What If I Had a Zero Credit Score? The Pros and Cons…

  •  
  •  
  •  
  •  
  •  

Do you have a credit score of 740 or more? Well then you must be a financial success! Or maybe not….

What does that credit score really mean?

According to MyFICO.com, a credit score is made up of five categories:

  1. What If I Had a Zero Credit ScorePayment history – do you pay your bills on time?
  2. Amounts owed – the lower the balance the better (but not stagnant at zero)
  3. Length of credit history – the longer the better
  4. New credit – some is okay, too much is a red flag
  5. Types of credit used – it’s best if you have credit cards and installment loans (car loan, student loans, etc.) and manage them responsibly

So let’s step back for one second here. After reviewing these five categories, what actions actually build up a high credit score?

  • You continually use debt, but you pay your bills on time
  • You have student loans, car loans, mortgage loans, and of course…credit card balances

Does this sound like the actions of the wealthy? When you hear Warren Buffett speak, does he ever say, “To get ahead in life, make sure you take out loans for school, your cars, and your house!“? Ummm…maybe in the bizarro world

Credit Score – The Illogical Measure

Bill is a project manager at a local advertising agency. He’s 40 years old, has $20,000 left on his student loans, has a $25,000 car loan, and a $300,000 home loan. His net worth is just $10,000.

Related: Net Worth and Income – How Do You Rank?

Lisa is a project manager at the same agency as Bill. She’s 42 years old, has no student loan debt, drives a paid-in-full Lexus, owes just $50,000 on her home, and she’s never had a credit card in her entire life. Her net worth is $500,000.

If you had to loan someone money, who would you pick??

My pick would definitely be Lisa. After all, she actually has money to pay me back with!

Guess who the banks would take? Bill! For the simple reason that he’s never missed a payment. Sure, he basically has no money, but he’s proven his ability consistently pay on multiple debts. Since Lisa has not borrowed much money (and therefore has little credit history), FICO would keep her score low, making it more difficult for her to get approved for future loans.

So basically, if you want to have a great credit score, you need to keep borrowing money. Does this make any sense at all??

zero credit scoreWhat If I Had a Zero Credit Score?

The credit score is so illogical to me that I often contemplate having a zero credit score. In other words, since I have no debt, I could just cancel my credit cards, have no recent credit history, and let my score drop to zero. This is the point where many of you get tremors and can’t help but think I’m nuts, but maybe there are some benefits to having a zero credit score!

Let’s dive into the pros and cons…

Pros of a Zero Credit Score

Having a zero credit score won’t win you any extra prizes in life, so this list is basically the pros of having absolutely no debt source – or no credit cards if you will.

1) I get rid of the temptation of debt – If your New Year’s resolution was to stop drinking alcohol, then you probably shouldn’t go to the bar because of the free peanuts. Eventually, you’re going to order a drink.

It’s the same way with debt. If you’re completely out of debt and have no intention of going back in, then why would you continue to use credit cards? Eventually, you’re going to charge up those credit cards again.

2) Become wealthy with no interest payments and high cash flow – When you get through the debt snowball and get rid of all your payments, you suddenly have a massive positive cash flow. Stop borrowing money and that cash with grow and grow, and then compound on itself!

3) Avoid the meaningless promotions – Remember the free peanuts I mentioned above? The free peanuts of the credit card world are “reward points”. One time bonuses and 1% cash back on purchases. It seems pretty smart to use credit cards to earn all the “free money”.

In reality though, we get very little from our spending. You could rack up $30,000 of expenses in one year and what does that earn you? $300. Bravo. You’re a super genius. Not.

4) I’ll decrease my spending – When you swipe a credit card, you don’t see the pain of the purchase. AND you don’t experience it until over a month later when the bill comes due. The emotion of spending never matches up to the pain of actually paying for it.

When you use cash or a debit card, you see your money stash decrease immediately. It’s enough to think twice about what you’re actually buying.

Using a credit card instead of cash will cause you to spend 12-18% more money on your purchases.

5) Reduced stress – What would it feel like if you had absolutely no payments? You owe nothing to anyone. You’re free. Breathe in…and breathe out. You’re free. Feels pretty good right? Get rid of all your debts and your stress level will go down dramatically.

Cons of a Zero Credit Score

Since the world believes that your credit score defines you, having a zero credit score can pose some challenges in your life.

1) Difficult to buy a house – If you don’t have a credit score, getting a mortgage from a bank can be nearly impossible. You basically have two alternatives: 1) You pay cash for your house, or 2) you find a company that can manually underwrite your mortgage (Churchill Mortgage is the only one that I know of).

Cash isn’t an option for most and finding a company that will underwrite a mortgage can be tough. Once you find one, you need to prove (with four different regular payments) that you have made on-time payments over the past 12 months.

2) Higher insurance costs – Car insurance, life insurance, and home insurance companies base your rate partially on your credit score. If your credit is bad (or if it’s zero), you’ll have to pay thousands more in insurance each year.

3) Difficult to rent vehicles – According to a few reports I’ve heard recently, it can be incredibly difficult to rent a car if you don’t have a credit card AND have no credit score.

These are the two go-to’s for a rental car company and if you don’t have them, they really have no guarantee that you’ll pay them for potential damages. If you don’t mind jumping through hoops, you can probably win over a rental, but it’s certainly not easy.

4) Forced to pay deposits – No credit score? Be prepared to pay deposits to your next cell phone provider or the new utilities company after your future move. If you have a ton of money, then it’s really not a big deal, but it can be a nuisance to leave a few hundred bucks with various companies throughout the year.

5) Might not be selected for a job – This one is a bit far fetched, but it’s probably happened a few times for sure. If two job candidates are equally talented and intelligent, but one has a 790 credit score and the other has a zero credit score, the hiring manager would likely choose the candidate with the high credit score because she has proven her “character” with many on-time payments to her debtors. Just saying that makes me throw up in my mouth a little, but it’s simply the reality of the world we live in.

What Should I Do?

I’ve decided that this is pretty much a lose-lose situation.

  • If I keep my credit cards and my credit score, I’ll probably spend more money.
  • If I ditch my credit cards for good, then I’ll probably spend less frivolously, but I’ll have to pay additional deposits, and companies are going to charge me more since they don’t trust my non-existent credit score.

So should you have a zero credit score? Meh, I really don’t see the point.

Here’s what I plan to do. I’ll commit to using my credit card only for gas and for crazy large purchases that I’m going to make anyway (for a few bucks in rewards because like I said, I’m going to spend that money anyway). For everything else, I’ll use cash and my debit card.

What about you? Have you ever thought about having a zero credit score?

If you enjoyed this article, Get email updates (It’s Free!)


  •  
  •  
  •  
  •  
  •  
  •  
  •  
  •  
  •  

39 comments to What If I Had a Zero Credit Score? The Pros and Cons…

  • “If I keep my credit cards and my credit score, I’ll probably spend more money.”

    I’ve read similar sentiments ever since PF blogs started and each time, I wonder about the validity of such claims. To be sure, your example of the bar is dead on. I’ve seen people I was close to who had a drinking problem and found that for these people, there’s no such thing as social drinking. To that point, I accept that the quote above is likely true for some percent of people. 50%? Closer to 65%, as a recent Money Magazine article quote “Only 35% of credit card users don’t carry a balance.” For the 65%, I agree that these people have exhibited the behavior that you warn against, and most can not go back to responsible use. The 35% who pay in full have their own reasons, and I’d suggest that safety and convenience are at the top of the list.

    A few years back, my wife and I documented every dollar we spent. The discretionary portion was less than 20% of spending, and it was all within budget, planned in advance. Funneling all the expenses we could through the credit card gave us an easy way to see a list of spending. Food, gas, drug store. Our purchasing habits wouldn’t change if we used cash, we’d just have to visit the ATM more often. This month, I had all our insurance bills come due, home insurance (including a rental property), auto, and life for both of us. Just over $6000. I could have written 5 checks or charged it and gotten $120 cash back to my daughter’s 529 college savings account (where rewards from our main card goes).

    I don’t claim to be a genius, but I also know not to regularly walk away from hundred dollar bills. The college account has been funded from this card for 18 years now, and it’s passed $32,000 on the last statement. Given the age of the account, more than half was growth, deposits from the card show as $14,500. (And a fraction of that was from business spending, my wife and I were able to use our card but were reimbursed from our employer.)

    I’d caution you against being so cavalier about the other benefits a good card provides. During that ‘budget’ year, we planned to buy a new dresser. My wife and a friend found a custom furniture shop and each placed their orders. A month later, when we checked on delivery, we found the shop was out of business. The friend had written a check, my wife had charged it. The friend lost her money, but our credit card reversed the charge a few days after a 2 minute phone call.

    Last, I’d challenge you or your readers to produce a valid study regarding the ‘paper vs plastic’ spending issue. I’ve seen dozens of studies, most of which observe college students using a $20 bill vs gift card. I agree that 100% of the card users will spend more. So what? This doesn’t scale up to adults with real incomes and budgets. For the real world study to be valid, it would need to study actual spending not a contrived small test. It also needs to separate the balance carriers from the pay-in-full card users. This is the simplest way to observe the real results. So far, no study will this level of detail exists. All that we have is your observation that the average card user spends more than the average cash user. And that is actually 100% correct.
    JoeTaxpayer recently posted..How I Changed to an S-Corp to Lower My Taxes

    • Great comment Joe. I’ve always been pretty good with my credit card and I honestly hardly ever buy anything. But I still have the nagging feeling that when I do, I’m not really thinking about the purchase as much as I should be. Cash leaving your hand just has a way of making you second guess what you’re doing… 😉

      • I guess it comes down to how you use your credit card. As JoeTaxPayer said, only 35% of credit card users don’t carry a balance. So getting rid of credit cards would make sense for 65% of people out there. Unfortunately as you’ve stated, a credit score will help in a number of financial transactions throughout your life.

        I bet for someone as disciplined as you, having a credit card won’t actually make you spend more:)
        CoupleofCents recently posted..2016 Financial Review: +$61,330 Net Worth

        • Very true. I might spend a little extra with a credit card, but probably not much. I definitely don’t buy stuff just to acquire points (like the people on those stupid commercials!)!! 😉

    • Great points Joe. While I believe that Dave Ramsey has helped tons of people get out of debt and cut up their credit cards, it was because of their poor usage of credit in the first place.

      Credit is like a fire, if it’s under control it’s very useful. If not, it can burn you to a financial death.

      I don’t think about spending money any differently if it is by paying with a credit card or in cash. But I can understand that for some (many?) it can be a problem.

      It just comes down to knowing thyself.
      Justin (MrDD) recently posted..How Quincy, Florida Became A Town Of Coca-Cola Millionaires

      • I couldn’t agree more, Justin. Dave Ramsey has his place. If you’ve been terrible with money and have no self control, his methods will benefit you. But for others who have a strong financial background and have made good choices, I see no reason why credit cards would change that.

        Like Joe Taxpayer said, there are so many benefits to using credit cards. I just booked an 8 night trip to Kauai and Maui using credit card points that I’ve saved up over the past 4 years. Prior to that, I used points to pay for all the materials for a new roof on my house. Additionally, there’s the added benefit of fraud protection. If you drop your wallet in a parking lot (which I’ve done) and you had 100s of dollars in it, it’s gone for good. If you just have credit cards in it, just cancel them, receive new ones and the credit card company will refund you for all fraudulent charges.

        Derek, it sounds like you’re pretty good with money. After all, you are running a personal finance website :). I think you’re doing yourself a disservice if you move to cash only.
        Go Finance Yourself! recently posted..Burning Desire for FIRE

        • I think I’d be doing myself a disservice too, GFY. Which is why I’ve decided to hang on to my credit cards, but only use them once in a while to keep my score up. If ever people start boasting about their credit score at work though, I’m just going to leave the conversation. It’s still meaningless to me.

  • Kathy

    My mother never had a credit card in her life. And while she had a million dollars worth of real estate and cash, she couldn’t qualify for purchasing a cell phone account. My husband and I had to get it for her in our name.

    • Beautiful story, Kathy. Here’s my most conservative opinion. Get one card (or if you are paying off debt and canceling cards, just keep one). Use the card for gasoline and electronics purchases that you’ve saved for 100% in cash, so the day you see the charge hit, you send the payment. Ignore my crazy cash back stories, but have that card to avoid the hassle you’d get trying to buy a plane ticket, rent a car or book a hotel room. I know it’s possible to do these things with a debit card, but keep in mind, there’s a ‘hold’ on far more than the actual expense. Mom may be 70 years old, and the tidiest person, but the hotel will put cash on hold as if she were a 70’s rock band about to trash the room.
      JoeTaxpayer recently posted..How I Changed to an S-Corp to Lower My Taxes

    • It’s crap like that that makes me hold onto my cards. Pretty ridiculous isn’t it?

  • It can be very costly to have poor credit. In addition to your list you may be denied for rent and utilities may deny you or ask for a deposit. Ultimately your better off having good credit and controlling expenses by other means.

    • It’s not crazy costly to have bad credit, but it might run you a couple extra grand a year. For me, it’s just not worth the hassle of doing without credit. If I must, I guess I’ll play their dumb game…. Hope I don’t turn into an alcoholic of credit…

  • mark

    I could not get a credit card from a store. He said I had no credit history. I told him I was worth more then 2m and owned everything I have. I just wanted the deal on a washer. I still did not get the card. I went to another store and paid cash on a 1200 washer.

    • But you know what? It totally wouldn’t have been worth taking credit out on a washing machine anyway. Not worth the hassle. Just pay cash whenever you can.

      By the way, congrats on the wealth that you’ve created!

  • Unfortunately your credit score affects more than just your credit. Like you said, it affects your ability to get crucial loans and better rates.

    I had a family member who had a zero credit score–she was a homemaker and her husband handled all of the finances. When we passed away, she had no recourse because she didn’t have any credit.

    While credit scores kinda suck, they’re how companies judge you and your history. I think they’re necessary, and that’s why it’s important to baby your credit!
    Mrs. Picky Pincher recently posted..What A Frugal Weekend!

    • Yup… it’s pretty annoying. But, I’m quite responsible with my money, so I guess I’ll just keep charging gas on my credit card and keep my score hovering around 800…for no reason.

  • Most large banks have a small number of mortgages that they keep on the books. Jumbo mortgages, micro mortgages, and condos in buildings where one owner owns more than 20% of the units. Google, “Portfolio Lenders, Your City” and you might come up with something.

    Once you have a mortgage though, you’ll have a credit score for seven years after you close it. BTW, my husband hasn’t had any credit for 3.5 years (no open accounts), and he still has a 720 FICO score. He’s trying to get a 0 credit score, just to prove a point.

    • Sounds like there must be an account open that he doesn’t know about. Typically the FICO score drops to zero after 6 months of inactivity. Sounds like an interesting test though! 😉

  • amazing article!

    Btw… I am Lisa!
    … but I don’t even have any mortgage left. I’ve actually never had an official debt in my life.
    Luckily I don’t live in one of those countries with a credit score philosophy 🙂

    (I’ve actually written about it on my blog)
    Mr. RIP recently posted..Early to bed and early to rise…

  • NatPhorU

    “Guess who the banks would take? Bill! For the simple reason that he’s never missed a payment.” Putting myself in the position of the bank, or say an investor in a peer-to-peer lending site, I’m taking the person with a track record 10 times out of 10 over the person with high net worth and no record of paying back debt.

    #4 in the pros section is definitely my biggest issue. I absolutely spend more just because I have the card in my pocket.

    Also, while I realize it doesn’t change the ideas of your post, and while it’s not as headline grabbing, I’m pretty sure 300 is the lowest possible credit score – you get bonus points for being able to fog a mirror.

    • Hi Nat. When you have no debt sources for over a year, your score drops down to zero because you no longer have an active history. It’s more like a no-credit score than a bad credit score.

  • I’m going to throw in with the keep-cards crowd. PF is about habits and if you are going to overspend, the credit cards certainly make it easier, but they aren’t the real problem. (not that you in particular would, the average Joe “you”) As discussed, many transactions and decisions by businesses are based on the credit score. We have to make decisions based on the rules in effect.

    • Well put, Mike. Obesity is caused by overeating, but rarely is the food the actual problem. It’s much deeper than that. I suppose using credit cards is somewhat the same. If you understand your true goals and set up your action plan accordingly and swiping the credit card probably won’t be an issue.

  • Jacq

    I put gas and groceries on my card, and automatic payments like Internet & cell phone. I am going to spend this money, there are no extra fees to use my card, it’s paid off at the end of the month. Since I will make these purchases,I may as well earn rewards. I do not let the lure of rewards influence me to spend on things I don’t need. Credit cards also have the small benefit of protection from fraud, reversing or disputing transactions. If they think your card is comprised they send a new one I can go a few days without my credit card, people have told me how horrible it is to get locked out of your debit card /bank account. Yikes!

  • So many things require people to have a good credit score. It is hard to get by without credit or with bad credit. Great information, thanks for sharing!

  • […] What If I Had a Zero Credit Score? The Pros and Cons… (30) […]

  • Gene Roberts

    I’ll apologize in advance for ruffling feathers, but I can’t see this much incorrect information and biased opinion in one place without attempting to fix the bad information and provide a differing viewpoint.
    Facts:
    There is no possible way to get a zero credit score. The ranges for different credit score products vary somewhat by company, but FICO scores are generally between 300 to 850.

    Even if you did close out all your accounts, it would take a minimum of 7 years for all the bad account information to fall off. Good account information stays in your file for a full 10 years.

    If there isn’t enough information in your file, you won’t get a “zero”. Instead, a credit score just won’t be returned when requested. One account opened for at least 6 months is enough to get you some score.

    Opinion:
    As a way to legitimately quantify the risk associated with lending money to an individual, the whole credit score system is a good thing.

    In a small town where everyone knows everyone, you would probably have some idea whether the person applying for a loan was a good risk based off of his/her reputation.

    Credit scoring allows a lender to judge the risk of a loan to someone he doesn’t know based on that consumer’s history with other lenders. As long as the information is accurate, you have earned your reputation.

    This benefits both the lenders and responsible borrowers. The lenders make fewer bad loans and can therefore charge lower rates and fees to the borrowers.

    Having a reasonable amount of self-discipline largely negates every one of your “Pro’s.”
    Temptation – I pay in full every month. I haven’t paid any fees or a cent of interest in years. I know what I have in my bank accounts, so I know what I can pay off and don’t spend more. I don’t feel tempted to spend more than I can pay off at the end of the month just because I have a large credit limit.
    A person with credit cards can generate wealth. I am growing my net worth and becoming financially independent, and I have five whole credit cards!
    Promotions are not meaningless. I don’t make extra purchases to get the cash back. But if I am spending the money anyway, why would I walk away from $500-600 per year. That would be beyond stupid.
    A lack of credit cards would not appreciably change my spending habits. I am an adult and I know that when I use a credit card, that same amount of money will need to come out of my bank account to cover the purchase.
    If one doesn’t carry month-to-month balances, there is nothing to be stressed about. It takes me about 30 minutes a month total to monitor my accounts and pay my cards off. I don’t lose sleep.
    From the “Cons”:
    Financially speaking, your credit score does define you and for good reason. It says a great deal about your level of self-discipline and shows how responsible you have been paying back money others have lent you.
    Nor is your credit score limited to helping lenders quantify you. Certain aspects of your credit history correlate to how you handle responsibility in other areas of your life. Which is why your score can influence how much you pay for insurance. People with higher credit scores on average, file fewer claims. This allows the insurance industry to offer lower rates to those less likely to file a claim.
    And if you were hiring someone to manage your business, do you want it to be someone who has demonstrated that they can’t handle finances reliably?
    If you have proved that you suck at money, you should have to put down a security deposit for utilities/cell. I don’t want those companies charging me higher rates to make up for your write-offs.
    Certainly feel free to treat your credit how you wish. But I hope that some of this comment has helped you consider a different viewpoint.
    If you are truly worried about having credit cards but not using them more than you would a debit card and still want the benefits, then I suggest having only a few cards and setting each one up to automatically pay one of your budget bills (like Netflix). Set up each account to automatically pay when the statement comes out. Then lock-up or physically destroy your cards.
    There is no up-side to destroying your credit rating/score.
    And there are numerous benefits to just playing the game at least on a small scale.
    There are other positives you didn’t mention.
    When you need credit, it is nice to be immediately approved based on your stellar score. I have every expectation that I could walk into a dealership and drive out with a new car.
    Two years ago when I approached my $20K limit on Amex (when making a couple of rare major purchases in one month), I called the card rep when I was in the exercise equipment store and requested a $10K increase so I wouldn’t go over. She was very polite and started in with the standard response to what she assumed would be a denial. In the middle of saying that I would get a letter in the mail in about a week, she cut herself off (clearly surprised) and after a couple of seconds said “Congratulations, your increase has been approved.” That was pretty cool. And yes, I did pay the card off in full at the end of the month.

    • Hi Gene. Two things:

      1) It may not be a zero credit score, but rather no credit score – this typically happens after 6 months of all accounts being closed.

      2) You’re a rare case like me. You’ve got a good handle on your money. So having a credit card isn’t a big deal, which is the conclusion I came to at the end of the article.

      Thanks for reading, bud.

  • Gene Roberts

    My apologies. I missed the stipulation that at least one undisputed account must have reported in the last 6 months to generate a report. Thanks for the learning.

    All that old data (bad<7yr & good<10yr) would still be floating around if you closed all accounts and went "dark". IE. as soon as one account reported, you would again have a full credit report/score heavily influenced by all that old data.

  • If you can buy your home and cars with cash, you don’t need to worry about credit. If you’re like most people, you need to have good credit. I have great credit because I’ve been working on it ever since I started working. My wife has never had a job but has cosigned on some mortgages and share credit cards with me. As a result, her credit score is around 800 without having done anything!

    • Why do you say, “you need to have good credit”? If you work, you can buy a car with cash. And, if you want to buy a house, you can always go through Churchill mortgage where they do actual underwriting and you don’t need a credit score. Credit isn’t a need, but for me, it’s just a convenience. Having good credit gets me great rates on insurance and it allows me to rent cars with ease. That’s it. Do I need good credit? No, but I don’t believe anyone does.

      • Don’t forget the most important part of what I wrote, “If you’re like MOST PEOPLE…” I really believe that most people need good credit because it means 1) they’re paying bills on time 2) using credit cards to get cash back and rewards points 3) getting the best insurance rates 4) not being disqualified for certain jobs that require good credit 5) be able to use debt as leverage for income producing assets. Can people live without credit? Yes. Just a difference in philosophy, I suppose. I hope you understand my point of view as I definitely get yours and don’t think it’s a bad thing either way.

        • Honestly, MOST PEOPLE are sucked into the credit card game, and they’re losing. What’s the average credit card balance? $8,000 or something? People are earning $80 a year with their points, but they’re paying out $1,600 in interest payments. For MOST PEOPLE, they’d be better off ignoring credit cards all together and instead asking themselves, “How can I become wealthy without credit?”

          Don’t get me wrong though. I have credit cards and I use them for big purchases. I also have a huge emergency fund and have never paid a single dime of interest to the credit card agencies. I am one of the few. For most people that find themselves getting into debt, I’d recommend that they cut their credit cards up.

Leave a Reply

You can use these HTML tags

<a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>

  

  

  

CommentLuv badge