The other day I received an email from Trulia.  It was a notification of a new blog post.  The title was “No Credit or Bad Credit: Which Is Worse?”  Of course, it intrigued me.  I was pretty sure, after have read other posts by them, that they were going to error on the side that no credit is worse.

Let’s take a look into some of their arguments. 

1. Without a credit score a bank won’t lend you money.
2. Banks will “hamstring you if you’re looking to get a car loan”.
3. Banks won’t allow you to get a mortgage.
4. Having bad credit gives the banks a track record.
5. You won’t be able to lease an apartment with no credit
6. You won’t be able to setup utilities with no credit.

The article goes on to say you should pull out a credit card at the bank to start building credit.  There is one statement I do agree with in this blog post “That means you haven’t taken out any loans or lines of credit — again, a good thing considering that means you have no debt either!”

So, let’s look at their statements.

1. Without a credit score a bank won’t lend you money

The article is talking about car loans and mortgages mainly, but there are other loans such as a personal loan.  The question here is why?  Why do you need the bank to lend you money?  The obvious answer to this is that you don’t have a budget, and/or an emergency fund.  A budget is crucial to telling you how much money you have, and helping you build that emergency fund.  The emergency fund should be 3-6 months of expenses.  With those two items, then personal loans, as well as loans for other types of things shouldn’t be needed.

2. Banks will “hamstring you if you’re looking to get a car loan”

The question here is again why?  Why do you need a car loan?  What happens if you lose your job as you have been paying back the loan?  Will the car be repossessed?  Depending on if you can work out a deal with the loan company.  What’s so great about a paid for car that you paid in CASH?  How about, you didn’t pay double the price!  How about you OWN the car!  If you lose your job and you OWN the car, you have transportation to interviews!

When we buy another car, we will be paying cash.  I have bought 2 cars on loans, and my first car was cash.  I love the fact that I own the car and owe nothing to anybody.  When my net worth does eventually top $1,000,000 I will buy a new car.  My guess is it’s going to be an Audi Q5, cash.

3. Banks won’t allow you to get a mortgage.

Some banks will consider your credit score to be the gospel.  However, there is a thing called manual underwriting.  They can get you a mortgage without a credit score, taking into an account you pay your bills on time, how much you make, and your net worth!

If I had 50% to put down on a house, will a bank that only relies on the credit score take that?  What if that house is $1,000,000 and I have $500,000 in cash to put down?  My thought here is no, they would put a greater emphasis on the credit score, not the cash.

How does this sound?  Save up!  I have decided that if we were to get a mortgage, it will be a 15 year fixed.  I can’t justify putting myself into a 30-year and spending so much time trying to pay off the house.  I also want to force myself to pay it off in 15, instead of trying to pay it off in 15.  What I really want to do is figure out a way to pay CASH for the house.  I know that’s a lot of money, but I would prefer to put the money towards retirement.

4. Having bad credit gives the banks a track record.

This statement shows a lot of ignorance.  Having a bad credit tells the banks if you can pay on time or not.  That is true.  Having no credit score makes them guess.  Also true.  However, which is more likely to pay a bill on time, someone who has $30,000 in the bank and a paid for car, or someone who keeps forgetting what that one card was that they seem to believe they owe?  Most likely a bank will deny someone with a low credit score than someone with no credit score.  This is only opinion, but if doing manual underwriting it is the most logical.

5. You won’t be able to get an apartment lease.

This is one of those semi true statements that is really stupid.  There are apartments that base your ability to pay on your credit report.  I am not sure what our apartment did, but I know they had to look at my offer letter to even consider my ability to rent the apartment.

Since I don’t have experience with this, I don’t know much.  I have heard that if you can fork over first and last month’s rent, then there is a greater chance of getting into an apartment.

What makes this really funny is this scenario.  If I have $1,000,000 in my net worth, and I recently got a job in a different city, so I had to move.  I go to the apartment complex to rent for a few months while I get my house sold, or buy a new one, I won’t be able to get it.  So, even though I can buy one of your buildings, I still can’t rent from you?

6. You won’t be able to setup utilities without a credit score.

Usually the utilities require a deposit, which they will refund after a year.  From my research it appears you might have a high deposit if having a bad credit score or no credit score.  Since it’s been a long time ago since I’ve had no credit score, please check with your utilities on how to proceed.

So, what is a credit score?  We’ll it’s a debt score.  It tells nothing about your net worth.  Yes, this is true.  Take a look at fico.com.  There you will see 30% of your score is how much you owe, 35% is your payment history, 15% is length of credit history, 10% is types of credit, and 10% is new credit.  So, it’s all about spending, and not saving or investing.

So, my conclusion is it’s better to save up, pay cash, stay out of debt, and don’t worry about a credit score.  I think way too often we get into serious trouble with credit, and it takes years to recover.  My wife and I had $54,117.39 in debt, credit cards, car loans, and student loans.  In 2 years we have knocked that down to just below $5,000.  We will start the rest of the journey this year.  Yes!  We are weird!  We like it that way!  We dream big, but we will be forever changed in our way of looking at money!

Blessings,

Andrew Krob