A credit score or otherwise known as a FICO score is a range that tells lenders how good you may be with borrowing money. Many lenders use this score when you apply for a mortgage or auto loan. Not having a credit score can hinder the ability to borrow money. But do you really need one?
What makes a credit score?
35% Payment History
30% Amounts Owed
15% Credit History Length
10% Types of Credit Used
10% New Credit
Many experts will tell you that you do not necessarily need a credit score. This can be true in the right circumstance. However, most people do need one unless you have a job that will never end, a good amount of cash sitting aside and a place to live. The need for a credit score will depend on where you fall on the income spectrum.
Most types of debt are not good and I would agree with the experts that not having a credit score can be a good thing. The truth about having a FICO score is you need to go into debt to get one. You pay for having a credit score. This is not a logical way to stay out of debt. The trick is to develop a score smartly taking out the least amount of debt to do it and then do small things to retain some type of score.
Why would you not need a credit score?
Not having a FICO score is the ideal situation. To have this you would need the monetary funds to pay cash for most things. This would depend on your occupation, income level and the ability to manage money wisely.
If you have a good job that pays regular income, this is a good situation to save money to pay for most things. A little can be put away each month for emergencies, to save for the next automobile and move into a house. The good news is you can buy a house without a credit score through manual underwriting. As long as you can put down at least 20% and show good income and no other debts, this should be attainable with the right lender. However, be aware that not all lenders will do this.
If you do not plan on having credit cards or auto loans, you can have no FICO score. The issue with this is that most people are not in the situation to live without a score. This is something that can happen over time, but not typical of a new college graduate or someone with lower income.
Although I do agree with the experts of trying to get to a point of not possibly having a credit score, there are several reasons why most people do need one at some point.
Why do you need a FICO score?
Unless an individual is independently wealthy starting out in life, most have to rent an apartment or home to live in. Depending on where a person decides to live, a credit score may be a factor. Many apartment communities run background checks that include a person’s creditworthiness. If you have a low credit score or not one at all, they may decide that you would not make a good tenant.
You can find places to live without having a FICO score, but this is not always the case depending on the urgency to find a residence and the type of place you want to live. The best way to do this is to find an individual owner renting. This is most likely the most successful way to do it.
Employment is another factor for having a FICO score. There are many occupations that do not have a steady income. Jobs with mostly commissions or large bonus structures that make up a majority of a person’s salary can be challenging to manage depending on the income, interval, and certainty. You can be disciplined to budget and have an emergency fund, but life happens. Having credit to carry a person over until the next commission check or bonus is sometimes necessary.
Just getting a job may also require having a decent FICO score. Sure, you can probably explain that you are good with money and have no debt to a potential employer, but when they run a background check and you have no credit history or no credit score, they may discount your eligibility immediately. It shouldn’t happen, but it does. Many types of employment in Finance run a background check including a person’s credit history.
Auto Loans
I do not promote getting any type of auto loan if you can avoid it. However, there are certain circumstances where it may not be avoidable. Reliable transportation is what gets many of us back and forth to work. Paying cash for a car is almost always the best method. But a $2000 automobile may not always be the best choice when the costs of repairs and maintenance are factored into it. A used auto financed at a low rate is sometimes a better choice. Not a new thirty thousand dollar one, but one with low mileage and good maintenance history. A car that can be paid off quickly that will last with few issues. The trick is to then start saving to pay cash for the next one. This creates a cycle of never having to finance an auto loan in the future.
I know there may be a lot of people that do not agree with having an auto loan of any kind. This is true to be able to remain debt free, but sometimes unavoidable. I have played the game of maintaining an older vehicle and the costs can add up quickly.
Having a credit score and a good one enables a person to get a much better rate. An auto loan is also one of the ways to build a FICO score. If at some point you take an auto loan, try to make it a habit to never do it again. One trick I use is once the car is paid for to pretend there is still a loan and put the money away each month. You will soon have enough to buy a good used vehicle the second time around in cash.
Home Mortgage
Owning a home is an American dream for many people. There are several experts that will say it is also a way to build wealth. I would agree with this. But many people do not have 20% to put down on a home or the cash to pay for one outright. As mentioned earlier, you can buy a home without a credit score through manual underwriting. Yet, the truth is that it can be much easier with a good FICO score. Finding the right lender with the right rate and terms through manual underwriting can take some time. Most banks will not underwrite a home loan where the applicant does not have traditional credit. If you find one, they may only write a 15- year mortgage in addition to the 20% down required.
Manual underwriting is a process that will take patience and a bit more work. I am not saying it can’t be done. It can be accomplished, but you will have an easier time with a traditional credit score.
Credit Card
I am saying credit card and not cards. These are not the necessary evil they can be, but a convenience and safety measure. Having at least one will require some credit history. Although, it seems that many companies will practically give them away. Having at least one will make some things easier from renting a car, booking a hotel room or buying things online. This requires some self-discipline by paying off the balance in full each month. Some would argue that a debit card can also be used with the same protections as a credit card, but this is simply not true in many cases. It will depend on the issuing bank.
There are exceptions to every rule, but having at least one
credit card can be advantageous.
Should You Have a FICO Score?
Having a credit score can be a good thing regardless of what the experts say. Getting a good one is something that you will pay for. With a perfect world, we would all have plenty of income to save and live our daily lives. With the constant changes in the economy and job market, there may come a time when you need a FICO score. Changes in employment and living arrangements at some point may require it.
While it ultimately may be best to become debt free and not have a FICO score, having one while working toward a credit-free life may be something needed. You pay to have one but you can also save by having a good one. It may lead to the right employment to get out of debt or provide a dependable car to make more money.
Having a FICO score is bad if used to obtain large amounts of credit and spend money you do not have. However, in my opinion, it can be useful if managed properly.
Checking your credit report regularly is important to ensure it is accurate and up to date. This can be done through one of the reporting agencies, such as Experian or TransUnion. Under Federal Law you can get your score annually from one of them for free. Even if you are in a position to not have a credit score, you should still periodically check. This can show possible signs of identify theft and fraud using your credit.
