How to Live Without Credit
Living without credit in 2010 isn’t easy. The economy has evolved in recent decades such that credit is an unavoidable part of almost every major purchase. Buying a car, taking out a mortgage and even signing a wireless service contract all involve your credit to one extent or another. Increasingly, employers are even pulling the credit scores of job applicants to evaluate their character. That said, credit is not an option for everyone. If you have poor credit, no credit, or simply choose for whatever reason not to obtain credit, these are your options.
Savings & Investment
Fundamentally, credit (whether in the form of a loan, credit line or credit card) is a way to spend today an amount of money that you do not currently possess. Lack of credit, of course, makes this impossible. The bedrock of a credit-less life, then, is a robust, ever-growing savings account. With enough savings, your lack of credit becomes less important or even irrelevant. In theory, there is nothing to stop you from saving up and buying a car all cash, bypassing credit checks entirely. While it’s unlikely that you can save enough to buy a home all cash, your credit becomes less of a hindrance if you make a higher-than-average down payment.
The only drawback with savings is that most banks pay meager interest rates on savings accounts. A faster way to grow your savings is by investing some of it into stocks and bonds. A wisely chosen investment portfolio consisting primarily of low cost, broad-based index funds will grow your money year after year with minimal fees and capital gains taxes. If you must live without credit, an aggressive savings and investment strategy is essential to financial success.
Unfortunately, not every credit-based purchase can be overcome by paying cash. A textbook example that has arisen in the last 5-10 years involves wireless phone contracts. If you have poor or no credit and attempt to buy an iPhone, you will not be able to sign an AT&T service contract without paying a security deposit. In some cases, this deposit is as high as $500. Initially, it may seem silly to require a security deposit for month-to-month phone service. After all, if you don’t pay, they can just shut your service off. But from AT&T’s point of view, you are not only getting phone service, but also a discount on the iPhone. Since all they know about you is your poor credit, a security deposit is the only feasible way to compensate for the risk of non-payment. Landlords will also typically require a security deposit before renting out an apartment.
This is, of course, another reason to maintain a healthy savings account. Without sufficient savings, a steep security deposit could mean financial ruin or even going without the purchase in question. With sufficient savings, security deposits need not be any great cause for concern. The simplest way to side-step security deposit headaches is t0 determine how high a deposit you will need and save up for it ahead of time.
Sometimes, not even a substantial security deposit will entirely compensate for your lack of credit. Renting an apartment is an example of such a situation. Some landlords (though not all) openly state that they will examine your credit history even if you pay a security deposit. If your credit score falls short of their expectations, they can opt to rent to someone else instead. Luckily, society has evolved a way for those without credit to get over such hurdles – co-signing. Essentially, you must persuade someone who does have credit (such as your parents or a trusted friend) to co-sign alongside you. But here’s the rub: co-signing makes that other person equally liable for your debt. If you fail to pay your rent, for instance, the landlord is legally permitted to go after your co-signer for the amount you didn’t pay. Therefore, co-signing is a strategy which demands careful consideration before going forward with it.
It should also be noted that co-signing does not only apply to renting. Generally speaking, you can also use co-signers to get auto loans, home mortgages, business financing or personal credit of any kind. Your best chance of getting a co-signer is to make an iron-clad case that you will faithfully pay up on time.
Finally, there’s something to be said for building or repairing credit if you do not already have it. Assuming that you have not decided to go without credit and would like to obtain it, you have several options. The most direct and straightforward is to obtain secured credit. The way secured credit works is that you put up a deposit (say, $300) in the amount of the credit you want. Then, the bank or credit card company issues you a card permitting you to charge that amount. Make a few purchases over the course of several months, pay on time, and your credit score will gradually show improvement. Eventually, you will qualify for credit on an unsecured basis. Co-signing, incidentally, also boosts your credit score provided that you consistently pay on time after being extended credit.
There are any number of reasons why you might lack credit as of today. But regardless of that reason, financial responsibility demands that you acknowledge this and structure your finances accordingly. There is no question that not having credit can make life difficult. For some transactions (like booking a hotel or renting a car), there are very few ways to sidestep it. Fortunately, however, the vast majority of major purchases can be made without credit if decisive steps are taken in advance.