We hear any number of instructions and tips for repairing or correcting your credit score. We tout the importance of a good credit score. But do you really even need a credit score? The answer is yes… and no.
Yes, You Really Need a Credit Score
There are many instances where you absolutely must have a credit score if you’re going to function in our modern fiscal society. A credit score tells banks that you’re not only capable of holding credit, but that you’re also a reasonable risk for lending money to. If you’ve never borrowed money from any bank, it’s hard for a bank to decide you’re worthy of a giant mortgage or even a much smaller car loan.
Of course, there are many factors that go into banking decisions about loans. Take for example a mortgage. In order to qualify for a mortgage you are told to have a sizable down payment as well as a very high credit score. It stands to reason that the more you have as a down payment, the less you need to have in regard to your actual credit score.
But that’s a large assumption to make. Unless you’re truly averse to having any form of credit for moral or political reasons, you would do well to open a small credit card or two, perhaps a store line of credit or a line of credit from your bank. Make a purchase or two and then wait a month.
When the statement comes, send over the cash that you would have used originally and your credit score is not only established, but is in good standing with no outstanding debts. Having even a small amount of credit can help pave the way when you need a big loan from the banks. Having a really large savings account, however, can pave the way even more – nobody turns down cash after all.
No, You Don’t Really Need Credit at All
On the other hand, if you’re not interested in a large loan through a bank in the foreseeable future, you may not even need to worry about establishing or maintaining a good credit score. Modern American society seems to thrive on the use of credit cards and credit cards are a very nice vehicle for simplifying expenses, but as we all know, credit can become problematic very quickly.
Rather than even think about credit, there is no reason you can’t use a debit card from your bank which amounts to paying cash for everything you buy. If you’re paying cash or using a debit card, you’re always right on top of your finances and there are no surprises with a big statement at the end of the month.
If you’re in any doubt about the wisdom of using cash only for purchases, skim through any book or column on advice for those in debt. The first rule of wisdom is to stop using credit cards, pay them off quickly and use cash. If it’s wise to stop using credit and use cash after the fact, it must be twice as wise to start with the cash payments and skip the credit all together.
The biggest hurdles you’ll have with a cash household are large loans including mortgages and car loans. However if you consider that for generations you bought cars outright and paid substantially on a home or rented until you could, it’s easy to see why credit has become a modern convenience.
Buy a car on credit and you pay for it over the course of years. Buy a car with cash and it’s yours immediately – and you can spend those years saving up more money for the next car you’d like to buy, or perhaps a new home. The less you buy with credit, the more you’re able to save as well, since you’re not paying for things after you get them. Since you’re saving and then buying large items, you’re ahead of the lending curve and able to save more for the next big purchase – making your money work for you, in fact.
The bottom line here is that credit is a luxury, not a necessity. It is not only wise to avoid a great deal of credit, but it may be in your best interest as well to stay well away from the temptation it presents. Just be sure to have a stash of cash for any emergencies that come along.