Do I Need a Credit Score?
As many of you know, I am a huge Dave Ramsey fan and his plan helped us pay off $45,000 in 17 months. He knows what he is talking about and his way of thinking works. He believes that you do not need a credit score to make it in the world. This has obviously worked for him and his family. I also know that our society pushes the importance of a good credit score and we are raised to believe that we need a good score to make it in the world.
What Is a Credit Score?
A credit score is basically a number assigned to you based on your credit history. It relates to how much debt you have, if you pay your payments on time, and how long you have had debt. Basically, the score is your relationship with debt so you can get more debt. This basic concept of what a credit score is, is exactly why Dave Ramsey advocates not having a credit score, because he doesn’t believe in debt. If you don’t have debt and don’t plan to have debt, you shouldn’t need a score.
Why You Don’t Need a Credit Score
Now, when I or Dave Ramsey talk about not having a credit score, what we mean is NO score. Obviously if you already have a score and are paying off your debt, you will still have a score. When the time comes that you don’t have any debt at all, including a mortgage, you should start closing the accounts. When you start closing the accounts, your score will drop. This is the scary part for most people. You will have a low/bad score until it disappears. I have been told that it can take 6 months or so for it to drop to zero. I still have a mortgage so, I still have a score, I can’t advise how accurate that number is. Having a zero or “undetectable” score in theory is the same as a good score. The interim is what turns most people away from closing the accounts.
If you are following the Dave Ramsey plan, you don’t need a score because you shouldn’t be going back into debt. The only reason that you would go into debt is for a mortgage and you can still get a mortgage with a zero score. You have to find a lender that will do manual underwriting. This is how you get a mortgage without a score. This obviously will not work if you have a low score, it has to be zero.
Why You Need a Good Credit Score
There are reasons to keep a good credit score and these are valid concerns for most people.
- Getting or keeping a job.
- There are a lot of employers now that check your score before they hire you and/or throughout your employment. Especially in certain fields, like banking, financial services, managerial positions, bookkeeping, government, and places like that.
- I think this is absolutely ridiculous but I have heard of people who had to pay more for car insurance or house insurance because their score dropped while paying off debt. If you are debt free, you would think that it would show you pay your bills, not the opposite.
- Renting a Car or Hotel Room
- This isn’t exactly related to a credit score but to having a credit card, which would be related to having a credit card open. If you try to pay for a rental car or hotel with a debit card, they will put a large hold on the account in case you damage something and/or to make sure you pay the bill. If you don’t have enough saved in the account or travel a lot for work, this could be an issue. If you get to a point where you have enough saved, then this won’t be as big of an issue. The problem is the time in between closing the accounts and saving your emergency fund.
- Renting a House
- It will be harder to rent a decent house if you have a bad or zero score. I hope that if you can find a decent landlord and explain that you are paying off debt or are debt free and that is the reason for the low or no score, they would still rent to you. Unfortunately that won’t always be the case. They may want a co-signer or a larger deposit.
- Buying a House Before Score Gets to Zero
- If you plan to buy a house relatively soon, you need a good credit score. If you are planning on buying a new house within a year or two, I would keep a good score. It is easier to get a loan and if you already have a mortgage, your score won’t be zero anyway. You do not want a bad score when trying to buy a house. If your score won’t be zero when you go to buy, have a good score.
Reasons You Should Close Your Accounts
I know that I just listed a lot of reasons to keep your accounts open but there are still good reasons to close them and let your score drop to zero. The biggest reason I can give is psychological. A lot of people don’t know that I have a degree in psychology. But it doesn’t take a degree in psychology to know that people have a tendency to follow old habits and do what they have always done. If you are trying to pay off debt and still have accounts open, it will be very difficult not to use the credit cards again. You have to change your mind-set and habits and it can take 9 months to change a habit. I can’t tell you how many people have been debt free, didn’t close the accounts, and a year later they have $10,000 in credit card debt again. They usually can’t tell me what they bought or how it happen. If they can tell me, it was a usually a “good deal” here and there. I sometimes hear “I saved 20% using my store card!”. Did you really save 20% when you are paying interest and bought more than you would have than if you used cash? If you spend $200 to save $30, you still spent $200.
If you choose to keep open an account to keep a good score, make sure that you don’t use it. Put it somewhere that it will be out of sight and out of mind. Do not get sucked into the reward points scheme. Just because you pay it off every month, doesn’t mean it’s a good deal. You spend up to 20% more swiping a card than using cash. The credit card companies pay millions of dollars a year for marketing. They know what they are doing. You are not out smarting them by paying it off every month. They know that you spend more using a card than cash. They get a fee based on how much you spend at the register. Then they get more in interest from you when an emergency comes up and you can’t pay it off one month.
You do not need a credit card for emergencies. If you are following the Dave Ramsey plan, you should have an emergency fund. If something comes up, you pay cash for it. If you don’t have enough cash to cover it, then sell something. I know that in life, that there could be an emergency you can’t cover especially while you are paying off debt. Do the best you can and pay as much in cash as possible. You use your small emergency fund and pause paying on debt until you can pay as much in cash as possible. It’s amazing what you can come up with if debt is no longer an option. If you end up having to make payments for an emergency, at least it won’t be the full amount and you can still pay it off quickly.
Whether you pay it off and close the accounts or not, be mindful of why you want to be debt free in the first place. Will keeping the accounts open or closed keep you from your goals? What are your long-term goals and how are you going to get there. Change your habits and mindset and you will win with your money. You will spend less and keep more. I know that I will probably hear a lot of backlash about why you want to keep your credit card and that’s fine. I love to hear from you whether you think I’m right or wrong.