Should I Have a Credit Card?

Many people have heard of the Dave Ramsey show. He often speaks of how “cash is king,” debt it dumb, and how everyone should stay out of debt. Dave argues that while some people use the credit score for getting loans, getting jobs, and renting an apartment, there are ways to get around using a credit score.

While this argument is technically true, there are a few difficulties to this. First I want to start by saying that I deeply respect Dave Ramsey and the work he does. The vast majority of his advice I agree with, like getting out of consumer debt, investing for retirement, and budgeting carefully.

However, on this key point I disagree. While not having a credit score at all can certainly work for some people, like those who don’t need many loans, and are willing to work around no credit score, there are times when having a credit score can save a lot of time, hassle and opportunities.

Take buying a home. If you don’t have a credit score you have to either buy a home outright for cash, or you have to go get a loan by doing what’s called manual underwriting. This is when the lender audits you through various lenses and metrics without necessarily looking at your credit score.

They might look at your job history, payment history for rent and other bills, your income, assets and possibly references to gain a picture of whether or not you can pay the mortgage every month. While this can certainly work, it is less streamlined, less predictable, and overall more hassle. That’s fine if your willing to go through the process. But for those who would like a relatively predictable, hassle-free and repeatable loan process this might not be the best option.

Now let’s say you want to forget about credit all together. This is definitely an option. However if you want to get another mortgage, or other debt soon after going through manual underwriting, you may wan to reconsider.

As soon as you get your new loan, it will usually be reported to the credit agencies. After a few months you will probably have a credit score, simply because you now have a loan. Even if you never add more debt to the picture, that mortgage will probably be active on your score for months or years after you get the mortgage.

The bottom line is be aware of having a credit score is something you want to do. For some people who want a simple life with practically no debt this might be a good option. For others who either want to use debt for multiple purchases or start investing in real estate as investments, you might want to reconsider…

 

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