How to Live Without Credit

Credit: It’s everywhere.

You can’t do anything related to money, it seems, without the need for your credit to be examined. Even if what you’re doing doesn’t require that you borrow money, your credit might still be checked. Telcom services providers, insurers (in states that don’t forbid the practice), and landlords might all check your credit score, even though you aren’t actually borrowing money.

On top of that, an employer might want to look at your credit report as part of a background check (employers aren’t supposed to look at your score).

And, of course, if you expect to get a mortgage at some point down the road, you need a credit history and a credit score. Otherwise, you might not be able to borrow to make such a large purchase — and few people are capable of coming up with hundreds of thousands of dollars to just buy a home using cash.

Live Without Credit

The conventional wisdom is that you can’t live without credit.

But what if you could buck the system? What if there is a way to live without buying into what the credit scoring industry tells us? Our guest, Steve Stewart from MoneyPlanSOS offers some helpful insights on how you can live without credit.

Convenience and Protection with a Debit Card

One of the biggest reasons that many of us use credit has to do with the fact that there are many protections that come with credit cards. In fact, debit cards don’t come with the same level of protection as credit cards do.

Steve, however, claims that you can live without a credit card and get the same protections with your debit card. The key is to check with the debit card issuer to find out if they treat debit cards as credit cards as long as you sign for your purchase, rather than use your PIN.

Increasingly, debit cards are being treated as credit cards — at least when it comes to protections. But that still varies from issuer to issuer, and in many cases you need to make a signed purchase as opposed to a PIN purchase. (Of course, our friends in Canada don’t have to worry about this distinction, since the country is in the process of switching to a Chip and PIN system for all cards.)

With plastic an increasing preferred way to pay, due to convenience and protection, it’s no surprise that people want the convenience that it brings. Steve suggests using a debit card, because it’s your money — money you have in the bank — rather than borrowed money. You get the convenience and most of the protections of a credit card, without having to borrow the money.

Of course, my only concern is that it is, in fact your money. When someone gets a hold of your debit card number, and gets money from your bank, it can affect what you have available to you. With a credit card the money that is stolen is, at least, someone else’s money (the credit card issuer’s). Steve points out that things have changed in the last five years or so, and it’s much easier to get your money put back into your bank account. But it still makes me nervous to put MY OWN MONEY at risk. It’s why I take credit cards with me when I travel, and why most of my purchases are made with credit cards. Limits the chances for my debit card number — the number connected directly to my bank account — to be stolen.

But, practically speaking, Steve is right: You can get the convenience and protection you want with a debit card, and the credit card is completely unnecessary.

What About Big Purchases? Houses and Cars?

Steve points out that he is not an absolutist when it comes to debt. After all, he has a mortgage! However, he does point out that you don’t need to use a bunch of credit over your lifetime in the hopes of getting into position to qualify for a mortgage.

One of the biggest problems with the credit system is that it encourages debt. Sure, you can pay off your credit cards, but it’s so easy for things to get out of control. Rather than rely on credit cards and other loans to help you build up a history, Steve suggests turning to alternative scoring sites. Sites like eCredable will take a look at your payment history in non-credit areas, and then let lenders know that you are financially responsible. With the right alternative scoring service you can live without credit for a long period of time and still qualify for various large loans when you decide the time is right.

However, the main drawback to using a resource like eCredable is the fact that it can be more expensive to get a mortgage this way. You need to pay for the credit check, since the company compiles the information manually, and you will also probably pay a little higher interest rate.

Having “insufficient data” to generate a credit score can, in some cases, be worse than having poor credit.

Credit Doesn’t Have to Mean Debt

Of course, the use of credit doesn’t have to mean debt. It’s true that mismanagement of credit can lead to a financial death spiral that can result debt.

However, inattention in any area of your finances can lead to financial difficulty. Plus, even if you don’t use credit, and think you don’t have a credit score, there are some non-credit items that can ruin your credit score if you aren’t paying attention.

The use of credit doesn’t have to automatically mean debt. In fact, most of us on the panel use credit to great effect, earning rewards and using them. (You need to use them, though, to get an advantage, and there are many consumers who don’t redeem their points.)

Others like credit cards for the perks offered, such as warranties, price protection, travel insurance, and other surprising perks. There are a lot of advantages to using credit cards, and many consumers like them.

What it comes down to are your individual preferences. Can you effectively manage your money when you use credit? Can you avoid getting into debt? And, as Steve points out, you also need to consider how you feel, ethically, about using credit card rewards when someone else — someone who isn’t as money savvy as you are — is probably the one paying for your “free” airfare.

Watch our episode on living without credit and then tell us where you stand. 

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