Why Living without Credit Is Playing with Fire

by JT McGee

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:

Critical Thinking

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

Ever been the subject of a job interview? Remember the first job interview where you sheepishly told your future employer about your empty resume and relatively non-existent work experience?

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!

{ 9 comments… read them below or add one }

leslie February 14, 2011 at 21:37

I guess I need to get more details but I am 99% sure that my father does not have any credit. He has never had a credit card or a checking account. He purchased every vehicle in cash. I am not sure how he purchased his house – I will have to look into that. When I was a kid, he traveled with traveller’s checks. Now I assume he just carries cash on him. He would use money orders to make payments and has a savings account so he can deposit checks. Oh, he is also completely broke – so his cash-only living wasn’t really much of a solution.

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JT McGee February 14, 2011 at 22:21

Wow, that’s a bit of an extreme, but even today there are tons of people that are considered “unbanked” or “underbanked” by the FDIC. He surely fits in the underbanked category.

Thanks for stopping by. 🙂

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Anne Sales | Coupon Codes February 15, 2011 at 11:46

I used to question the logic behind it as well. But now I fully understand how it works. Bankers need a proof and that’s it.

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JT McGee February 15, 2011 at 12:25

Yeah, it just serves as an additional layer of protection.

While we can examine income levels and expenses, it also helps to see to what degree people respect their personal finances. I’d be willing to bet, also, that those with higher credit scores are less likely to walk away from homes on which they’re upside-down since they value their credit-standing higher than the general population.

That’s a relatively new risk, and one I don’t think many companies were prepared for.

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Anne Sales | Coupon Codes February 22, 2011 at 10:33

Well, it just makes sense. That’s why we have the word credi-bility. You will know a person’s ability in something if he has passed the test.

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Chris @ MyMoneyMess February 15, 2011 at 20:05

So the biggest drawback of living without credit is the higher insurance premiums? That’s not so bad considering that many insurance companies give discounts if you stay with them for a longish period of time.

What about the fact that for nearly 200 years in this country consumer credit didn’t exist? Widespread access to consumer credit only came about after the invention of the magnetic strip in the 1970’s. The credit scoring system as it exists right now didn’t arrive on the scene until a decade and a half later.

With nearly a trillion dollars in consumer debt hanging around out there, can anyone honestly say widespread access to consumer credit has been a good thing for anyone but the banks who own those receivables?

It’s fine to maintain a good credit score. The problem is that statistics show that for a large number of consumers, access to credit becomes a trap. Those people, which number in the millions would be better off without it.

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JT McGee February 15, 2011 at 21:26

The widespread availability of consumer credit is good for anyone who uses it responsibly just like the availability of pseudoephedrine is good for anyone who uses it responsibly. Sure, pseudoephedrine brings meth production and consumption, but I’m not one for limiting the privileges of the many for protection of the few.

This doesn’t do much for me: “What about the fact that for nearly 200 years in this country consumer credit didn’t exist?” Cash registers didn’t exist for nearly 200 years either, are they to blame for exploding debt loads? Same for the scoring system.

Also, let’s not forget that you can build credit with a 100% secured credit card.

Are the banks bad for extending credit? Just wondering what your view is on that.

I enjoy the discussion.

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Chris @ MyMoneyMess February 16, 2011 at 12:39

Are the banks bad for extending credit? IDK. Is big tobacco bad for manufacturing and marketing cigarettes? A large percentage of the population would say they are. Many courts have held that opinion. As someone who never smoked I can say that their marketing and their product never interested me. I would also say our decisions and actions all have consequences. If you decide to take up smoking and you get lung disease or cancer or have a heart attack as a result, that’s a direct consequence of your actions.

High schools are required to teach health education but there are no financial education requirements. Why is that? When I was in school (back when dinosaurs roamed the earth) our health classes covered drug use, smoking and STDs. I would argue that classes covering the importance of savings and the effects of carrying debt are equally important.

To make another analogy along this line, give 100 million people loaded guns with no instruction on gun safety and you’re going to have several million people shooting themselves or someone else accidentally. Educate those same people on firearm safety before they get a gun and the number of accidental shootings would be very small.

IMO credit cards in the hands of the uneducated are the financial equivalent of a loaded gun.

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JT McGee February 16, 2011 at 13:20

I agree 100% on including personal finance in high school. I took it as a senior as an elective for an easy A, and that it was. The teacher was awful, though. I don’t think he understood one bit of what he was supposed to be teaching.

Personal finance isn’t included in high school because there are few that truly understand the complexities of personal finance, and money management. Consider that the same people who run the school system are the same people who have managed deficits for decades in the public sector. You think they have any understanding of managing a budget? I don’t.

The school system is a another topic for another day. I’m sure we agree that the school system is in need of serious repair.

The conflict in this discussion seems to be centered mostly in public policy and private stupidity. I see no reason to restrict anyone from spending beyond their means, nor do I see any reason to restrict people from smoking, or restricting companies from making cigarettes.

I think these are all decisions someone should make individually, and it should not be our responsibility to protect them from themselves, nor should it be our responsibility to bail them out after making poor financial or health-related decisions.

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