Can You Live Without Having Credit?

I recently corresponded with a young man who had an unconventional goal: to intentionally achieve a credit score of zero. Yes, you read that correctly. He aimed to have such a low credit score that credit reporting agencies might mistake him for deceased. Initially, I was taken aback by this notion. After all, most of us are constantly striving to boost our credit scores.

The credit system operates in a peculiar and somewhat counterintuitive manner. Essentially, you must demonstrate that you don’t truly need the money in order to borrow more money. Nonetheless, it’s the system that drives our modern society forward. Regrettably, I perceive individuals attempting to live without credit in a similar light as freegans. While I empathize with their cause, I believe they’re taking it to extreme and impractical lengths.

In the spirit of fairness, however, I decided to delve deeper into the lifestyles of those who eschew credit altogether. Like any other lifestyle choice, living entirely without credit has its advantages and disadvantages. If you’re intrigued by the idea of living “off the credit grid,” here’s what you can anticipate.

Let’s start with talking about some of the positive aspects of living without credit.

Opting out of credit entails adhering strictly to your financial resources. Without the option of borrowing, you’re compelled to prioritize your purchases and abstain from acquiring excess possessions, extravagant vehicles, or larger homes than necessary. Embracing a minimalist philosophy, individuals who reject excessive consumerism often find solace in this approach, purchasing only essential items with funds they’ve already accumulated.

Adopting a credit-free lifestyle mandates building a substantial emergency fund with actual funds. Without the fallback of a credit card for unexpected expenses, you’re compelled to prioritize saving. This habit not only enhances your net worth but also instills a culture of saving. It involves accumulating a reserve of tangible cash, facilitating savings for significant expenses, emergencies, or leisure trips. Additionally, steering clear of substantial debts ensures a smoother transition into retirement.

For those prone to succumbing to the allure of plastic, abstaining from credit altogether might be the ultimate solution for fostering financial responsibility. By eliminating the option to accumulate debt through credit cards, you prevent the possibility of falling into excessive indebtedness. After all, you can’t dig yourself into debt if you never engage in borrowing in the first place.

Although foregoing credit might seem appealing for some, it’s important to acknowledge the significant drawbacks associated with this decision. Here are the most prominent disadvantages of living entirely without credit.

If your goal is to lead a completely credit-free life, then the challenges associated with not having a credit score may be seen as part of the journey rather than drawbacks. However, the absence of a credit score can indeed pose difficulties, particularly when it comes to renting an apartment or buying a house. Nonetheless, there are strategies to navigate these challenges.

For instance, if you lack a credit score when renting an apartment, you could offer a higher security deposit or opt for a shorter lease at a premium rate until you establish reliability. Renting from a private owner who has different criteria from a property management company is another option.

Similarly, purchasing a house without a credit history can involve seeking out mortgage lenders who offer manual underwriting, focusing on assets and net worth rather than credit score and income. However, securing such loans can be challenging compared to conventional mortgages.

When considering these workarounds, it’s essential to weigh the benefits against the added complexities. Additionally, it’s crucial to reflect on whether you’re truly living without credit or merely striving for a headline-grabbing goal, especially if you’re pursuing a mortgage or renting.

Once more, if your objective is to completely distance yourself from the credit system, this concern may not be relevant. If you have no intention of seeking a loan, your credit score becomes inconsequential. However, circumstances can change, and unforeseen financial needs may arise. If you find yourself requiring a loan in the future, whether for purchasing a car or obtaining a small business loan, your lack of credit history could pose challenges. You may face higher interest rates compared to someone with a solid credit score. While it’s tempting to assert that you’ll never need to borrow money, maintaining the flexibility to access credit can prove beneficial for various reasons.

What if you’re in need of credit access but lack any credit history whatsoever? Perhaps you’re a teenager embarking on the journey of financial independence, or you’ve recently immigrated and are in the process of establishing yourself financially. When I relocated to the United States in my twenties from Canada, where I had a credit history similar to that of the U.S., I encountered this very situation. Surprisingly, despite my previous credit activity in Canada, I found myself without any credit history upon arriving in the U.S. This absence of credit history proved to be a significant inconvenience.

For instance, I had to pay substantial deposits to utility and cell phone providers due to my lack of credit history. Moreover, obtaining a credit card was out of the question; I was deemed “high-risk” due to my non-existent credit score. However, I soon discovered a solution: securing a secured credit card from a bank.

To begin, I deposited $500, thereby establishing a credit limit of $500. Each month, I diligently paid off the balance in full. Over time, this responsible credit usage allowed my credit profile to gradually develop. Within approximately a year, my credit score reflected a pattern of responsible credit utilization.

Although the process was initially inconvenient, as I was reluctant to increase my initial deposit to raise my credit limit, it ultimately proved to be a worthwhile endeavor. After a year, I successfully reclaimed the deposits I had made with various service providers.

I informed the young man from the beginning of this article that achieving a credit score of zero is actually impossible, regardless of one’s efforts. For instance, FICO scores range from 300 to 850, meaning it’s not feasible to attain a score below 300.

However, the more pertinent question is why someone would choose to live without credit. Perhaps it’s a aversion to being indebted or a deep-seated distrust of the banking system. Nevertheless, credit serves as one of many tools for maintaining healthy finances. When used responsibly and prudently, it can be a valuable asset. Living without credit is akin to possessing a toolbox with only a screwdriver inside. While you can still find ways to accomplish tasks, you’ll encounter unnecessary challenges along the way.

Therefore, unless one lacks confidence in their ability to handle credit responsibly, attempting to function without it may prove to be more trouble than it’s worth.