Forget skydiving…if you really want to live life on the edge, try living with a credit score of zero.
In March of 2009, I checked my credit score to make sure Kate and I were ready to apply for a home loan when the time was right. At the time, I had a decent credit report score (718) and assumed all was well.
In June of 2009, I applied for a mortgage online. Our loan representative called me immediately and said something like this:
Josh…
I’m looking at your credit history, and it’s excellent.
During the last few years, I can see that you made all of your payments on time, in full.
However…
Your credit score is currently a 0 (zero).
That’s a problem.
My first thought was “You’ve got to be kidding me. You’ve got the wrong guy.”
Here’s what happened.
When I graduated from college in 2006, I paid off my student loans very quickly. Even though wonderfully generous loan companies give you money for your education, they expect you to repay the principal (fair enough) plus interest over a long period of time (not so fair). Since I took a few math courses in college, it seemed like a good idea to pay off the principal as soon as possible to avoid paying thousands of dollars in interest.
I guess I was wrong.
I later learned that my quick loan repayment meant that my credit score only had a 12 month window to benefit from my financial responsibility. By the time we applied for a mortgage, I hadn’t made any debt related payments in over 12 months and the credit bureaus “could not determine my ability to make payments on a loan.”
What a joke.
Other factors also brought my credit score to its proverbial knees:
- We live within our means.
- We only spend money we actually have.
- We pay for everything in full.
- We do not have a credit card.
Even though these credit bureaus had all of my credit history at their fingertips (college loans completely paid off in less than a year, no late utility payments, etc..) they still assigned me a credit score of 0 (zero).
The message: You must have debt to get a good credit score.
I was actually being punished for my financial stewardship. Because I did not adhere to the system (the same system that drives millions of Americans deeper into debt each year), I had to jump through hoops to get us approved for a home mortgage.
Good thing I enjoy jumping through hoops.
I spent the entire month of June contacting past utility vendors for “letters of alternative credit.” Most of them wouldn’t provide these letters, in spite of the fact that I paid them thousands of dollars over the course of my short adult life. I guess it’s unreasonable for the consumer to actually request something from the corporation.
Let me recap some of the ironies so you can learn or repeat my mistakes:
- You should have lots of debt if you want a good credit score. Debt is good.
- Don’t pay things off quickly. That would be unwise.
- Get as many credit cards as you can. They will help you.
In retrospect, what I’ve really learned is that Fair Issac Corporation (responsible for FICO scores) wields a dangerously powerful and highly illogical control over lending in this country. If you’re not willing to adhere to their system, you may end up with a credit score of 0 (zero).
Life on the edge.
It’s incredible that good stewardship would put you in such a bind. Our world’s system is so backwards. I hope your home-buying dream is a reality very soon. So exciting!
What a coincidence! My wife and I had undergone a speech very similar when we made our first visit to a mortgage broker. Up until that point, we had never owned a credit card, for the same reasons you list in this post. However, after checking out a guest post by Ramit Sethi, author of “I Will Teach You To Be Rich” (don’t let the title fool you…it’s a GREAT book for folks in their 20s – http://www.iwillteachyoutoberich.com), he explained on his blog (and book) the value in having a high credit score and also how to build it. Not that your blog is a sounding board for confession, but we have since gotten a Capital One card and have used http://www.mint.com to track how the $ spent on the card measures up to what is in the account. Kind of like a debit card that comes with reward points
. Anyways, I’m not saying that’s what you or any of your readers need to do, just offering up some perspective on the matter. Thanks for a great post Josh!
I rented for a few years, saved my money with the intensity of a gazelle, and bought my first house with a 100% downpayment. No mortgage necessary.
What Jeff said. You don’t have to play the credit game. Just delay the urge to own that house now and save for one. In doing so you save hundreds of thousands of dollars in interest payments.
What is the point of this? You can do all the same living within your means while still taking on “debt” in the form of a credit card. All you are doing is delaying payment for a month, and there is good reason to do so. Not only does it more succinctly show your ability to manage a budget, but it shows your ability to borrow and pay back consistently and in a timely manner, which is the WHOLE POINT of what a lender is looking for. In addition, it allows you to effectively defer payments for up to a month. Again, you don’t ever have to live beyond your means. Just have a credit card, spend only what you have in the bank, keep track of what you need to keep on hand, and just run a one month larger balance. So, you aren’t being penalized for “living within your means” or “spending money you actually have”. The idea that not taking on trivial debt is the only form of good stewardship is simply false. Also, while it might seem ridiculous for them to ignore good credit from a year previous, not all lenders do that, and again, it is extremely easy to prevent that.
Hey Chris,
Thanks for your comments.
Though I understand what you’re trying to say (having a balance on a credit card and paying it each month isn’t really debt and/or a big deal), I’d like to respectfully disagree with you.
Why should I be obligated to carry a “trivial debt?” Why do I need to have a credit card from one of the some financial behemoths that single-handedly derailed the American economy?
I’m not saying living without a credit card is the only form of good stewardship. What I am saying is that I shouldn’t be penalized for living without one.
Thanks again for joining the discussion.
What steps did you take to get your credit score “viewable”? My wife is going through the same thing right now…. perfect loan history on several loans, but a score of zero. Nobody will lend to her or collectively to us, because of this. We are trying to figure out which direction would be best to take.
Thanks!
Hey Ahren,
Sorry to hear about your predicament. Not really fair, but then again, if our financial system was fair, the nation’s largest banks would be out of business.
Nonetheless, the easiest solution is to get a credit card and start paying off the balance on a monthly basis. From what I understand, a better credit score should appear in 6 months to a year.
Best of luck to both of you.
JWAL
We are closing our last credit card today and plan to have our house paid off by the end of the year… how long do you think until our score is zero? Is it really a numerical “zero” or just non-existent?
Can’t wait to jump though those hoops! I love a good fight
Yours in frugality,
Christina
I found out today that it take 6 months for your score to drop to zero. We had excellent credit 6 months ago and are having a house built on land we own. Today the lender calls and says my husbands score is zero. We sold our house about 9 months ago and had no other debt. I opened a kohls card a few months ago for the discount so while I have zero debt, I hav an excellent score. Going to be interesting to see how this shakes out in the next couple of weeks.
Hey Christina,
The terminology is interchangeable, as far as I can tell. A non-existent credit score is essentially a zero.
Congratulations on getting rid of those credit cards. As you take a simple stand against a complicated system, I hope you get that inner satisfaction of knowing that you’re willing to go against the tide.
Yours in rebellion,
Josh
Donnetta,
Good luck with your situation. I had to jump through many hoops because of my score. Using your credit instead of your husband’s or finding a more flexible lender should help things go through.
Wishing you and your family the best.
Josh
Hey Jwal,
Found out yesterday that I have a zero credit score. Paid off my house a year ago, no car debt for 5 years and paid off and closed my credit cards 2 years ago. Now, according to the lenders, I’m a financial risk. LOL! I actually prefer it this way but how frustrating! There I was doing my best to not be in debt and to do what I thought was the right thing. This system truly is backwards. Love your blog. Keeps me inspired
.
M
@Mich,
Pretty crazy, isn’t it?
I doubt we’ll reverse the system, but it’s great knowing that wisdom and rebellion sometimes coincide.
Now I just need to update my blog…
JWAL
I didn’t even know a zero credit score existed until tonight. After checking my credit score myself (685 … not excellent, but not bad either) I applied for a car loan today. To my surprise I also have a zero credit score, according to the lender. I have owned my car “payment free” for the past 10 years … and do not have any credit cards. Like you, I believed living within my means was a good thing! Boy was I badly mistaken! I’m a grown woman in my 40′s … earn a very good income … have no debt whatsoever … and cannot purchase a $15,000 car. The system is seriously screwed up! Thanks for your blog … at least I know I am not alone.
@Deb,
Glad my story offered some encouragement. Find a car that you can pay for in full, and then ride off in the sunset, laughing all the way.
Best of luck to you.
JWAL