Breaking Free from Credit Scores: A Life Without Limits

John McConnell
John McConnell

I'm John McConnell, a nationally recognized Credit Expert and Specialist in Personal Finance. I help people repair their credit and learn to manage their finances. I'm currently with Pyramid Credit Repair and working in this field for over 12 years, and I'm passionate about helping people take control of their financial future. My work has been featured in media outlets like ABC News, Fox Business, and The Huffington Post.

Breaking Free from Credit Scores: A Life Without Limits

Living without debt and not worrying about credit scores is a viable option for a fulfilling life, despite debt being viewed as a necessary evil by many. While the advantages of living debt-free are clear, it’s crucial to be aware of the potential obstacles that may arise and how to overcome them if you decide to forego credit usage.

The Difficulties of a Cash Only Lifestyle Build Credit with Confidence © Pyramid Credit Repair

The Difficulties of a Cash-Only Lifestyle

If you don’t use credit, you won’t have a credit history which can lead to a low credit score. This may cause difficulties in purchasing things and if your plans change, it can be hard to re-enter the world where credit scores matter. Building a good credit score takes time.

One of the challenges of living without debt is making purchases either with physical cash or a debit card. To avoid borrowing, one needs to either save up over a longer period or save a larger sum of money to make significant purchases.

What are some alternatives to using a credit card for spending?

Here are some ways to manage in a cashless society if you don’t have a credit card.

Daily Spending

To pay for daily expenses like shopping, dining out, or entertainment, you have the option of using either cash or a debit card. Maintaining a budget becomes simpler if you allocate cash for different purposes using the envelope method, but it comes with a certain degree of risk. On the other hand, a debit card that is connected to your checking account works like a credit card and offers convenience, ensuring that you only spend the money you have.

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Regular Monthly Expenses

If you’re used to paying bills like your cell phone, utilities, or gym memberships each month with a credit card, it’s a simple habit to break. Instead, try switching to online bill payments where your bank sends funds to your biller via check or electronic transfer. You can still set up automatic payments just like you would with a credit card or use your debit card to make these payments.

Reloadable Cards

If you don’t own a checking account, you can opt for a prepaid debit card as an alternative to a regular debit card. A prepaid card is funded with money beforehand, which can be used by swiping or online bill payment until the balance is all spent. The card becomes unusable once the balance runs out.

Debit Versus Credit Cards

Using debit cards or prepaid cards for everyday spending is more risky than using credit cards. If someone steals your debit card number and makes purchases, the money will be taken from your checking account. Although you will usually be protected from fraud and mistakes, it is important to inform your bank promptly to ensure the best protection.

The main issue is that if your account gets hacked, the funds in the account might be used for payment, leading to payment bounce and a chain reaction of problems that you will need to address. On the other hand, with a stolen credit card, the thieves utilize the issuer’s money, giving you time to sort things out without involving your checking account.

Frozen Funds

The merchant will place a temporary hold on funds in your checking account by pre-authorizing your card. These charges will likely disappear after a few days. However, if you have multiple pre-authorizations combined with a low balance in your checking account, it could create problems.

If you have enough money but your bank doesn’t allow you to access it, your transactions will not go through and your checks will not clear. To prevent any issues, it’s a good idea to keep an extra amount of money in your checking account and check your available account balance on a regular basis.

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Debit Card May Not Be Accepted Everywhere

Debit cards are widely accepted, including in most online forms that request credit card information. However, some hotels, airline companies and car rental agencies may require a credit card for reservations instead of a debit card. It’s important to check beforehand which cards are accepted or if there are any requirements specific to using a debit card, particularly when renting a car.

Purchasing a Home: Credit Score-less

Some people who dislike borrowing may make an exception when it comes to buying a home. Although it’s possible to save money and pay for most things without borrowing, houses can be very expensive, and it could take several decades of intense saving for most buyers to afford one with cash.

Alternative Lending to Credit Scores

To get a loan, you won’t be evaluated based on the traditional FICO credit score. Instead, alternative factors will be considered. This could reduce the number of lenders willing to work with you and limit the types of loans available. Additionally, there is a chance that you may be charged a higher interest rate.

If you want a guaranteed loan from the U.S. government, consider applying for an FHA loan. Lenders will examine your creditworthiness by reviewing your record of paying bills on time, including rent, utilities, and insurance premiums. To improve your chances of being approved, be sure to make on-time payments for at least 12 months before applying for a loan.

Underwriting mortgage with No Credit Scores Build Credit with Confidence © Pyramid Credit Repair

Underwriting with No Credit Scores

To get a mortgage loan, your available income is an important factor to consider. If you don’t have traditional credit, you’ll need manual underwriting. For this, lenders will check that your debt-to-income ratio is less than 43%, with lower being better. As someone who lives debt-free, you must be spending less than 43% of your income on expenses, including your mortgage payment.

The Importance of Savings

Having money saved in the bank can be beneficial. If you don’t have any debts and have already saved money, you might be in a good position. Being more financially stable can increase your chances of getting approved for things, even if you don’t have a credit history.

Employment History Matters

To increase your chances of getting a loan, it’s best to have a stable employment history. Lenders prefer applicants who have been employed for a longer period of time as it indicates a reliable source of income. Additionally, the industry you work in can also impact your eligibility for a loan. Seasonal jobs are perceived as less reliable while a government job is generally considered more secure.

Loan Approval Timing

If you don’t have a traditional credit score, the loan approval process will take longer than usual because it requires manual underwriting, which is a time-consuming task of reviewing and evaluating all the details. This can put you at a disadvantage when buying in a fast-moving seller’s market with high demand. If you reside in a hot market, it is best to initiate the loan application process as soon as possible and well before making an offer.

Is it recommended to completely stop using credit?

To help make an informed decision about ditching debt, it’s important to understand the benefits of having good credit score.

  • Building and maintaining great credit scores can be possible without spending money. To avoid paying interest, it’s best to only borrow money when necessary. For everyday expenses, consider using a credit card and paying off the balance each month within the 30-day grace period. This way, you can maintain good credit, potentially avoid interest charges altogether, and benefit from the added security of using a credit card.
  • Having a good credit history is crucial if you need to borrow money. It is okay to maintain an active credit card for unexpected situations but refrain from making purchases beyond your means.
  • The events that have occurred in the past cannot be undone or forgotten. Your credit history will remain even after becoming debt-free and could still create issues for you. Although debts will eventually be removed from your credit reports and collectors cannot collect after the statute of limitations expires, this process could take several years.
  • Breaking the debt cycle and understanding your spending habits to help take control. Using credit cards and taking out easy loans may lead to a cycle of debt. This can be compounded by unexpected misfortunes, such as health issues. To avoid financial difficulties, it’s crucial to comprehend your spending habits and motivations. Developing a practical plan is key to achieving success with your finances.