by Robin Hartill, CFP®
Dave Ramsey doesn’t need a credit score. He says you don’t need one, either.
The anti-debt crusader, who has an estimated net worth of at least $200 million, calls FICO scores the “I love debt scores.” He’s proud of the fact that he doesn’t have a credit score.
Ramsey has inspired countless people to pay down debt — and we love that. But the truth is, he can afford to be credit invisible. If you’re a regular person, not having a credit score makes life a lot more costly and complicated.
Here’s what Ramsey gets right about credit scores: They aren’t a reflection of your overall finances. Doubling your salary or your savings is great for your finances, but it won’t affect your credit score, because a credit score only measures how you manage debt.
If you’re like Ramsey and you don’t have a credit score, that probably means you haven’t used credit in the past 24 months. So the credit bureaus often won’t have enough data about you to give you a credit score.
But you don’t need to carry debt to have a credit score. In fact, one of the best ways to build excellent credit is to open a credit card and pay off the entire balance each month.
Here’s why everyone who’s not a multimillionaire should ignore Ramsey’s credit score advice.
Forget a three- to six- month emergency fund. If you’re going to live without a credit card, you’ll need to have a lot more cash saved because you’ll have to pay deposits for virtually everything. Expect to pay first and last month’s rent plus an additional security deposit, along with deposits for things like utilities, internet and cellphone service.
Ramsey says the people who need a credit score are the ones who plan to take on more debt. That’s partially true. Having a high credit score helps you get the best financing rates for big purchases like a home, which few people can afford to pay cash for.
It’s possible to get a mortgage with no credit score through a process called manual underwriting. Smaller banks and credit unions are most likely to offer this option. But be prepared to provide more documentation and a longer approval process.
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You can also expect to make a bigger down payment. This can be good if it stops you from buying too much house. But when you’re buying a house you can afford, a large down payment requirement can keep you renting for longer. That costs you in the long run because your housing payments aren’t building equity.
When someone hacks your credit card account, technically, that’s your bank’s money they’re stealing when they make those fraudulent transactions. But with a debit card, they’re stealing your money. In practice, your bank will probably refund your money if a hacker drains your account, but the process could take several days. That could leave you without cash or put you behind on bills.
Credit is the safest way to pay in situations where your data is vulnerable, like when you’re shopping online or paying for gas at the pump. That doesn’t mean you need to carry debt when you make a credit card purchase. You can pay off your balance daily if you want.
You can probably check into a hotel or rent a car using your debit card. But they’ll typically put a temporary hold on whatever credit or debit account you use. It’s meant to ensure you have sufficient funds in case of damage. That’s money you can’t spend until the hold is lifted, which may not happen until several days after you’ve checked out of the hotel or returned the car.
If you’re paying with credit, that won’t be a problem as long as your card isn’t maxed out. But if you’re paying with a debit card, a hold could lock you out of funds you need for basic expenses — or worse yet, cause you to overdraft.
In a perfect world, you’d have an emergency fund that can carry you through any crisis. But in the real world, an emergency fund can take several years to build. Using credit cards to get through an emergency isn’t ideal. But in a crisis, it may be the least terrible option. Having access to a credit card can help you avoid dangerous alternatives, like payday loans.
If you know that you’ll be tempted to rack up debt because you have access to credit, it may be best to follow Ramsey’s advice and live without a credit score. The inconvenience and additional deposits are worth it if you have a serious spending problem. But for most people, the advantages of credit far outweigh the downside.
If you don’t have a credit score, either because you’ve never used credit or you haven’t had a credit card in a long time, the easiest way to get one is to open a secured credit card. You’ll pay a refundable security deposit that will become your line of credit. After about a year of on-time payments, your odds of getting approved for a regular credit line are good.
Limit your purchases to no more than 10% of your credit limit, and pay off the bill in full each month — or even as soon as you make a purchase if you’re worried about falling into debt.
With a little discipline, access to credit won’t lead to debt. But it will make life easier and more affordable.
Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder. She writes the Dear Penny personal finance advice column. Send your tricky money questions to [email protected].
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