Life on the edge — Living with a credit score of 0 (zero)

Life on the edge — Living with a credit score of 0 (zero)


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 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 Isaac 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.

35 Comments

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  1. 1
    Liz

    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!

  2. 2
    Josh

    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!

  3. 3
    Jeff

    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.

  4. 4
    Joe

    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.

  5. 5
    Chris

    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.

  6. 6
    jwal

    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.

  7. 7
    Ahren

    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!

  8. 8
    JWAL

    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

  9. 9
    Christina

    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

  10. 10
    Donnetta

    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.

  11. 11
    JWAL

    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

  12. 12
    JWAL

    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

  13. 13
    Mich

    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

  14. 14
    JWAL

    @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

  15. 15
    Deb

    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.

  16. 16
    JWAL

    @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

  17. 17
    shell

    @ deb im going through the same exact thing right now im in my 40′s have’nt had a car loan in 8 years and i need a new car found out my score is zero i thought living within my means was a good thing but now i feel like im screwed ;*(

  18. 18
    Beth

    So after finding out that I have a credit score of 0 I went searching the internet for answers and found this little tidbit. I was denied a credit card, which I was applying for in hopes of paying for my cat’s serious injuries, and now I’m left with some questions. Unlike you I am still paying off my student loan (four years now), and lots of interest to go along with it. I also make regular on time payments for gas/electricity bills. If that isn’t credit then I don’t know what is. How am I supposed to build my credit if I am denied a credit card for not having credit? Stupidity!

  19. 19
    JWAL

    Hey Beth,

    The system isn’t as logical as its cracked up to be.

    When I purchased a house, I applied for a credit card at Lowes and was denied because of my non-existent credit score. I paid for all of my Lowes purchases in cash or debit, but I shook my head knowing that its sort of stupid to ask someone to fix the credit score with a credit card, even though their application is going to be denied because of their credit score.

    Good luck to you.

  20. 20
    ron

    Beth wrote: How am I supposed to build my credit if I am denied a credit card for not having credit?

    Being in the same situation recently I was advised to get a secured credit card. It’s the only option I am aware of that will in time do the same as a coventional credit card. Debit Cards will not work of course because you do not make payments. Utilities, phone, cable, etc, should be enough to show a good history of on-time payments but unfortunately are not reported when payments are made on time…. Secured Credit Cards from a bank report monthly to the credit bureaus and will reflect on your score. Its all just a twisted game. Put up money…borrow from yourself…at a higher than normal interest rate…and probally geat stuck with an annual fee…to get the card. yep….thank you…could I please have another??? Just an FYI the Banker did add to get the best reports try not charge over half the limit on card. Best of luck everyone!

  21. 21
    JWAL

    Ron,

    Thanks for adding to the conversation. I wasn’t aware that consumers going for the best credit scores should avoid charging over half the time on their card.

  22. 22
    CK

    We paid cash for both our cars, paid off the home mortgage 5 yrs ago, and have no other debt. We, however, continue to use 2 credit cards that have good rewards and pay off the balance each month. It’s a good way to simultaneously maintain your credit score (don’t plan on needing it, but just in case…) as well as stick it to Citi and Amex–we get approx. $1000 in cash back from them like clockwork every year. It seems to keep the score going-last time I checked it was a little over 800. I wish everyone the best in their efforts to kill debt for good.

  23. 23
    jwal

    @CK,

    Congrats on your financial achievements. I’m sure it feels great to be free from unnecessary monthly payments.

    I still think it’s sad that you need to have credit cards to maintain your credit score, but I also understand that it may be worth playing the game and getting some of the perks that go with it, cash back being one of them.

    Thanks for your comments!

  24. 24
    SallySaver

    This just happened to me! I had my credit pulled years ago and was in the 700s. It never occurred to me that all my previous good credit could disappear. I have zero credit cards, no debt, pay for everything with cash, even bought a house last year with cash. (We chose an inexpensive house, bought at the exact right time, and got a good deal.) I have a good job and lots of savings so was shocked to discover I have a zero credit rating. Now I have to take steps to get it back up there, but being thirty-something with zero credit is actually worse than being an 18-year-old kid with no credit. I hate this game and can’t believe I’m being punished for living modesty, saving all my money, and being responsible. Terrible.

  25. 25
    JJ

    I’m not sure what “math classes” you took in college, but paying off your principal before accumulating any interest is not smart if the interest rate is low. For instance, I have a large student loan debt that I’m locked in at 3.9% and a mortgage at 3.75%. It would be idiotic of me to pay either of those off in one fell swoop when I can instead invest that money and get a much bigger return. Yes, I’m paying interest on the loan, but my net gain is in the thousands of dollars because over the years I’ll make much more than 3.9% on that money. The belief that all debt is bad is misguided; that’s why economists refer to good debt versus bad debt. Why do you think rich people who have the means to pay for things up front still take out loans? They make their money work. And why exactly is it “not so fair” for a loan company to charge interest over a long period? How else are they to remain in business? Perhaps an econ class at college would have been more beneficial.

    Of course you need debt to have a good credit score. It’s not a “living within your means” score. It’s a credit score. Credit requires borrowing which means accumulating debt. If you’ve done that only in a limited capacity, it makes sense for a creditor to question your ability to do so in the future. You paid your college loan back immediately which is terrific and certainly not deserving of a ridiculous “0” score. However, a house costs thousand more and requires decades to pay off, so the loans are not equivalent. The percentage of people who pay off their student loan immediately compared to those who pay off their house is not even close. It’s impressive that you’ve lived within your means for so long and never had a credit card, but all that tells the creditors is that you have zero experience with a credit card. You have zero experience with managing the continued monthly responsibility of seeing to your debt. That’s a very different skill set from keeping your costs down and paying for everything up front. It’s certainly a laudable quality, but a different one nonetheless. You seem amazed that people who provide credit would care about your history of paying back debt over a long period of time. I agree that the numbering formula is deeply flawed, especially if someone who’s behind in their payments has a higher score than you, but the essential criteria for how credit is doled out makes perfect sense.

  26. 26
    Robert

    I had 20 years of perfect credit then sold my house and cancelled credit cards I’m at zero now and looking to get a home loan. Will getting a credit card allow the credit bureaus to see my history and jump my score back up accordingly.

    It’s sad to have to ask this. Being debt-free is a great way of life, but not realistic in our backwards thinking lending institutions.

  27. 27
    jwal

    Hey JJ,

    Thanks for the response.

    Call me a fool, but if you paid off your student loan debt in the next year or two instead of paying 3.9% interest every month for 15-30 years, wouldn’t that allow you to invest more money into other enterprises as I’m currently doing now?

    As you referenced in your comment, paying off a home loan in one fell swoop is not a reality for most people – myself included – but have you taken a look at your mortgage payment schedule? I’ve been paying on the same house for almost 5 years, and I’ve only taken a few thousand dollars off the principal off the loan. It would be stupid of me to keep trudging along in interest-laden misery so I can have a credit score that makes lenders feel better about me.

    If I can pay off student loan debt in two years, and pay all of my utilities on time for 10 years, that should be a fair indication of my ability to pay back debt.

    This post was written a few years back, and I currently have a credit card to keep everyone happy, but a system that tells me these are the rules and you have to follow them (in spite of the fact that the “rules” sink more Americans than they help), seems like a flawed system at best.

    In fairness, your comments indicate that you’re a responsible borrower, and I applaud you for that. But why should you have to be a responsible long term borrower?

  28. 28
    jwal

    Robert,

    Though it doesn’t make sense, you should have a credit card that you pay off each month. It keeps the lenders happy and doesn’t give them any opportunities to derail your life or credit score.

    All lenders can see your past credit history, so if you’ve done well, and you’ve had a card for a few months, you shouldn’t run into any major problems.

    Backwards system though.

  29. 29
    Keith

    Thank you… I went for a home loan today and my score was 0 for all three companies.

    It was hell getting approved for my car loan, my finance guy at my dealership actually went through all their lenders then back to the first one they asked and had to talk them into it. I was not surprised then, because I knew I had no credit being young. Tough not having a cosigner available…

    I was pretty confident when I went to the bank today to see how much I can be approved for, thinking I had perfect credit. I fully paid off my car (within a year), my student loans (a couple months after the car), and I got a best buy credit card to just help with the score. Have been done with all payments for over a year now. Thought it was going to be amazing and I would be approved right away… Now I am starting the process of getting them to recognize my financial responsibility since they are f***ing me with this system.

    I thank you for explaining that it goes off the past year; I figured it was something like that. The bank did not know the answer to why it was so. Way to get screwed for not being in debt.

    I’m off to get a credit card in hopes of bringing it back to life. Hell, maybe I’ll get two and just pay each one off with the other one.

  30. 30
    jwal

    Hey Keith,

    In my conversation with an Experian employee, I was kindly told that “the system is designed to favor the lenders.” Guess we’re on the wrong side of the equation.

    Good luck to you.

  31. 31
    ashley

    jwal thank you for posting this!! I am in the same situtation and its soo frustrating!! Im trying to buy a house but because I live within my means and have no debt im denied? because my score is a 0? But when I go to Experian, Trans. and Equafax SURPISE! I have 3 SCORES? Im so confused on how one lender can tell me I have a 0.. but when I pull my scores THEY are not at a 0. The lenders answer to me..yep you guessed it! A credit card… I dont know what I should do..HELP!

  32. 32
    jwal

    Hey Ashley,

    Sorry to hear about your situation. There might be a difference between getting 3 credit REPORTS and your actual credit SCORE. That might explain the discrepancy.

    Either way, its ridiculous to be penalized for living responsibility. The credit bureaus want you to have some type of open-ended debt payment (credit card, car payment, etc). Without having one of those accounts, your score will stay at zero.

    Wishing you luck,

    jwal

  33. 33
    Ryan

    It seems kind of foolish to spend all that time to get out of debt and want to get back in for a car or house, IMO once out of debt I’m never going back. As said in previous posts you live within your means and know how to budget already they saving should be second nature it shouldn’t take very long (in the scheme of things) with no other payments to save and pay in full for the house, car, that big screen, etc, if you need to get a loan it means you can’t afford it. Thats how things used to work as I understand it, I’m only 26 so what do I know. If you can’t wait for a house I was told you can tell the bank to go through manual underwriting which is where you use other methods to determine that you can honor your commitments to pay rent, bills, etc. More work I guess but its better then being in debt. Look up Dave Ramsey he lays out a simlple plan and he seem to be doing well with a ZERO credit score. But this advice is worth what you paid for it. Haha

    Good Discussion

  34. 34
    Hollie

    My husband and I are trying to get a house. He checked his credit on the site and saw the score we needed and then while applying for the loan, the bank came back with one a few points higher. But the highest and middle scores were at zero. ?? It was within the same day. How could we go from having credit good enough to get a home loan to just zeros, nothing?? The only credit score that wasn’t at zero was the low score? What happened within the same day that would cause this? We have a credit card that we use often. We pay all of it off, most of the time, when my husband gets paid. Can anyone help?

  35. 35
    Brandon Muth

    We have our mortgage amortization schedule printed out and taped to our fridge. Above it, in huge all caps, reads BEAT THE BANKERS. Every month when we make a payment, we include the next month’s principle, effectively cutting the length of the note in half. We keep a running tab of the interest payment avoided/saved in the margin. Granted, this gets more difficult as the principle and interest amounts begin to flip but we like the approach and the visualization of the interest. Also, the slogan provides an object for my competitive juices to fight against. Stinking bankers.

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