Live With No Debt and No Credit Score

Updated: May 13, 2018

How can anyone live debt free and have no credit score? They have to be millionaires, or even billionaires, right? Well, they certainly could be. However, there are ways to have no debt, no credit cards, yet still have money.

You won't have a credit history, so you will have a low credit score. This can make it more difficult to buy things, and re-entering the world of credit scores can be painful if your plans change, or you aren't able to sustain your no credit lifestyle.

Saving More, Spending Less

A debt-free lifestyle is paying for everything with cash. It doesn’t have to be paper cash; it can be a debit card. For large purchases, this can be difficult.

You will need a lot of money to purchase a car or home Many people wait longer to buy and buy less expensive things.

How to Spend Without a Credit Card

  • Day-to-day expenses: You can pay everyday expenses—groceries, errands, entertainment, meals, etc.—with cash or a debit card.

  • Monthly bills: If you’ve grown accustomed to paying monthly bills such as your cell phone, utilities, or gym memberships with a credit card, that’s an easy habit to break. You can setup online bill pay, where bank sends funds to your biller by check or electronic transfer.

  • Prepaid cards: If you don’t have a checking account, rrepaid cards are “loaded” with funds before you use them, then you can swipe the card or make online bill payments out of your loaded balance. 

  • Debit vs. credit cards: There can be issues with your account being emptied if your card gets into the wrong hands. You will be protected, but it can be a hassle.

  • Frozen funds: Debit cards also can be problematic when the card gets swiped before the exact amount of your spending is known. This typically happens when you rent a car or hotel room, or when you open a tab at a nightclub. The merchant will pre-authorize your card and temporarily lock funds. These charges should fall off after a few days, but numerous charges combined with a checking account that’s running low can cause trouble. You may have plenty of money, but if the bank won’t let you use your money, your card will be declined and checks will bounce. Keep an extra buffer of cash in checking to avoid problems, and check your available balance regularly.

  • Debit card required: Debit cards work almost everywhere, even when an online form asks you to enter a credit card number. Find out ahead of time what cards are accepted or what the requirements are if you only have a debit card, especially if you need to rent a car. 

Buying a Home

Homes can cost hundreds of thousands of dollars, which would take decades of extreme saving for many buyers. If you decide to get a mortgage, you’ll need to work a little harder than most borrowers due to your lack of credit.

  • Alternative credit: You’ll have to get approved based on “alternative” factors instead of a credit score to get approved for a loan. This limits the number of lenders you’ll be able to work with because some lenders prefer not to think outside the box. It also limits the types of loans available. You’re most likely to find a loan guaranteed by the U.S. government, such as an FHA loan. Lenders will look for information about regular on-time payments you make, such as rent, utilities, and insurance premiums. Make sure you pay on time for at least 12 months before you apply for a loan.

  • Income: Another important factor is the income you have available to repay a mortgage loan. With manual underwriting—which is what you’ll need if you don’t have traditional credit—lenders most likely need to see your debt-to-income ratio less than 43 percent, and lower is better.

  • Reserves: Have money in the bank. If you’re a debt-free saver, you're probably there already. The more financially secure you are, the more likely you are to get approved, even without a credit history.

  • Stability: Lenders are looking for a sure thing, or at least as close to it as they can get. A long history of employment is helpful because it suggests you will continue to earn a consistent income. The industry you work in also can be a factor. Seasonal employment is less dependable, while a government job often is considered secure.

  • Time to close: Without traditional credit scores, it will take a long time to get a loan. Manual underwriting is a labor-intensive process because somebody must review and evaluate all the details. This is a serious disadvantage if you're buying in a seller's market, and it could be frustrating. Get started on the process as soon as possible if you live in a hot market, long before you make an offer. 

Should you Abandon Credit Entirely? 

You might want good credit so you can make a more informed decision to do without.

  • It doesn’t have to cost money to build credit and maintain great credit scores. You only pay interest when you borrow money. If you don’t have to borrow, use a credit card for everyday spending and pay off the card every month. You have a 30-day grace period before interest costs are charged, so you can never pay a penny in interest, maintain your credit, and have the added safety of a credit card.

  • If you ever need money, it’s nice to have a solid credit history. Again, debt is only a problem if it hangs around for too long. You can keep a credit card open for emergencies—just don’t use it to buy more than you can afford. Living without debt is appealing, especially after you’ve seen hard times. But if you ever change your mind and want to borrow, you’ll have to start from scratch after you let your credit dry up entirely.

  • You can’t erase the past. Even if you go debt-free, your credit history still exists, and it can continue to cause problems. Debts will fall off your credit reports eventually, and collectors can't try to collect after the statute of limitations has run out, but that takes several years.

  • Spending is the problem. Credit cards and easy loans can lure you into a debt trap. Bad luck and health problems can make things worse. The most important task is to understand where your money goes and why you’ve spent the way you have. Make a realistic plan and your chances of success become much better.

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What do you think? Could you live this debt-free and no credit score life? Are you already?

Disclaimer: The content on this site is provided for information and discussion purposes only. It is not intended to be professional financial advice and should not be the sole basis for your investment, financial or tax planning decisions. Under no circumstances does this information represent a recommendation to buy or sell securities, or any other products, or services. All content and information is subject to change at anytime.