There have been some pretty fruitful debates regarding credit scores, debt, and cash-only (debt-free) lifestyles. Proponents of strictly being debt-free will say that one doesn’t need a credit score if they are no longer going in any debt. Therefore, it isn’t important to build up your credit. Folks on the other side of the isle say that while debt isn’t a good thing, it is a necessary evil to build your credit score and it functions as a safety net in case of an emergency.
Where do I stand?
I have two main positions on debt. First, debt is never good. I disagree with Robert Kiyosaki, author of Rich Dad, Poor Dad when he says that there is good debt and bad debt. Owing somebody money is never something that we should call a good thing, though, there are times when I think debt is understandable and with that, it is important to maintain a good credit score.
Let’s look at a couple of scenarios. If a couple is just starting out and they want to go from an apartment to a house, they will need a credit score to secure a mortgage. A manually underwritten mortgage is possible with no credit score, though they are very hard to obtain. To build their score, they may take out a credit card, use it for their budgeted monthly expenses, and pay it off every month. But you will need to pay your bills on time and make sure that you do not carry a month-to-month balance.
On the other side, if a couple has done well and has no mortgage, no consumer debt, a good investment portfolio, and a six-month emergency fund, I cannot see why they would need a credit score. Some may say that it functions as a safety net as mentioned before, but really your emergency fund is your safety net. Plus, if you have a great salary and no debt, you can still get a credit card, even if you have no credit score.
Some experts, like Dave Ramsey, are against debt 100% and claim that there is no reason for auto loans and credit cards. However, I think there are some circumstances where debt is unfortunately necessary and those I will write about in tomorrow’s post. One thing I agree with Dave on, though, is that debt is never a great thing that you should be jazzed about to rush into. Secured debt, like a home, is not a bad decision because you at least have the house. Unsecured carryover debt, like student loans and credit cards, are bad news and should be avoided at all costs.
The average student finishes school with $30,000 in student loans and the average person has $15,000 in credit card debt. We have a debt crisis here in America that we really need to work through and become more educated on.
So in summary, when I advise people about debt and credit scores I do not tell them to shun all credit and try to obtain no credit score. I do tell them that if they want to build credit, that there are certain ways to go about it that make more financial sense and will work out better for them in the long run. To be honest though, it really depends on their current financial position and their future goals. Best advice I can give you is to stay completely out of consumer debt, work on paying your mortgage off, and do not carry any month-to-month credit card debt. If you did that, you would be in the financial top 10% in America.
So what do you think? Is a credit score important to you? Do you just want to have a debt-free lifestyle with no ties to a FICO credit score?