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Some "financial gurus" promote the idea that the best way to avoid debt and build wealth is to swear off credit for good. Avoiding bad debt is smart advice, but is it possible to live with no credit or credit score? If it is possible, is going credit-free a good idea?
It may be possible to live without credit if you aren't already borrowing through student loans, a mortgage or other debt. Even so, living credit-free can be very difficult. Tasks such as finding an apartment or financing a car can become challenging obstacles without credit.
Here's a rundown of the challenges of going cold turkey on credit and advice for growing your credit score without going into debt.
Challenges of Living Without a Credit Score
While not impossible, living without credit presents real challenges. Having no credit score can create some of the same obstacles as having a low credit score:
- Finding an apartment is harder. Searching for rental housing without a good credit score can be stressful; many rental companies turn away applicants with no credit history. Others may ask you to put down more money as a deposit or find a cosigner or guarantor.
- Traveling may be more complicated. It's possible to travel without a credit card, though you'll need to plan ahead to ensure your debit card is accepted in most places you plan to visit. In addition, without a credit card, some rental car companies and hotels will place large holds on funds in your checking account to ensure you're good for the rental rate as well as any fees you may incur. You'll need to ensure you have adequate spare money in the bank to avoid ending up in a bind.
- It may take longer to buy a home. With a median list price of $425,000 in April 2022, according to Realtor.com, houses cost more than most can pay in cash, even with years of diligent saving. You may be able to qualify for a mortgage if you have no credit by finding a guarantor with a high credit score. One form of alternate lending, manual underwriting, requires years of stable employment history, a high income and larger down payment. Since the manual underwriting process is lengthy and uncertain, a prequalified buyer will have a competitive edge in a seller's market.
- You'll need to pay for everything with existing funds. Without credit, you'll need to use cash, a debit card or a bank account to pay for anything you want or need. Of course, it's always wise to live within your means and only buy what you can afford, but flexible payments can make budgeting for significant expenses convenient.
Why a Good Credit Score Makes Life Easier
Your credit score is a three-digit number representing your credit history that lenders use to evaluate your risk as a borrower. Having no credit score makes it more difficult to access financing for anything from a cellphone to a car or home.
Even if you don't plan to borrow money in the near future, having a good credit score can still make life easier in a number of ways:
- Get access to favorable credit terms. Many lenders extend the best credit card benefits and loan terms to borrowers with high credit scores. Having a good score may mean paying a lower interest rate or qualifying for higher credit limits and better rewards.
- Secure housing on your own. Good credit can make it easier to apply for an apartment without seeking a cosigner to help you qualify. It can also help you qualify for a mortgage without relying on a guarantor to serve as backup if you don't make monthly payments.
- Protect yourself against fraud. Credit cards typically offer better fraud protection than debit cards do. If a scammer steals your credit card number to make unauthorized purchases, for example, you'll be reimbursed and can only ever be held liable for a maximum of $50.
- Give your budget some breathing room. Without credit, you'll need to use savings to pay cash for everything. It's always wise to save for things you need and keep a flush emergency fund. But the flexibility to pay over time can sometimes be favorable to paying outright, especially for large purchases such as a home renovation.
How to Build Credit
You don't have to choose between living within your means, avoiding debt and building your credit history. Whether you're building credit from scratch or recovering from past credit mistakes, here are key tips for building credit responsibly:
- Make payments by the due date. A strong history of on-time payments comes in handy if you decide to borrow down the line. If you already have a credit card balance, an auto loan, a student loan or a mortgage that you're paying off, continue to make on-time payments to build your score.
- Add monthly bills to your credit report. You may be able to get credit for bills you already pay. Experian Boost®ø is a feature that can help you add qualifying past on-time payments to your credit report. Boost users who receive a score increase see a lift of 13 points to their FICO® Score☉ on average.
- Use Experian Go™ to start your credit history. Even if you don't have any credit accounts or loans, you can use Experian Go™ to create a credit report and start building up your report and FICO® Score.
- Open a credit line. Opening your first credit card can help you build credit. To avoid paying interest, be sure to use your credit card with a budget and pay off your entire balance by the due date each month. If you're starting out with no credit, consider applying for a secured credit card or becoming an authorized user on a family member's or friend's credit card.
- Manage your money. Having credit isn't an automatic entry point into a debt spiral, but overspending on a credit card certainly can be. Use credit alongside a spending plan to avoid taking on high-interest debt. Buffer your emergency fund to avoid becoming reliant on credit in an emergency.
The Bottom Line
You can avoid debt without committing to a life without credit. By sticking to a spending plan and making intentional use of credit products, you can take steps to build a credit history and enjoy the benefits of credit cards without going into debt.
Sign up for credit monitoring through Experian to get a clear picture of where you stand now, how lenders might view your creditworthiness and how you can improve your score.