Life without a Credit Score is Possible; But is it Wise?

Hang around money websites long enough, and one day you’ll stumble across an article discussing why it’s important to build a good credit history. I even wrote one myself.

But not everyone agrees.

For some who believe debt is to be avoided at all costs, credit isn’t just unnecessary; it’s abhorrent. The loudest voice in this camp is Christian money guru Dave Ramsey.

Ramsey has built a $240-million-a-year ministry/business around helping people get out of debt. 

Without question, he has helped millions of people with their money.

But Ramsey’s advice is dogmatic. And when it comes to credit, Ramsey offers no leeway. Per Ramsey, all debt is bad and to be avoided – period. Therefore, credit is unnecessary.

As a result, you will often hear Ramsey promoting the idea of living without a credit score.

I simply don’t think this is good advice, and I’m going to explain why. To do so, I’m going to deconstruct Ramsey’s article “Living Without a Credit Score”.

Ramsey’s article is divided into two sections. In the first, he briefly explains how to buy a home, rent an apartment, apply for a job, and travel – all without a credit score. Next, he proselytizes the benefits of living without credit. Let’s dig in.

Having enough cash to buy anything you might need negates most (but not all) of the arguments for building credit.

With hard work and financial discipline, it’s possible (if not easy) to pay cash for everything. You can avoid student loans by choosing a college wisely and working through school. And you can certainly find an affordable used car once you accept that most Americans are buying cars they cannot afford. 

But what about a house? 

Sure, you don’t need to buy a house. There’s nothing wrong with renting, per se. But there are plenty of benefits (both financial and psychological) to owning a home if you’re ready to settle down for the long-haul.

Here’s the catch. The median home price in the United States is $324,900 as of Q3 2020. It’s hard to imagine many Americans outlaying that much cash under the age of 30. And depending upon where in the nation you live, $300k might not even buy a parking space.

Enter the need for a mortgage – a long-term (up to 30-year) loan secured by the property you purchase.

You can get a mortgage without a credit score, but it’s more difficult

The process of a bank approving a borrower for a mortgage, known as underwriting, takes several factors into account. Underwriting looks at the condition and value of the real estate you’re buying, your income and work history, your assets, and – almost always – your credit history.

Mortgage lenders need to know they’re making a loan to a qualified borrower for a qualified property.

Because mortgages are secured by real estate, they carry some of the lowest interest rates on any kind of debt. As of January 2021, mortgage rates were as low as 2.25%. At such low interest rates, it’s not only acceptable to borrow money, it may be a savvy money move because you can earn a higher rate-of-return in the stock market than you’re paying on your mortgage.

Dave Ramsey explains that you can still get a mortgage without a credit score. And yes, he’s right. It’s possible.

To do so, you need to find a mortgage lender that does what’s called “manual underwriting”. In other words, they assess your credit risk by looking deep into your financial past rather than relying upon a credit score. Many large mortgage lenders do manual underwriting – not only for borrowers without credit but also for very large (jumbo) mortgages and other reasons.

But here’s the thing: just because it’s possible to get a mortgage this way without a credit score doesn’t mean it’s easy.

How manual underwriting works

The manual underwriting process will require much more time than a traditional mortgage application and a lot more documentation. While all mortgage applications require a few bank statements and paystubs, manual underwriting will require one to two years of bank statements, several years of tax returns, employment history, and more.

If you have very little credit, or none at all, they may also ask for you to produce years’ worth of utility bill payment receipts or rent receipts. 

In essence, the underwriting is manually creating a credit history on you! You can use manual underwriting to get a mortgage if you live a debt-free lifestyle as long as you can produce several years’ history of paying your rent and utilities on-time. But if you have damaged credit, don’t expect manual underwriting to be a panacea: an underwriter may simply validate the reasons your credit score is suffering and deny the loan.

Are manually-underwritten mortgages more expensive?

It’s easy to assume that a mortgage with manual underwriting for a borrower with no credit score will be more expensive (in fees and/or interest) than a conventional mortgage for a borrower with a good credit score. And that may be true in some cases. But in other cases, the two mortgages might have similar costs.

There are simply too many factors that go into what a borrower pays for their mortgage to categorically say “manually underwritten mortgages cost more, the same, or less”. What I can tell you is this: if you have past credit problems, it will most likely lead to a higher APR and/or other fees, regardless of what kind of mortgage you use.

Many people don’t realize that their credit score is used for things other than applications to borrow money. Wireless companies check your credit before issuing a phone contract, insurers check your credit before writing a car insurance policy, and most landlords check your credit before renting an apartment. Although less common, some employers also check job applicants’ credit scores – especially for positions with financial responsibility. 

Ramsey’s advice for renting an apartment and getting a job without a credit score leaves something to be desired. 

Renting an apartment without credit

For renting an apartment, he suggests getting a rental history from previous landlords. Fair enough, but what if it’s your first apartment? His only advice is to “simply tell them that you don’t have debt and you use cash.”

I hate to tell you this, but if I’m renting an apartment to somebody there’s no way in hell that’s going to satisfy me. Ramsey admits “If it’s your first time renting, you might have to look around for a little bit.” Then, he adds: “but don’t worry, you’ll be able to find someone to work with you.”

Gee, that’s great. He’s probably right – you may eventually find someone to rent to you. But it may be far from your first choice. And if you’re renting in a competitive market, finding such a landlord may be an insurmountable task.

Applying for jobs without credit

Getting around employer credit checks may be easier. First of all, most people hopefully won’t have to deal with credit checks when applying for a job. I think I’ve personally only encountered this once.

Pulling credit makes sense for certain jobs. Two good examples are if you will handle company money or be in a position of public trust (for example, a police officer). In these cases, the employers will want to make sure you don’t have excessive debts that might make you tempted to embezzle or accept bribes.

Outside of these situations, I don’t think checking a job applicant’s credit makes sense. And some lawmakers agree. Eleven states currently restrict the practice and Congress has proposed (but not yet passed) legislation to federally ban the practice federally in recent years.

If you have no credit history at all and an employer really wants to hire you, I’m betting you can explain this one away. But again, if you’re trying to go in without a credit check because you have a bad credit history already – that’s not going to work, sorry!

If you want to live without credit, you can’t get most credit cards.

In most of daily life, not having a credit card isn’t a problem. You can pay for almost everything with cash or a debit card.

But problems arise when you want to travel or rent a car (or really, anything else).

Hotels without a credit card

Reserving a hotel without a credit card is easier than renting something without one, but it still presents issues. Many hotel chains will now accept debit cards for reservations and even incidentals. See policies from Marriott and Hilton, for example. 

The issue is that, when you check-in, the hotel places a hold on your card that’s typically more than the cost of your stay. Hilton, for example, will charge the entire amount of your stay plus $50 per day. This is to cover any incidental charges like food and beverage purchases during your stay. 

You may have plenty of money in your checking account to cover such a hold, but the point is that the hold will tie up your money. Holds take an average of three days to be released. As an example, a seven-day hotel stay could result in $350 of funds in your debit account being inaccessible for up to three days after your stay.

Renting a car without a credit card

Car rental companies strongly prefer renting to customers with credit cards. The reason might be obvious: they’re letting you drive off in an almost-new car costing somewhere between $20,000 and $50,000, maybe more. Presenting a valid credit card in your name does at least four things to appease the rental company.

It serves as a de facto credit check. You qualified for the credit card at one point in time. That’s an indicator of responsibility.

• It allows the company to place a hold against your available credit without tying up real funds.
• It provides a way to track you down if you run off with the rental car.
• Also, most major credit cards provide customers with some level of rental car insurance. Even if you’re driving without any other valid insurance, the card issuer will reimburse the rental company for certain losses in the event of a crash.

Debit cards, on the other hand, do not require a credit check, require tying up your funds to place a hold, and do not typically offer the same kind of insurance.

Renting a car with a debit card is possible at certain locations, but it’s not easy. You can expect the company to put at least a $200 hold on top of the cost of your rental when you sign for the car. Here are some of the other restrictions and obstacles you may face renting a car with a debit card (taken directly from major rental company’s policies):

• Be required to present two or more forms of photo ID showing the same home address.
• At airport locations, provide proof of your return travel itinerary.
• Be limited to renting economy vehicles.
• Be required to provide two recent utility bills.
• Be required to provide your most recent pay stub.
• Provide two personal references who can verify where you live.
• Be prevented from adding additional drivers to your rental.
• Be unable to rent at certain locations. For example, Hertz does not allow debit card rentals in the New York Metropolitan Tri-State Area (NY, NJ, CT), areas of Hartford, CT, areas of Philadelphia, PA, areas of Boston, MA, areas of Manchester, NH, areas of Detroit, MI, areas of Baltimore, MD, and Atlanta, GA. At off-airport locations, Enterprise does not guarantee debit-card acceptance, it’s up to each location manager.

Renting a car with a debit card is a huge hassle. And though it may be possible, there’s a lot more that can go wrong than renting with a credit card. I remember one time I was renting a car from a slammed rental agency at LAX. They had ten or so agents and I still waited in line for 45 minutes. While I was signing my paperwork, I overheard a guy two spots over pleading with the agent to allow him to use his debit card. But the would-be renter didn’t have something or another and the policy wouldn’t allow it.

After showing you how you can get by in life (with some difficulty, at least) sans credit, Ramsey presents seven benefits of living without a credit score. Let’s do some fact-checking.

Dave says “You’re no longer enslaved to a life of debt”

Far from it. You can possess a good credit score but have no debt other than a modest credit card (that you pay off each month without incurring interest). Being “enslaved to a life of debt” is the result of overspending and mismanaging credit – not simply having a credit history.  

I suppose if the mere thought of having a credit line makes you want to buy all of Amazon, then yeah, maybe stay away from credit. But I suspect that’s not the case.

Dave says “Your bank account becomes your measuring tool”

I don’t disagree here. Your net worth – and what you save versus what you spend – are more important than your FICO score. But you can care about both.

Dave says “You’re in complete control of your finances”

To say that you can’t be in “complete control of your finances” unless you renounce credit is just silly. You can be in control of your money as long as you don’t buy things you can’t afford.

Dave says “You’re less likely to overspend”

There’s truth here. It’s a fact that we spend more on credit cards than we do with cash. But part of this phenomenon is that we experience some pain when we physically see cash leaving our wallets. That means that debit cards are not immune.

If you’re on a tight budget and may feel tempted to buy something you shouldn’t because you have a credit card, don’t get a credit card. (Or, at least, make it very hard to access). You need to know yourself and what’s right for you.

Dave says “You’ll build wealth and give generously”

Ramsey’s point here is that once you’re free of debt, you can put most of your money toward investing and charity. One last time we have a statement that truly has nothing to do with whether or not you maintain a good credit score. Using credit cards responsibly and taking a mortgage to buy a home within your budget are perfectly acceptable things to do. In fact, done wisely, these things might even help you build wealth faster than somebody who lives without credit. (But that’s for another day).

As I said earlier, Dave Ramsey’s money advice is dogmatic. His rules are black-and-white. There is no room for interpretation. According to Dave, debt should have no place in your life. (Unless you need a mortgage to buy a house, I guess. He makes that exception).

Some people want dogma. In fact, some people need it. I have no doubt that many of Ramsey’s followers tried numerous ways to get out of debt and the only thing that worked was renouncing credit once and for all. It’s not unlike Alcoholics Anonymous. For some, lifelong abstention from something is the only way to mitigate an unhealthy relationship with something, be it alcohol or debt.

But just as only a small percentage of drinkers need AA, I think only a small percentage of consumers need to forgo credit forever.

To clarify, I have nothing against a debt-free lifestyle. If it’s your personal choice to live without debt (and, as a result, stop caring about your credit file), that’s great. I just want you to make an informed choice. I don’t want you to be surprised when you have a really hard time renting an apartment or get turned away when you try to rent a car. I also want you to understand that you do not need to “love” debt to get a good credit score.

I recommend that everyone take some steps to build a credit file in their early 20s. And I recommend that everyone checks their credit at least once or twice a year. (Mistakes happen, and identity theft is real). 

If you’re repaying student loans, have a credit card or a car loan, you’re already on your way.

How to build credit from scratch

If you’re starting from scratch, the hardest part of building credit is getting your first account. This is the part that can be frustrating if you want to live a debt-free lifestyle. If you want to build credit, you do have to open a credit line and use it. But you don’t have to go into debt.

For example, you can open a credit card, make just one purchase a month, and pay that charge off at the end of the month. You’ll never incur interest because you’re paying the entire bill during the grace period. To the extent that you’re “in debt”, it’s only for 30 days.

If you do this consistently, you will build credit.

Credit building credit cards

If you don’t have a credit history yet, getting approved for a credit card can be tricky. Your best bet is what’s known as a secured credit card. Secured credit cards require a security deposit (usually between $50 and a few hundred dollars). This deposit is fully refundable and earns interest. 

Otherwise, a secured credit card works like any other: you can spend with the card up to your credit limit and are responsible for paying the balance due each month. You’ll only pay interest if you don’t repay your entire balance at the end of the month. 

Two secured cards that are ideal for building credit are the Citi® Secured Mastercard® and the OpenSky® Secured Visa® Credit Card. 

Credit-builder loans

If you don’t like the idea of a credit card – even a secured one – there’s an alternative product that can help you build credit. They are known as “credit-builder loans”, but that name is admittedly deceiving because they don’t work like traditional loans.

With a credit builder loan, you make fixed monthly payments for a set term of 24 months. At the end of the term, you get your money back in a lump sum minus fees and interest.

I know what you’re thinking. And yes, you read that correctly. A credit-builder loan basically charges you fees and interest to make monthly savings deposits.

So why in the world would you do that when you could put money into a savings account each month and earn interest rather than pay it?

For one reason, and one reason only: to build credit without going into debt.

With a credit-builder loan, you never owe money to anybody but yourself. And yet, your on-time payments will still be reported to the credit bureaus and help you build good credit.

The biggest name in online credit-builder loans is a company called Self, which offers 24 month credit builder loans. They charge a $9 admin fee and monthly interest that depends upon your selected monthly contribution.

If I were trying to build credit from scratch, I would rather open a no-annual-fee secured credit card, make some monthly charges, and pay them off in full to avoid paying any fees or interest. A credit-builder loan is a more expensive way to build credit, but it allows you to do so without going into debt and without posting a security deposit.

Personal finance is personal. What works for you might not work for me. And too many money gurus like Dave Ramsey peddle one-size-fits-all solutions. I believe these end up being a disservice to followers who may not realize that his way isn’t the only way – or even the best way.

If you choose to live a debt-free lifestyle, that’s great. But debt-free is not the same as credit score-free. You may still want to prevent your credit score from going in the toilet.

Living without a credit score (or with a bad one) is possible, but it will present challenges from time to time even if you never borrow money.

A parting clarification

In years past, when the subject of credit comes up, someone invariably quips “of course you’re advocating for credit, your website makes money from lenders.”

That is true: banks and other lenders are counted among the advertisers on this (and most other) financial advice websites. But this is not why I make the argument for participating in the credit system. I truly believe you will be best served by learning how to use credit responsibly rather than avoiding it altogether.

And let’s not forget that Ramsey profits from advertisers, too. He typically only recommends one company for each kind of financial product (Churchill for mortgages, Zander for insurance, for example). These are companies that have long relationships with Ramsey’s business and likely pay him millions in kickbacks for being his exclusive recommendations. Food for thought.

Ultimately, the important thing is to be careful with debt. Debt is like medicine. If you don’t need it, why use it? And if you need it, you want to use the minimum effective dose and no more. When it comes to credit, though, it’s your decision: learn to live with America’s imperfect-but-universal credit system or become a credit rebel and live life without a credit score.