Going Naked in the World of Credit
Do you have a credit score? I bet you do. Do you know what you score is? Maybe you do, maybe you don’t. Do you believe that it’s absolutely necessary to have a credit score? Most people do, and they are wrong.
First, let’s take a look at exactly what a credit score is and why we have one. The credit score, also known as the FICO score, was started by the Fair Isaac Company (Thus FICO) to gauge a person’s credit worthiness. Your FICO score is basically a number that tells people how good you are at borrowing money.
Your score is determined using these guidelines:
- 35% is based on your debt history
- 30% is based on your level of debt
- 15% is based on how long you’ve been in debt
- 10% is based on how much new debt you have
- 10% is based on the types of debt you have
Now, what do all these factors have in common? They all say “Hey I’m in debt, baby!” The higher the score you have means that debtors can trust you so that they can give you more debt and they know you’re more likely to pay it back.
But what happens when you have no debt? Well if you’ve been out of debt long enough your credit score can actually go to zero, and that’s a good thing. A zero credit score shows that you have actually achieved something that not many people have, and that something is freedom from the bondage of debt (Read post entitled “Slavery”)
When you’re free from debt you don’t have to worry about making those payments every month that drag you down mentally, physically, and financially. You’re not paying extra for everything you buy in the form of interest and fees. You’re much more free to live life the way YOU want to live it and have less stress because you are no longer a slave to the lender (Read my “Goin’ Commando” post for more on this)
I can hear you saying now, “But Doc, what if I need to buy a house or a car? How can I buy those high dollar items if my credit score is at zero?” Well, the car part is easy. If you’ve made the commitment to become debt free, or you already are debt free, saving up for a car is very simple. You simply drive your present car until its paid off, then keep driving it, put the payments in the bank to save for the next one, and in a few short years you buy another car (Read “4 Steps to Getting Rid of Car Payments Forever”)
But what if you want to buy a house? Even If you are debt free except for your mortgage, a house can be expensive. Of course the best way to buy a house is with cash, but I’m not going to vilify anyone for taking out a reasonable mortgage. So this is where manual underwriting comes in. Many people don’t know about this process, and not all lenders provide this option, but it’s what you need in order to get a mortgage when you have a zero credit score because you don’t use consumer credit any more.
Basically manual underwriting is a nonautomated, MANUAL process of figuring out how much the lender thinks they should loan you. Normally the process is automated, they just stick your numbers into the computer and it spits out a number based on what the software says. The manual underwriting process actually has a human being running the show to determine how much to loan to you.
However, there are certain guidelines that you will have to meet in order to have your mortgage manually underwritten:
- You must be able to prove that you are paying 4-6 regular bills in a timely fashion over an 18-24 month time period. These can include rent, phone, cell phone, power, water, etc.
- You should choose a 15 year conventional fixed rate mortgage.
- You must have a strong employment history and predictable personal income history.
- You must be able to put at least 20% down on the home.
- Your previous credit history should have no red flags. Even though you have no credit score, previous history matters.
So yes, you can buy a house with a zero credit score. It’s just a different process. Of course the best way is to pay cash (I know some people that have actually done it), but it usually does take many years of banging away at that mortgage payment to get the house paid off and eventually pay cash for the next one.
Remember, living with a credit score, whether it’s a good score or a bad score, is a choice that you make. Do you really want to be the person that creditors like to see coming? Don’t get me wrong, if you use credit you should be trustworthy in how you use it, so don’t start stiffing your creditors and putting your credit score in the toilet. However, the best thing you can do for yourself and your family is to change your mindset about money and work your plan to pay off all your debts and Celebrate Financial Freedom with the rest of us who have already arrived at that wonderful destination.