I wrote a post on living without money, so I figured why not cover living without credit, as well?
This lifestyle strategy popularized by Dave Ramsey is probably great for some. But for those with the slightest amount of financial willpower it’s personal finance dead-weight.
Living without a Credit Score
Living without credit and a credit score is a appealing. Stick it to the man! RAWWW!
Meh, maybe not.
How you treat your open credit lines affects your credit score which ultimately affects the price you pay for a number of financial products.
Believe it or not, actuaries (Sidebar: looking for a decent job? Become an actuary—high growth and high pay!) have found that people with no or low credit scores tend to make more insurance claims. While this has infuriated a number of insurance shoppers, let’s consider this policy for one second:
We have two groups of people, one group who manages perfectly their personal finances, never or only once making a late payment.
The other group is frequently late, carries consistently high balances, and does not have any record of consistency when it comes to their personal finances.
Of these two groups, which do you think is most likely to file an insurance claim? Which do you think is most likely to drive carelessly?
Critical Thinking Round 2
We have two groups of people: one group who manages perfectly their personal finances, keeping open several lines of credit and moderating their balances, and another group who has no-credit or high utilization of their open lines.
Of these two groups, which do you think is more likely to seek an insurance payout for a claim? Which group do you think is more likely to finance the damages themselves (an auto accident, for example) to keep their monthly premiums reasonable?
Which group is more likely to think ahead to perform the steps noted in the last question? Which group is more likely to have the capacity to make it happen, do you think?
What Your Credit Score and Resume Have in Common
Remember your second job hunt where you could use your previous employment on your resume? Did you feel like that one job, no matter how unrelated, still seemed to give you a boost?
Much like your resume can’t tell a prospective employer how well you’ll fit into the new company culture, or how well you actually perform at certain tasks, it does give very important information—you were capable of showing up on-time every day and holding down a job for at least the duration of your last job.
Your credit score is a little like that, as well. It can’t tell a banker what your earning prospects are, or that you’ll be able to pay on your mortgage for the next 30 years, but it does tell him or her that you make payments on time, and never bite off more than you can chew. It also indicates that you have thought about balancing capital structure.
Those details are important, especially when a bank wants to trust you with $250,000 for the next 15 to 30 years. If it were my money, I’d ask for far more than that!