The average American consumer has a 717 credit score, according to FICO data. A FICO Score ranges from 300 to 850, with anything from 670 to 739 being considered “good.”
With good credit comes the ability to get different types of financing products, like mortgage loans or rewards credit cards. The better your credit is, the more likely you are to get better rates and terms as well.
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But what about if you don’t have credit at all? According to Dave Ramsey and other financial experts, it’s entirely possible to live without a credit score. In some cases, it might even be better. In others, it can make your life significantly more complicated.
GOBankingRates spoke with Alyson Burkett, chartered retirement planning counselor (CRPC), certified financial planner (CFP) and wealth consultant at 21 Goats Financial Planning, to get her take on Ramsey’s advice on living without a credit score.
Also here are eight steps to building (or rebuilding) credit.
You Can Live Without a Credit Score (But It Can Be Tricky)
“Can you live in the United States without a credit score, absolutely. Does it make some purchases or financial transactions more difficult? Yes,” said Burkett. “Dave Ramsey’s [belief] that you can buy things without a credit score is very true. Do most Americans do this daily? No.”
When you need to make a big-ticket purchase, you typically have one of two options:
- Pay for it in cash
- Apply for financing
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To finance a purchase, like a car, you’ll need to apply for a loan. And this typically requires a credit check, which also involves pulling your credit score. If your score is low or nonexistent, you might not qualify for financing.
But if you’re paying in cash, you don’t need to worry about getting approved.
“If you are paying cash for a car, education, home or any other large purchase, you do not have to borrow money from a financial institution, so you do not need their approval,” Burkett said. “The difficult side is where most Americans are purchasing a home and they do need to finance part of that transaction, where do you go?”
Burkett said some mortgage companies do offer manual underwriting — also called no credit score or nontraditional credit lending. This could help someone without a credit score qualify for a mortgage. But there’s no guarantee that your financial institution will have this option.
There May Be More Emphasis on Income and Debt Without Credit
If you don’t have a credit score and are applying for a loan, your best bet may be to work on your income and debt. Debt-to-income (DTI) ratio, which is the percentage of your monthly gross income that goes toward your monthly debts, is crucial when applying for a loan. The lower your DTI ratio is, the better your approval odds.
“I would argue that someone who does manually [sic] underwriting offers less risk to a mortgage lender than someone who has a high credit rating but might have a high debt to income ratio,” Burkett said. “A credit score has nothing to do with how high your income is but how good you are at managing revolving debt and the payment associated with each debt obligation.”
Living Without Credit May Require a Mindset Shift
Debt is all too easy to accumulate in the U.S. According to Experian, the average American consumer owes $104,215 across different types of loans and credit cards. But if you plan to live without a credit score — or are having a hard time getting one in the first place — you might need to shift your mindset to avoid debt.
“Dave has valid points when he says if you want to make good financial decisions do not buy anything that you cannot afford to pay in cash,” Burkett said. “This is difficult to do and a mindset change to make. Essentially, you are delaying instant gratification or spending days, months and years to save for a large purchase.”
Advice From a Certified Financial Planner
So, what are your options if you have no credit?
“My advice to my clients when I encourage them to avoid debt at all costs is to make a plan. Have a list of wants or needs that are coming in the next year, five years and future. Put dollar amounts to those goals and [the] dates you want to accomplish goals,” Burkett explained.
“If you want to purchase a new to you car for $30,000 in three years from now, you need to save a little more than $800 a month, not including interest earned between now and then,” she added. “Funny enough, that is the average car payment I see right now. Maybe you get a bonus or sell another car that can get you to that $30,000 sooner — wonderful, you can move that goal up on your list and feel comfortable making that purchase.”
No Credit Is Better Than Poor Credit
“No credit score is better than having a poor one. I agree living without credit is possible, but surviving without it is tough unless you buy your own assets and aren’t borrowing through a mortgage or student loans,” said Steven Mena, financial planner and CEO at AAA Fence and Deck Company.
Mena had a few additional tips for living without credit.
“Without credit, I suggest don’t buy a house without five to six months of savings in your emergency fund paired with a decent downpayment worth 20%,” he said. “Prepare your proof of income and build a remarkable history of payments made for rent (if applicable) and utilities. These will serve as proof you can pay on top of being a good payer.
“Pay everything in cash,” he added, “but get a debit or check card because they will work in situations that require a credit card from you.”
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This article originally appeared on GOBankingRates.com: I’m a CFP: How To Follow Dave Ramsey’s Advice on Living Without a Credit Score
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