NEW YORK (MainStreet) — Living your life without credit can sound really tempting. But there's just one problem with living a life totally without credit: You won't have a credit score. More than just your ability to get a new, shiny credit card, not having a credit score can impact everything from your cell phone contract to your ability to get a mortgage. Yet lots of people live very fulfilled lives without using credit and without having a credit score. How do they do it?
The Perks and Pitfalls of Living Without a Credit Score
Kevin Gallegos, vice President of new client enrollment and Phoenix Operations with Freedom Financial, notes that "it's hard to buy a car or house without getting into debt," but is quick to add that "if you can manage your life so that you don't have a credit score, but you can still buy a car or a house, you're probably in good shape." What's more, even getting an apartment can be harder, because most landlords are going to run a credit check.
Even jobs are more and more likely to run a credit check. However, Gallegos says that this isn't as prevalent as many people think. "I don't run a credit check for my agents," he says. "There are lots of jobs that don't run credit checks, even if they run background checks." And either way, most employers are looking for bad debts or big debts on your credit report -- not a lack of both. So while debt-free, credit-free living might not be for everyone, it's certainly something most people can pull off and live full lives.
"If you want a lifestyle that's all champagne and caviar, you'll probably need credit," Gallegos says. "If you're going to live on needs and some wants, it's totally feasible. It just requires budgeting and planning for a full lifestyle."
Get Rid Of All Your Debts
Getting rid of existing debts is the first step toward living life without credit, according to Chris Hogan, a personal finance expert with Dave Ramsey's Speakers Group. "If you're going to buy a home without a credit score," he says, acknowledging the elephant in the room, "you need to be debt free and you need to save up a substantial down payment of between 10 and 20%."
Hogan recommends the "snowball" method of paying off your existing credit card debt. This means you make minimum payments on everything but your card with the least amount of debt, which you'll try to pay off in full. Once the smallest card is paid off, you pay that payment forward to the next biggest card and so on. This not only helps you to get out of debt, it also proves to yourself that you can get out of debt. "You pay off a little $400 Visa and you start to believe in yourself," Hogan says. And it goes without saying that you can't start adding more debt while you're trying to fix your existing situation.
Have an Emergency Savings Fund
One of the most common reasons that people start getting into trouble with debt is that they don't have an emergency savings fund. So when an emergency happens, whether it's their car needing new brakes or a medical emergency, people go to their credit cards to cover the difference. "You want to have three to six months of expenses saved up in an emergency fund," Hogan says. "It needs to be liquid. I advise people to put it in a money market account." That way, the money is there when you need it -- not tied up somewhere else.
One place where your emergency fund will be radically different from a credit card is that you won't (hopefully) use it for things you think you "deserve." "People work so hard to make things happen, and they see a commercial," Hogan says. "Commercials exist to make you feel bad about what you don't have." Hogan says people then begin justifying luxury purchases on the basis that they "deserve it" -- and their credit card is right there. "But credit is debt and debt is a preventer that keeps you from living your dreams," he says.
Once you have an emergency fund, all the money that you're throwing into that can start going into your retirement fund. Rather than paying money to the banks and credit card companies, you're saving and investing for the day when you don't have to work anymore. That's going to feel a lot better than whatever you're spending money on with your credit cards.
"I think that living debt free is a great idea," says Gallegos. "But it's very difficult." Maybe so. But for the 98% of credit card users who aren't paying off their balance every month and getting caught in the debt cycle, life is also hard. If you're looking for a way to live debt free, this is your introductory guide.
--Written by Nicholas Pell for MainStreet