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 you really need a credit score to be financially successful? Most people do, and they are wrong.
What Is a Credit Score?
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 creditors can trust you so that they can give you more debt and they know you’re more likely to pay it back. They make you believe you need a credit score to succeed with money.
A Zero Credit Score is a Great Thing
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 manage to do. It means you have no debt!
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.
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 continue 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”).
Can I Rent a House Without a Credit Score?
Renting a house without a credit score is only a little different. You will have to be proactive when you first approach the landlord.
You will have to let them know you don’t have a credit score and why. You can also provide them with documentation such as:
- How you have paid your bills on time
- Present copies of your monthly budget so they can see how you run your financial life
- Proof of a good previous rental history
- Proof of a consistent income
As long as they understand you have no credit score because you don’t use debt, they may even be more likely to rent to you because they understand that you’re more financially responsible than most of their other renters!
Can I Get a Job Without a Credit Score?
Many employers now check your credit score when you apply for a job. It’s one way to help an employer gauge how responsible you are.
So if you don’t have a credit score and you apply for a job, you’ll need to be proactive.
All you have to do is ask if they check your credit score as part of the hiring process. If so, then let them know why you don’t have a credit score, and offer to provide any documentation they need to prove it.
Just like with renting, they may be more likely to hire you when they discover how financially responsible you are compared to everyone else!
Do You Need a Credit Score to Get a Mortgage?
But what if you want to buy a house with a mortgage? Even If you are debt free except for your mortgage, a house can be expensive. Especially if you're a first-time home buyer.
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.
How Does Manual Underwriting Work?
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.
Guidelines For Manual Underwriting
However, there are certain guidelines that you will have to meet in order to have your mortgage manually underwritten:
- 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.
- 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.
Having a Credit Score Is a Choice
Remember, living with a credit score, whether it’s a good score or a bad score, is a choice 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.
Then you can Celebrate Financial Freedom with the rest of us who have already arrived at that wonderful destination.