Does having good credit matter even if you are avoiding debt? The short answer, yes. Here’s why.
Back when I was young and thought I knew everything, I was also a big fan of talking heads who also think they know the One Right Way to Do Everything. Looking at you, Dave Ramsey.
Any Dave Ramsey fans here?
So, the thing is, Dave has some great thoughts. Living debt free? I’m a big fan of that.
About 12 years ago, our family became completely debt free, by the grace of God (literally – you can read that story here), and from there we just got rid of all credit accounts. No need for any temptation, right?
No mortgage.
No car loans.
No credit cards.
No loans.
No credit.
This seemed like a huge victory in our lives. But, I’ve learned to have no credit history at all can actually work against you in the future.
Let’s break it down.
Think of your credit report like your financial report card. It shows others, such as potential employers (if they ask), potential landlords, and any lenders just how responsible you are with borrowed money. If you’ve never had a credit card, loan, or any kind of debt you’ve paid off responsibly, they have no way of knowing if you’ll be a good borrower. And, if you’ve not had one in the last 5-10 years, you’ll also not have much of a credit history.
But, Dave Ramsey says a Credit Score is an I Love Debt Score, I hear you say.
Yes, I used to think that too.
Sadly, this is not how the world works, and since we live here, we need to work within the systems, whether or not we like them.
Having no credit history or a poor credit score doesn’t just affect your ability to get new credit cards to max out like an irresponsible shopaholic. I can affect other things too.
Housing, including Renting
Most landlords check credit scores before renting. No credit history can make it harder to find a place, or you might have to pay a higher security deposit.
Right now, the housing market is very competitive, with limited options. Without a credit score to give your potential landlord a clear picture of how responsible you are at a glance, they’ll just move on to the next applicant who does have good credit and can prove responsibility without extra work on the part of the landlord.
Employment Opportunities
I find it ridiculous, but I’ve even experienced it recently. Some employers check your credit report to see if you are a generally responsible human.
It’s not fair, and it’s not accurate, but it is what it is.
As you are moving up the ladder in your career, good credit may help with that.
Various Essentials May Cost More
Utilities like phones, electricity and internet sometimes require a credit check for new accounts. Without a credit history, you might have to pay a deposit upfront, which can be a pain.
Look, I agree. Your electric bill and other utilities should be included on your credit report. But they aren’t.
Rewards: Missing Out on Sweet Deals
Once upon a time, I used to roll my eyes at stuff like this. Really? Rewards points? The credit cards are taking advantage of you, babe.
BUT, I’ve learned, if you are disciplined about it, and purposeful, you can do really well for yourself with rewards points. Credit cards often offer these perks, but without established credit, you might not qualify for the best cards.
Just today, my trusty Capital One Card (with an appalling 29% interest rate, which is why i never keep a balance) upgraded me to a rewards card – 2% back on all purchases. Yes, 29% is insane, and far more than 2% – unless it’s paid off every month, which it is, because I’d not sleep at night if I had a balance with that level of interest.
I have a rewards Visa through my bank that gives me 4.5% back on all gas purchases, among other things. So what do I do? I buy all my gas with that card, then I pay it off. My reward this quarter was over $50.
Finally there’s the good old Kohls card. Kohls always has sales, and usually you get even better deals if you use the Kohl’s card. The interest is an absolute nutso 35% or something like that. But, as soon as I make a purchase, the very next day I go online and pay it off because I’m not a complete idiot. I’m just here for the rewards. Beware, however. Kohls has a “no mercy” policy on people who pay late on their card. The second you’re late, you get a ding on your credit report. Most places give you about 30 days of grace before reporting you to the credit report people.
Pay More for Bad Credit
If you thought my 29%-35% interest rates were crazy, just know part of that was the cost of not having a credit history or credit score until recently. As my credit score improves, I get better offers. I keep my old cards because “age of credit” is a factor in my credit report, and I use them periodically (and pay them off immediately) to keep them active.
If you need a car loan or a mortgage for some unforeseen circumstance, if you have poor credit or no credit you’ll either be turned down or pay through the nose in interest. Good credit saves you money, friend.
Is debt good then?
So, have I totally changed my tune and decided that debt is good.
Heck no.
I think being in debt is like gambling on your future. Debt is buying today in the assumption you’ll be able to pay that off later, and you might not be able to. We used to have debt 25 years ago, until one day hubby went to work to find the whole company boarded up and our last two paychecks bounce. That was not a fun time.
Being in debt is also like throwing money away. If I maxed out my $5000 limit card that charges me 29%, that would be a significant amount of cash I’d be throwing away each month. Sometimes that’s unavoidable, and no shame at all. I’ve been there, friends. But you don’t have to live in that situation just to have a good credit score.
What Building Credit Looks Like
No…when I’m talking about building credit, I mean using credit cards purposefully and paying them off immediately. I don’t mean you should go out and max out a credit card tomorrow!
Using credit responsibly can actually help you build a good credit history, which unlocks a world of financial benefits.
If self control is hard for you around credit cards (been there, done that), here’s an easy place to start building that responsibility and self control.
Start by leaving a credit card at home except when you know you’re going to need to fill your gas tank. Only use it to fill your gas tank. Don’t buy anything else with your cards. Then pay that off.
If you have a balance on your cards at the moment, and it’s too big to pay off (again…been there, done that), no worries. Pay more than the minimum if you can, and pay off anything additional you buy with your card (such as that tank of gas).
Thank God I stopped listening to Dave Ramsey when I did…
At some point about five years ago, I started to feel this nagging deep within about the fact that not only had we fallen behind in retirement savings due to some hard times, but we basically had no credit to speak of since becoming debt free.
Anyone who has ever been a fan of Dave Ramsey knows the drill on that one. It doesn’t matter, Dave would teach, because a credit score is really just an I love debt score and you don’t need it.
I couldn’t shake free the feeling that I did in fact need it, which was in conflict with the long-held belief I had that credit scores weren’t necessary unless you wanted to have a bunch of debt.
To reinforce this idea, I applied for a really great job that would have been a perfect fit for me. It was a toss up between myself and another person, so the deciding factor was how responsible we were…determined by our credit scores. Mine was something like 600 I think because I didn’t have any credit history from the last 6 or so years. His was 780.
I tried to explain…we’re debt free…we don’t even have a mortgage…I can show you all this other stuff to prove it.
The thing is, they didn’t want to have to do homework to figure out if I was responsible or not, when the other person had a healthy credit history that showed in one simple metric that they paid bills on time.
To make a long story shorter, I applied for a gas card to build some credit…and was turned down.
So I got a secured credit card with Green Dot, used it just for my gas purchases, then paid it off every month. My credit was so bad (from being non-existent) that I was only approved for $250. That’s bad.
I had a friend who was now working with a bank in the mortgage department so I bought her lunch and picked her brain about what I could do to improve my credit score.
“Kim, this is not good. Your credit score is terrible. If you guys ever needed to move, you wouldn’t even be able to rent an apartment without a credit score.”
Ha, as if we’d move, I thought. Famous last words.
As it turns out, I wound up needing to move to Georgia last year and was so thankful that I had purposefully worked hard (as did my hubby) to build my credit by slowly getting cards as I was approved for them, and paying them off immediately (that’s the tricky part).
If we hadn’t been purposeful about rebuilding our credit, we’d probably be living in our car even after selling our house. We were even told we got our apartment because 730s and up were moved to the front of the line with the long waiting list. And later, we were able to buy a house in this more expensive area because of our credit score.
Your credit score does matter.