Dave Ramsey doesn’t need a credit score. He says you don’t need it either.
The anti-debt crusader, who has an estimated net worth of at least $200 million, calls FICO scores the “I like debt scores.” He is proud of the fact that he has no credit score.
Ramsey has inspired countless people to pay off their debts – and we love it. But the truth is that he can afford to be invisible credit. If you are an ordinary person, not having a credit score makes life much more expensive and complicated.
5 reasons why Dave Ramsey is wrong about credit scores
- You will pay installments for everything.
- It will be difficult to get a mortgage.
- Credit cards are generally the safest method of payment.
- Traveling is difficult without a credit card.
- Credit can be a valuable tool in an emergency.
Here’s what Ramsey is right about credit scores: They don’t reflect your entire finances. Doubling your salary or savings is great for your finances, but it will not affect your credit scorebecause a credit score only measures how well you manage your debts.
If you’re like Ramsey and you have no credit score, it probably means you haven’t used any credit in the last 24 months. So the credit bureaus often won’t have enough data about you to give you a credit score.
But you don’t have to be in debt to have a credit score. In fact, one of the best ways to build great credit involves opening a credit card and paying the full balance each month.
Here’s why anyone who isn’t a multi-millionaire should ignore Ramsey’s credit score advice.
1. You will pay installments for everything.
Forget a delay of three to six months emergency fund. If you’re going to live without a credit card, you’ll need to save a lot more money because you’ll have to pay installments for just about everything. Expect to pay first and last month’s rent plus an additional security deposit, as well as deposits for things like utilities, internet, and cell phone service.
2. It will be difficult to get a mortgage.
Ramsey says the people who need a credit score are those who are considering taking on more debt. It is partially true. Having a high credit score helps you get the best financing rates for big purchases like a house, which few people can afford to pay cash.
It is possible to get a mortgage without a credit score through a process called manual underwriting. Small banks and credit unions are most likely to offer this option. But be prepared for more documentation and a longer approval process.
You can also expect to make a bigger advance payment. It can be good if it prevents you from buying too much house. But when you’re buying a home you can afford, a large down payment can keep you renting longer. It costs you in the long run because your housing payments are not equity.
3. Credit cards are generally the safest method of payment.
When someone hacks into your credit card account, technically, it’s your bank’s money that they’re stealing when they make these fraudulent transactions. But with a debit card, they steal your money. In practice, your bank will probably refund your money if a hacker empties your account, but the process can take several days. It could leave you with no money or put you behind on your bills.
Credit is the safest way to pay in situations where your data is vulnerable, such as when shopping online or paying for gas at the pump. It doesn’t mean you have to be in debt when you make a credit card purchase. You can pay your balance daily if you wish.
4. Traveling is difficult without a credit card.
You can probably check into a hotel or rent a car using your debit card. But they will usually temporarily suspend the credit or debit account you are using. It is intended to ensure that you have sufficient funds in the event of damage. It’s money you can’t spend until the hold is lifted, which may not be until days after you check out of the hotel or return the car.
If you’re paying with credit, that won’t be a problem as long as your card isn’t depleted. But if you’re paying with a debit card, a hold could tie up funds you need for basic expenses — or worse, take you to an overdraft.
5. Credit can be a valuable tool in an emergency.
In a perfect world, you would have an emergency fund that can get you through any crisis. But in the real world, an emergency fund can take years to build. Using credit cards to spend an emergency is not ideal. But in a crisis, it may be the least terrible option. Having access to a credit card can help you avoid dangerous alternatives, like payday loans.
No credit score? Here’s how to get one
If you know you’ll be tempted to go into debt because you have access to credit, it may be best to follow Ramsey’s advice and live without a credit score. The inconvenience and extra deposits are worth it if you have a serious spending problem. But for most people, the pros of credit far outweigh the cons.
If you don’t have a credit score, either because you’ve never used credit or haven’t had a credit card in a long time, the easiest way to get one is to open a secure credit card. You will pay a refundable security deposit which will become your line of credit. After about a year of on-time payments, your chances of getting a regular line of credit are good.
Limit your purchases to no more than 10% of your credit limit and pay the bill in full each month, or even as soon as you make a purchase if you’re worried about going into debt.
With a little discipline, access to credit will not lead to debt. But it will make life easier and more affordable.
Robin Hartill is a Certified Financial Planner and Senior Writer at The Penny Hoarder. She writes the personal finance advice column for Dear Penny. Send your tricky money questions to [email protected].