This post is by staff writer Tim Sullivan.

I recently had dinner with my friend and fellow 20-something, Gwynn. When the check came, I put down plastic; she put down cash. The following conversation followed:

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Gwynn: Would it be easier to just take the cash and put it all on your card?
Me: No, I’ll just have him split it. I tend to do this awesome thing where I take the cash, thinking I’ll get the miles, and then spend the cash on whatever. When the bill comes a month later, I’m wondering why I spent $50 on dinner for myself.
Gwynn: I just don’t trust those things.
Me: Credit cards?
Gwynn: Yeah, never had one, never will.

Gwynn and I kept talking and not only has she never had a credit card, but…

  • The only school loan she took out for school was directly from her father.
  • She’s never had a car payment.
  • She’s never had a mortgage.

Gwynn has never taken out any loan whatsoever.

Do you know your score?
Gwynn has worked at the same non-profit since graduating college and saves with every paycheck. When a big purchase comes up, whether it be a plane ticket or a vacation, she saves and pays out-of-pocket. For her lifestyle, it works great. That said, after our conversation, I got curious about her credit score, and Gwynn said had no idea what it was or really what a credit score is at all. According to the 2011 Financial Literacy Survey by National Foundation for Credit Counseling, two in three adults haven’t checked their credit score in the past 12 months, and one in three have no clue what their score is.

I’ve had a credit card for years now and find it helpful in pursuing my longer term goals. By that I mean, I’m young, but I still want to own a house one day. Although length of credit history is only 15% of my credit score, or FICO score (as it was created by the Fair Isaac Corporation), I still consider my credit card to be my number one way of building a solid credit line, and perhaps more importantly, establishing good credit habits for the future.

Quick overview of credit scores and home mortgages

Let’s review the anatomy of a credit score. There are a few categories that determine your final number. All you Gwynns out there, lend a quick ear…

A FICO score serves as a quick reference guide for lenders to determine the risk level for them to give money. It’s a number between 300-850, the higher the better.

Lenders take your credit score and a few other pieces of information into consideration, such as age and salary, and make a decision about how your loan will play out. In short, a high score will be less risk, therefore a lower APR and less overall cost to the borrower.

Here’s a chart comparing APRs and total cost for a 30-year fixed mortgage on a $500,000 house:

Credit Score APR Including interest, your house will cost…
760-850 (best) 4.014% $860,760
700-759 4.236% $884,160
680-699 4.413% $902,880
660-679 4.627% $925,560
640-659 5.057% $974,880
620-639 (worst) 5.603% $1,003,560


What I get from this is that by keeping a good solid line of credit from now until the purchase date of my home (whenever that may be), I will lower my monthly mortgage payment almost $500 a month and end up saving myself near $150,000 in the long run.

What are Gwynn’s options?
Building a solid credit score with my card is working for me. I know my habits, like how I shouldn’t take cash from friends at a restaurant to get the miles on my card.

But if Gwynn wants to start paying more attention to her FICO score, what are her alternatives to credit cards? I called Gwynn and asked her if she had looked up her score with myFICO since we talked. She had, and found that she had no credit record at all, making her one of the 22 million Americans who doesn’t, according to Craig Watts, public relations director at FICO (he adds that another 30 million have very thin files.).

Gwynn says her cardless system is working for her now, but she still wants to build her credit. What are her options?

  • According to the FICO website, she can take out a small personal loan from her bank. She already has established a good relationship over the years and should be able to get a small personal loan. When she pays it off quickly, her credit record will start to thicken. Yes, it will affect her score and doesn’t involve a credit card, but this seems like debt for debt’s sake. This isn’t what I would chose to build my score from the ground up.
  • Again, according to FICO, a very low-risk solution is to start a secured credit card. A secured credit card involves putting down a given amount of money as collateral ($200 on the low end), and your line of credit is equal to the initial money down. There’s a great article on it here that includes suggestions on specific cards with low annual fees.

A third option? Get a credit card and use it only for automated expenses. Yes, this option involves opening a credit card, but she could only use it to automate a few payments. In about an hour, Gwynn could set up her card to automatically pay off her utilities, cable, and Netflix (or whatever else), and then automate a payment from her checking account to pay off her credit card in full. She’ll get e-mails before transactions go through telling her everything is working like clockwork.

She can put her card in an ice cream carton filled with water and stick it in the freezer if she wants. She can give it to her father and say, “never ever give this to me ever.” She won’t have access to the numbers, but will still be building her credit score.

An alternative to the credit card alternatives?
There is a philosophy growing in popularity that having no FICO score is just fine, that everything should be paid without using credit, including a house. There are alternatives to a traditional mortgage loan, such as a bank doing manual underwriting. There are a few forums that discuss pros and cons, such as this one here.

I can understand the philosophy that all purchases, including very large ones like houses and cars, should be made with cash. As with all things personal finance, you have to do what works for you, just as Gwynn does what works for her. I, on the other hand, like how credit cards are improving my credit-worthiness. Cash-only is one option, but I’m not ready to close any doors yet.

There have been some great articles on Get Rich Slowly representing a lot of different credit card viewpoints. Here are a few of my favorites:

What are ways you recommend taking a credit score from zero to hero? Do you think of your credit score as a friend, a necessary evil, or something you can live without?

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