiped before the exact amount of your spending is known. This usually happens when you rent a car or hotel room, or when you open a nightclub tab3.
The merchant will pre-authorize your card and temporarily lock the funds in your account. These charges should be dropped after a few days, but numerous charges combined with a low current account may cause trouble.
You may have a lot of money, but if the bank doesn't let you use your money, your card will be discarded and your checks will rebound. Keep an extra cash buffer in check to avoid problems, and check your current account balance on a regular basis.
Debit Card Required
Debit cards work almost everywhere, even if an online form asks you to enter a credit card number. In rare cases, a car rental agency may require a credit card instead of a debit card to make a reservation. Find out in advance what the cards are accepted or what the requirements are if you only have a debit card, especially if you need to rent a car.
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| How to Live Debt-Free With No Credit Score |
Buying a Home
For some, aversion to borrowing ends up buying a home. You can save up and pay cash for most things, but homes can cost hundreds of thousands of dollars, which would take decades of extreme savings for many buyers.
If you decide to get a mortgage and live a debt-free lifestyle, you 're going to have to work harder than most borrowers to prove your creditworthiness because you don't have a credit history.
Alternative Credit
You 're going to have to get approved on the basis of "alternative" factors instead of the traditional FICO credit score to get the loan approved. This limits the number of lenders who work with you and the types of loans available. It may also result in higher interest rates.
You are most likely to find a loan guaranteed by the U.S. government, such as an FHA loan. To determine your creditworthiness, lenders will seek information about the regular on-time payments you make, such as rent, utility, and insurance premiums. Make sure you pay on time for at least 12 months before applying for a loan.
Income
Another important factor is the income that you have available to repay a mortgage loan. When you do manual underwriting — which is what you'll need if you don't have traditional credit — the lenders most likely need to see that your debt-to-income ratio is less than 43%, and lower is better. In the case of someone who lives debt-free, that means that you spend less than 43% of your income on expenses, including your mortgage payment.
Reserves
It's also a good idea to have money in the bank. If you're a debt-free saver, you 're probably already out there. The more financially secure you are, the more likely you are to be approved, even without a credit history.
Stability
Lenders are looking for something certain, or at least as close to it as they can get. A long history of employment is helpful because it suggests that you will continue to earn a consistent income. The industry in which you work can also be a factor. Seasonal employment is less reliable, while government work is often considered secure.
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| How to Live Debt-Free With No Credit Score |
Time to Close
Without traditional credit scores, it will take longer than usual to get a loan. Manual underwriting is a labor-intensive process because someone needs to review and evaluate all the details. This is a serious disadvantage if you're buying in a fast-moving market where demand is high. Get started as soon as you can, if you live in a hot market, long before you make an offer.
Should You Abandon Credit Entirely?
Before you ditch debt for good, know why you might want good credit so that you can make a more informed decision without:
- It doesn’t have to cost money to build credit and maintain great credit scores. You pay interest only if you borrow money. If you don't have to borrow, use your credit card to spend your money on a daily basis and pay off your card every month. You have a grace period of 30 days before interest costs are charged, so you can never pay a penny for interest, keep your credit, and have the added security of your credit card.
- If you ever need money, it’s nice to have a solid credit history. You can keep your credit card open for emergency situations — just don't use it to buy more than you can afford.
- You can’t erase the past. You can't erase the past, man. Even if you're going debt-free, your credit history still exists, and it can continue to cause problems.5 Debts will eventually fall off your credit reports, and collectors can't try to collect after the limitation period has run out, but it takes a few years.
- Spending mismatch is a problem. Credit cards and easy loans can lure you to a debt trap. Bad luck and health problems may make things worse. The most important task is to understand where your money is going and why you've spent the way you've spent it. Make a realistic plan, and your chances of success will be much better.
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| How to Live Debt-Free With No Credit Score |
