Why You Need a Credit Score Even If You Hate Debt

Your credit score plays a vital role in your financial life, impacting everything from loan approvals to insurance rates. While a high score suggests you manage credit responsibly, a low score can indicate financial instability, causing lenders to hesitate in approving loans. However, what if you don’t have a credit score at all? You may assume that if you don’t plan to borrow money, a credit score is irrelevant. But there’s more to the story.

The Reality of Living Without a Credit Score

According to the U.S. Government Accountability Office, roughly 45 million Americans had no credit score as of 2022. This statistic includes people who have never borrowed or actively avoid debt. But while being debt-free is commendable, living without a credit score can lead to significant limitations.

Why You Need a Credit Score, Even If You Don’t Borrow

For individuals who dislike debt, paying cash for a home and avoiding credit cards might seem ideal. While it’s technically possible to make major purchases and pay bills with cash or a debit card, living without a credit history can create unnecessary roadblocks.

For instance, renting an apartment can become challenging without a credit score. Most landlords rely on credit checks to gauge a tenant’s reliability in paying rent on time. If you have no credit history, you might find it difficult to secure a rental agreement.

Another factor to consider is higher deposits. Utility providers often ask for a deposit if a customer lacks a credit history. Cell phone contracts might also be harder to obtain without a credit score, leading to costly prepaid plans.

In many states, insurance companies use credit scores to set premium rates. People without credit scores may be charged higher premiums for auto, homeowners, and life insurance. This can lead to significantly increased costs over time, making a lack of credit history surprisingly expensive.

READ

Texting in Politics: How Kamala Harris and Donald Trump Are Changing Campaign Communication

Steps to Establish a Credit Score

No credit history? Establishing a credit score can be worthwhile, even if you don’t plan on using it to take out loans.

One option is to become an authorized user on a family member’s credit card. However, this isn’t feasible for everyone. Alternatively, you can apply for a credit card and make small, manageable purchases, paying off the full balance each month. Using a secured credit card, where you deposit an amount equal to your credit limit, is another way to build credit if you have no prior history.

Reconsidering the Role of Debt

Not all debt is inherently negative. Although credit cards are known for high-interest rates, you won’t pay interest on balances that you pay off in full each month. This approach allows you to establish credit without falling into debt.

Credit cards can also be rewarding. Many credit cards offer cash-back rewards on purchases, helping you save money while building credit. To explore the best cash-back credit cards, check out our comprehensive list.

Final Thoughts

Building a credit score doesn’t have to lead to debt, and establishing credit is essential for more than just loans. Without a credit score, you may face rental challenges, higher insurance premiums, and substantial deposits. By responsibly building a credit score, you open doors to smoother financial experiences, even if you choose not to borrow money.