Don't make your own life harder because of Dave Ramsey's grudge against credit scores.
Dave Ramsey is known for his anti-debt philosophy. While avoiding debt makes sense, he also takes his approach to unnecessary extremes. To make it even worse, he frequently recommends that his followers do the same.
His advice on credit scores is one of the most problematic examples. Although the conventional wisdom is that you should work on increasing your credit score, Ramsey says to do the opposite. He recommends going lower, so low that your score disappears. And there are people who follow this advice, calling in and asking Ramsey how they can get a credit score of zero.
To be blunt, this is terrible advice. If you abandon your credit score, it's going to be a huge inconvenience, and it's probably going to cost you money.
Dave Ramsey's misguided opinion on credit scores
According to Ramsey, a credit score is really an "I love debt" score. He's against credit scores because he believes they're tied to being in debt. To make his point, he shares misleading information about what goes into a credit score, with the names of the scoring criteria conveniently changed.
For example, one of the actual factors that goes into your credit score is your length of credit history. This is how long you've had credit accounts, which can be credit cards or loans. Ramsey refers to this factor as "how long you've been in debt."
If all you've heard is Ramsey's take, it's important to learn the truth about how credit scores work. A credit score is simply a measure of how likely you are to repay money you borrow. To build a credit score, you do need to borrow money and pay it back. However, you can do this without going into debt or paying any interest charges. Here's how:
- Get a credit card.
- Use it to pay for some of your regular purchases.
- Pay the bill in full every month.
This is all you need to do to get a high credit score. As long as you pay your credit card in full, you won't be charged interest. You don't even need to use your card that much. You could literally use it for one $10 purchase per month, pay your $10 credit card bill, and build credit.
Why should you do this? Because contrary to what Ramsey will tell you, credit scores are important. Let's look at the downsides of taking Ramsey's "no credit score" approach.
Buying and renting a home is much more complicated
Most people who buy a home need a mortgage, and most mortgage lenders check your credit score to determine your loan rate. If you have a high credit score, you'll qualify for much lower mortgage rates. If you have no credit score, you won't qualify for a mortgage with these lenders at all.
Ramsey's solution to buying a home without a credit score is to find a lender that does manual underwriting. Go to a lender that offers this, and bring along 12 to 24 months of documentation showing your income and payment history on multiple monthly expenses.
Is this going to cut down your options quite a bit? You bet. Here's what Ramsey himself has said about manual underwriting: "Not a lot of mortgage companies know how to do that." So, instead of just building a high credit score so you can get a mortgage from any lender, Ramsey wants you to:
- Limit yourself to a much smaller pool of mortgage lenders, even if it means getting stuck with one that charges higher interest rates or fees.
- Gather much more documentation than you'd need if the lender had, say, a convenient way to evaluate you as a borrower.
It's just as unnecessarily difficult if you're renting instead of buying. Many landlords and property management companies run credit checks on every applicant. If you're trying to get an in-demand apartment, and the owner has multiple applicants, not having a credit score could be a dealbreaker.
Finding affordable housing is already challenging enough. Why make it even harder? A credit score gives you far more options, because you won't need to rule out the many landlords or mortgage lenders that require that from an applicant.
More ways having no credit score can cost you
Housing is the most prominent example of how life is harder without a credit score, but it's not the only issue. Here are a few other drawbacks:
- You could pay more for insurance. In all but three states, insurance carriers can use your credit score to help set your premiums. For auto insurance rates in those states, drivers with excellent credit pay less than half what drivers with poor credit pay.
- You may need to pay a deposit for utilities. Utilities companies often charge a deposit to new customers with no credit score. That means paying more upfront to set up your water, electricity, gas, and other utilities.
- It's harder to borrow money. An anti-debt lifestyle is fine, but you might run into a situation where you need to borrow money. For example, if you have an unexpected expense that costs more than you have in your emergency fund, being able to get a personal loan or a 0% APR credit could be a huge help.
There's no reason to be without a credit score
Ramsey's advice about credit scores is out of touch and does listeners a disservice. He can handwave away all the difficulties about not having a credit score, because he has enough money to where it doesn't affect him. For the everyday listener without a net worth in the hundreds of millions of dollars, not having a credit score is a huge, and unnecessary, disadvantage.
