The Zero Credit Score: A Lofty Goal or Foolish Decision
Why having debt is a prerequisite to boosting your credit.
A growing number of people are shunning credit cards in favor of paying cold, hard cash. They say they spend less and are more mindful of their purchases. Even when it comes to large items—like a car or a house—they’re saving up and paying in cash. As a result, they have a zero credit score (or none at all).
Is this a smart money move, or a risk that can cost you financially?
Dave Ramsey, who hosts a popular radio show about personal finance, is perhaps the most vocal in his avoidance of any kind of debt and advocating for a zero credit score. He calls the FICO score an “I-love-debt” score, explaining that having a credit score doesn’t mean you’re winning financially but rather that “you are good at borrowing money and paying it back.” Ramsey takes pride in not having a credit score, and encourages his followers to shun credit cards in their path to become debt-free.
If you follow Ramsey’s plan and pay off all of your debt—and you no longer have any credit cards, auto loans, or a mortgage—your credit score will become “indeterminable.” This is a good thing, Ramsey says—explaining that “you don’t need a credit score, anyway, since you don’t plan on using credit!”
How credit scores work.
FICO scores, which measure how good you are at borrowing money and paying it back, range from 300 to 850, with 690 considered “good” and a score of 720 or more considered “excellent.” Banks are more likely to lend money (in the form of a car loan or mortgage, for example) to those with the highest credit scores, and they borrow at lower interest rates.
To boost your credit score, however, you need to have debt. That’s because your credit score increases when you have a long history of paying your credit card bills on time, and use only a small portion of your available credit. It also gets a lift when you have a healthy mix of different types of loans, such as a mortgage, a car loan, and credit cards.
Can you get a mortgage without a credit score?
But what about when you’re ready to buy a home? Few people can afford to pay for the full cost of the home in cash—especially if they live in a city with a high cost of living. Those with a zero credit score will need to seek out a mortgage company that does manual underwriting, a more cumbersome process in which a mortgage lender evaluates whether there’s enough income and assets to afford the loan’s repayment. So while it is possible to get a mortgage with a zero credit score, you’ll likely have a harder time getting one and may have to hand over a larger deposit.
The bottom line
Not having a credit score may work well if you don’t plan on borrowing money—ever. Proponents of the zero credit score say it helps them get rid of the temptation of buying things they don’t need or can’t afford.
“When you swipe a credit card, you don’t see the pain of the purchase AND you don’t experience it until over a month later when the bill comes due,” writes Derek Sall, a personal finance blogger who runs the blog, Life and My Finances. “The emotion of spending never matches up to the pain of actually paying for it.”
So while the zero credit life means reduced interest costs, decreased spending, and less financial stress, it will make it more difficult to buy a house (unless you can pay in cash) and you’re likely to have higher insurance costs. You may also have to pay larger up-front deposits when signing up for your next cell phone plan, utility contract, or rental car.
Whether you choose to go for the zero credit score or not depends on your personal financial goals—such as one day taking out a mortgage on a home. No matter what you decide, monitoring your credit history on a regular basis is a smart move.
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