Marie recently made a terrific response in Ask the Readers: What if you have no credit history? This thread is a month old and most people probably missed the comment, so I’m featuring it here.
I am a bit shocked that someone would be so irresponsible as to tell someone else to “suck it up and get a credit card”. Are there hassles about not having a score? Yes. But there are a lot more hassles about having debt and/or using a debt instrument. Especially this day and age when you can use a debit card.
I am 37 and was as disciplined as you sound when I was your age. I started out only buying small amounts of stuff I would normally have purchased anyway. Then it grew to everything I would have bought anyway and on and on. It took about eight years for me to realize that I was in serious debt and needed to do something about it. It just crept up on me. Not that it will happen to you, but it could. So is it really worth the risk?
Debt also caused me to not aggressively go after saving for an emergency fund. In the back of mind I knew that I could always use the credit card as an emergency fund. I also tended to buy more when I used the credit card instead of cash. I got “cloned” and had my identity stolen numerous times because I used credit cards. My life would have been a lot simpler had I done without them.
Truly responsible adults will live below their means. I don’t mean that to be insulting but Dave Ramsey is right: a two-year old will throw a tantrum to get the cereal they want because they want it now. Just wait an extra couple of years until you have the money to pay cash. Surely if you’re disciplined enough to pay off the credit card each month, you can do that.
And don’t even get me started about all the things that have happened to friends and family because someone co-signed or put someone on their account.
Why succumb to the norm? Why follow the pack? Fight back and refuse to get sucked in. If you’re going to have to “suck it up”, then fight against the system instead of being such a wimp. “Suck it up” by refusing to play the credit card game — live like a college student longer than your friends do and live below your means.
I am a landlord and I would never turn someone down as a tenant if they could show me they were financially responsible and that that’s why they have no credit score. Also, they’re right, you can, as I have done, get a mortgage through manual underwriting and then pay it off in five years. And, if I ever had a prospective employee who came to me and explained the reason they don’t have a credit score is because they don’t believe in debt, live below their means, and paid cash for their assets (I paid cash for my first small, $40k condo), then I would (oh, and have) hire them on the spot. For someone, in my opinion, to have the courage to stand up for their principles and actually follow through with what they believe — well, that’s someone I want on my team.
I only make $40k. I’ve never made more. I rent out my first condo, have zero debt, a four-year old car, and a house. I max out my savings. I have zero stress! I live like a queen with all the spending money I have each month. The best part is is that I’ll be a stay at mom in a few years. As an added bonus, the friends that made fun of me incessantly for driving a used Ford Festiva, without AC, (in Houston, mind you) for ten years, well, every single one of my has admired me and wished they had done the same. They’re upside-down on their cars, have no retirement because they kept raiding it due to some “emergency” and aren’t able to, sometimes, maintain their house like they should because they spent so much money on buying furnishings on credit because at 26 they had to have a showplace. Well, now their showplace is out of date. They’re stuck and can’t do anything because they’re not allowed any more credit. Think it won’t happen to you? Ha. These are attorneys, pilots, NASA engineers. Now, are they all in that bad? No. But every single one of them has some major issue. I have none.
If you are truly determined to not get into debt, then don’t. Work at it. then you’ll be able to retire like me before your 40 (if you want to).
There. Enough of my soapbox.
I agree with Marie: it’s foolish to tell somebody that they must get a credit card. There’s no one right way to be smart about money — it’s not wrong to avoid debt. Remember: do what works for you. If a person wants to avoid credit, she should be encouraged. If a person uses credit responsibly, he should not be condemned. There are advantages and disadvantages to both.
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This is really admirable that she’s managed to do this, but is this honestly realistic for most people? I live in an area of the country known for a fairly low cost-of-living, but I’ve certainly never seen a $40k condo around here, and I can’t in my mind rationalize contributing to somebody *else’s* income for a decade while saving up for a house. Not to mention that things like student loans are very often not optional–a student loan is a far better alternative than not learning because you’re working 40 hours a week while taking 15 credit hours a semester and barely scraping by. If you’re very prepared and nothing unexpected happens, I’m sure you *can* do this, but I think that “no credit ever” is a long way from universal advice.
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Susan’s got a point. My business management professor in college restated it as a much more workable rule: “You should only borrow money for your house, your car or your education.”
I’m not so sure about car loans, but I’ll testify to education loans: I borrowed $100k to go to law school, and while that liability freaked me out on paper, it’s practically paying for itself.
Minor caveat: Said professor gained notoriety a few years later as The Stoned Professor. But to his credit, he wasn’t like that when I took his class.
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Wow that was incredible. Thanks for posting the comment here or I’d have missed it. I have no cards but people think I’m just strange. Haven’t met anyone else yet with no cards.
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The disconnect is that for some reason some people think credit= debt. It does not. Anyone who can budget can use credit the same as cash. You can also get credit cards and never use them. Millions of people somehow manage to do this. Sure going into perpetual personal debt is not good.
And not all debt is bad.
A lot of people who get ahead in life use credit/leverage. Ask Dave Ramsey how many credit accounts his company has ( and how often they are beyond terms). It is very easy for someone to SELL an idea when he is making millions off it – by accepting credit cards at his website.
There are very deep philosophical differences in these viewpoints. For example I believe highly in personal responsibility and indidivualism. I believe adults can make choices and be responsible for their own lives. Ramsey-types view adults as children in need of preaching to, who are not capable of controlling their own lives. Paternalism, Authoritarianism, whatever you want to call it.
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Greg, you make some good points. But I think you — and the other commenters — are mistaking the argument “it’s not wrong to avoid debt” for the argument “you must avoid debt”. I think that Marie is trying to point out that it’s absolutely possible to get by without using debt (and she’s responding to a comment in which somebody had told the original poster to “suck it up and get a credit card” when the poster obviously did not want to do so). I believe that it’s important to support *all* responsible approaches to money management, and a “no debt” approach is certainly worthy of support.
A lot of people who get ahead in life use credit/leverage. Ask Dave Ramsey how many credit accounts his company has ( and how often they are beyond terms). It is very easy for someone to SELL an idea when he is making millions off it – by accepting credit cards at his website.
I’m sure that Ramsey’s corporate offices use credit. It would be curious to know if they pay within terms, though that’s something that’s really impossible to discover unless his company discloses it.
There are very deep philosophical differences in these viewpoints. For example I believe highly in personal responsibility and indidivualism. I believe adults can make choices and be responsible for their own lives. Ramsey-types view adults as children in need of preaching to, who are not capable of controlling their own lives. Paternalism, Authoritarianism, whatever you want to call it.
Here I disagree with you strongly. I’ve never heard Ramsey’s program — only read his book — but I believe it is unfair to say that Ramsey views adults as children who need preaching to. Speaking for myself, humans are complex psychological creatures with motivations that are often hidden even to themselves. If a person knows from experience that they have difficulty using credit responsibly, it is *admirable* for them to avoid its use. If a person doesn’t even want to try to use credit, that should be encouraged. There are many people who use credit responsibly. These people, too, should be lauded. But I think it’s apparent that too many people use credit irresponsibly, and these people, especially, need to be shown that there are options. They don’t need to be preached to by *anyone*, Ramsey or otherwise.
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“I don’t mean that to be insulting but Dave Ramsey is right: a two-year old will throw a tantrum to get the cereal they want because they want it now.”
I’d hate to see when you do mean to be insulting. It’s really difficult to take the rest of what you write seriously with a stinker like that in the middle.
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Great post! I missed the comment as well, and I think Marie has an extemely solid footing for the rest of her financial future. I always enjoy reading posts about people doing well for themselves. Definitely a great case study.
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Re Dave Ramsey and credit cards:
If you’ve listened to his radio show at all (I listened to it daily for nearly a year), you will have heard him say repeatedly that the only sort of credit card he uses for any reason is a “pre-loaded” debit card that has only the balance that he paid into it. It’s alspo the only sort of card he allows employees to use for business purposes.
Also, if you’ve tried to buy anything off his website, he only accepts debit cards, not credit cards. He has a debit card policy stated clearly on his website.
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It’s not wrong to avoid debt, but I think it is misleading to treat credit history as something that doesn’t matter. You can live without a credit history, but it’s hard. Maybe as hard as managing credit responsibly…
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While this is a great strategy, the problem is that the original question was “how do I get a credit score,” and the real answer to that is pretty much you have to get a credit card.
Sure, you can build some of a credit score with your bills, but overwhelmingly, the industry has made it so that card=score.
While this is a great plan for living, and shows that you don’t necessarily need a score to live your life, it also doesn’t answer the original question, and shouldn’t be knocking the people who did.
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rich said:
“I’d hate to see when you do mean to be insulting. It’s really difficult to take the rest of what you write seriously with a stinker like that in the middle.”
Unfortunately, despite the author’s apparent desire to make the world a better place, the entire post comes off as sanctimonious and self-congratulatory.
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Marie deserves a lot of praise for having succeeded on the no-credit path. She also gets thumbs up for being an employer who looks beyond the numbers and actually talks to potential employees.
However, everyone must understand that her experience is Unusual. Yes, with a capital U. The vaaast majority of landlords and employers who use credit checks will simply disregard an applicant with no credit history, because they haven’t the time and there are many other applicants who do have the track record they need to fill in all the right blanks.
So yes – this method is doable. However, it should be suggested only with the caveat that it carries a significant burden of extra work and probable lost opportunity.
Having a credit history (obtained thru mostly wise use of credit cards and one car loan (which I’ll never do again, btw)) enabled me to get lower-than-market financing on my house through the federal government, for whom a credit check was not negotiable.
Just sayin’.
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It seems to me that a lot of those advocating the no-credit approach are those who have had problems abusing credit in the past but who have now reformed. This implies they have some credit history, and if they tied things up well in the end, they probably have a decent credit history.
If you have good credit but no longer use it, it may be misleading to tell folks with no credit that they don’t need it based on your own experiences.
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I don’t mean to call out fraud insurance every time someone mentions using debit cards, but this post specifically cites identity theft as a case against credit cards, then advocates debit cards as an alternative.
Maybe there should be a front-page post about this issue: how banks respond to debit card theft compared to credit card theft, laws and bank policies on customer liability, and how to get an ATM card that isn’t a debit card.
Maybe even a post about living without credit *or* debit cards: Use the ATM card for groceries and cash, use cash for small purchases, and use checks or money orders for medium and big stuff. For online shopping, Amazon.com lets you pay with bank transfers, others accept PayPal. If you really want to live card free, it’s probably worth it to just not use card-only retailers.
Debit cards have fraud advantages, too: Unlike the routing numbers printed on checks, debit cards expire, and have security numbers on the back that change every time a new card is issued. I wouldn’t write a check or give routing numbers to anyone I wouldn’t trust with my debit card.
The best advice is to have an emergency fund, so when (not if) your debit card number is stolen, you can replace the stolen amount quickly so your checks will still clear while the bank investigates your claim.
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Lest anybody think from my aboe post that I’m 100% a Dave Ramsey-ite, I’m not. I was responding to others who were taking the moment to criticize Dave Ramsey in a way that I didn’t think was justified.
I still use my credit card for certain limited purposes, and I use a debit card, and I’m working on getting out of debt. I think the interesting thing in this whole dicussion is the way it’s so either/or for many people. EITHER you use (and thus agree with the use of) credit cards OR you think it’s a great evil. Etc. Even Dave Ramsey falls victim to this mentality.
I think it’s possible to be a sane credit card user — incredibly difficult, but hard. I think a lot of us (myself first) delude ourselves thinking we can use a card responsibly. For anybody who routinely carries a balance of any amount they couldn’t easily pay off within a payment or two, I think we are to some degree deluding ourselves that we are responsible users of credit cards.
Yes, today’s world is set up so that credit is almost surely a necessity. That doesn’t mean we have an open ticket to rack up the bills. It’s all about moderation and self-control — if you have it more power to you. You need it, and moderation and self-control are ironically two things credit card use is incredibly adept at overriding.
Anyway, I’ll not worry whether others ought use credit cards or ought not to. I’ve got quite enough on my hands keeping my own spending (barely) in check to pass judgement on others.
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[...] over at Get Rich Slowly also has some great posts about the issue of avoiding [...]
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I am 28 and have never had a credit card and when I went to buy a house I got an excellent rate because my credit score was over 800. So tell me how exactly not having a credit card hurts your credit…?
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1. Buying housing via credit vs. renting
http://seekingalpha.com/article/123340-report-renters-are-wealthier-than-home-owners
Also, read patrick.net analysis of when a home is a good investment.
The average person who takes out a loan pays as much as the full value of the home in insurance, maintenance, taxes, interest expense and closing costs. These are all amounts that you will never get back (and therefore you must be “throwing money away on.”
During the first part of the loan, if you rent an apartment and invest the rest, you can end up much farther ahead than someone who purchased a house right away on credit.
Whenever you buy a house, realize that the interest deduction on your tax return is like a coupon on an item at the grocery store. If you buy an item with a coupon, you are still spending money for that item. When you get an interest deduction, you are still paying money on interest.
On average, houses increase in value at the same rate as inflation. Do the math before you call a purchase an “investment” to determine if you are going to make money on the deal (and thus will have purchased a good investment.)
Also realize that if you default on your payments, you no longer “own” the house, including whatever money you have dumped into the “investment”. If you rent, you may deplete your savings if you lose your job, but you don’t lose $10K’s of savings. (In other words, purchasing a house on credit increases your risk, and that risk is not always accompanied by an increasing amount of return.)
2. Many people have worked their way through college and made very good grades. This is a realistic option for those who want to avoid debt, regardless of whether or not the majority of people do that. Encourage your children to make good grades in HS and stress the importance of the standardized tests for college admissions. Go to a solid state school with a partial scholarship. There are many solid state schools that offer great scholarships to out of state students. If your children don’t know what they want to do, why not let them take a year off and work (earning money for college?) I went to a state school and managed to find an off campus living situation where I shared a room with another girl (2 bedrooms, 4 girls, 1.5 bathrooms) and my total monthly expenses were $150 for rent and utilities. I had almost all of my tuition paid for by scholarships (and I was not Harvard bound, even though I made good grades and scored fairly well on the standardized tests.)
Will you be able to go to any college you want to and get through without loans? No. However, you can go anywhere with your career after graduating from a state school. I know – I got hired by one of the top firms in the world when I graduated.
From what I have seen, read and experienced, the majority of students who take out loans do not do well enough with their college degrees to justify the money borrowed (especially those in liberal arts.) Also, many of the “necessary” student loans merely enable students to live an above average college student life. I know of students who could have made it without loans (but couldn’t eat out every day of the week without the loans.)
Living without debt is an excellent financial goal based upon intelligent analysis. It doesn’t have to be your goal to be a good goal in general.
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Regarding the Susan and Joe’s posts (posts #1 & 2) about student loans. I couldn’t disagree more. I paid my way through school working up to three part time jobs for at least 30 hours a week. All while juggling at least 16 credits (up to 21 in my last semester) with a GPA of 3.95. No student loans.
My kids went to even better universities, both worked at least 30 hours and both graduated with 4.0 GPA. Neither had student loans when the graduated. How did that happen besides their work? We bought rental units that they “managed” by renting rooms to their college buddies. Not only did we make lots of nice $$$ but they learned how to buy a home, manage a property, handle the monthly bills and manage difficult relationship issues that come with tenants. All great learning experiences!!
This baloney that kids have to have time to party, that it’s acceptable to just get by in grades is just that – baloney. People will do what you expect! Yes, I set the bar high, but my kids are very thankful! No school debt AND they are far above their peers in their current job. My son is already managing 7 other employees as a financial analyst – he got to that stage in his first year out of college!!
You don’t have to live like the “norm”, set new standards. Marie is different – and better!
Debt free and lovin it!
David
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