In the United States, your credit score is viewed as a crucial piece of your financial information. You need a good score if you want to open a credit card or get a loan of any kind. Often, landlords and even employers will ask for your credit information. Many Americans don't think you can get by without using credit, but is that really true?
You can have the life you want without ever having to worry about credit cards and credit scores. It might be a little more of a hassle to apply for an apartment or get a loan, but it is completely feasible.
The main thing you want to do is save money. Always set aside a portion of your paycheck for your savings account. This is a good practice for basically everyone, but you'll need a decent savings if you want to live without credit. This isn't just to cover monthly bills or emergency expenses. You can use your savings to prove that you can cover a loan or a car payment.
Typically, when you apply for a new apartment, you will be asked for your monthly or yearly income and maybe also your credit score. If you don't have credit, you won't have a credit score. This makes it hard for the landlord to determine if you are trustworthy to pay rent on time. If you've already rented an apartment, you can ask your previous landlord for payment history. You can show this to the new apartment complex to demonstrate that you're good for the rent. If that doesn't work, you might have to pay a bigger deposit. This could be as much as half or all of a month's rent. If you have a nicely sized savings, then you should be able to cover it with little issue.
The same goes for getting a loan. If you've paid back previous loans on time, then show those records to the bank. This might help lower your interest rate. In combination, your savings will also help you pay down the loan much faster than the typical borrower. Additionally, taking out a small personal loan and paying it back quickly can help you build your credit without having to open a credit card.
If you're looking to buy a house, your credit score will be a big factor. Unless you've saved enough to buy the house outright (which is highly unusual), you'll probably be taking out a mortgage loan. To get the best interest rate, your down payment will need to be at least 20 percent of the cost of the house. If you can pay more than that, all the better.
Lastly, instead of charging an expensive purchase to a credit card, wait until you have enough money to cover it outright. You might not be able to get that flatscreen HD TV right away. This prevents you from paying interest on the purchase. Even if you only take a few months to pay off the credit card balance, you would still be paying hundreds of dollars more than the cost of the item. Better to keep that money in your savings.
Living without credit is completely doable, if a little annoying at times. You'll probably need to produce extra paperwork or pay a bigger deposit if you don't have a credit score. Even in America, you absolutely never have to open a credit card if you don't want one.
- Living Without a Credit Score: Your Top 3 Questions - daveramsey ... ›
- Why I REFUSE to Play the Credit Score Game - ReadyForZero Blog ›
- Life Without Credit: 4 Reasons to Think Twice - NerdWallet ›
- 45 million Americans have no credit score ›
- Can I Live Without Credit? | The Huffington Post ›
- You Do NOT Need a Credit Score ›
- How to Live Without Credit - Money Mastermind Show ›
- How to Live With No Debt and No Credit Score ›
When you take out a loan for a car, charge something to your credit card, or get a personal line of credit, there is going to be an interest rate that applies to your loan.
A lot of different factors go into what you will be charged, including your own personal credit score. But even those with flawless credit still see a minimum charge that they can't get around. That all goes back to the Federal Funds Rate.
One thing consumers rarely realize is that all of our banks are lending money to each other every night. Banks are legally required to maintain a certain percentage of their deposits in non-interest-bearing accounts at the Federal Reserve to ensure they have enough money to cover any withdrawals that may unexpectedly come up. However, deposits can fluctuate and it's very common for some banks to exceed the requirement on certain days while some fall short. In cases like this, banks actually lend each other money to ensure they meet the minimum balance. It's a bit hard to imagine these multibillion-dollar financial institutions needing to borrow money to tide them over for a bit, but it happens every single night at the Federal Reserve. It's also a nice deal for those with balances above the reserve balance requirement to earn a bit of money with cash that would normally just be sitting there.
The Federal Reserve
The exact interest rate the banks will charge each other is a matter of negotiation between them, but the Federal Open Market Committee (FOMC) (the arm of the Federal Reserve that sets monetary policy) meets eight times a year to set a target rate. They evaluate a multitude of economic indicators including unemployment, inflation, and consumer confidence to decide the best rate to keep the country in business. The weighted average of all interest rates across these interbank loans is the effective federal funds rate.
This rate has a huge impact on the economy overall as well as your personal finances. The federal funds rate is essentially the cheapest money available to a bank and that feeds into all of the other loans they make. Banks will add a slight upcharge to the rate set by the Fed to determine what is the lowest interest that they will announce for their most creditworthy customers, also known as the prime rate. If you have a variable interest rate loan (very common with credit cards and some student loans), it's likely that the interest rate you pay is a set percentage on top of that prime rate that your lender is paying. That's why in times of low interest rates (it was set at 0% during the Great Recession), a lot of borrowers should go for fixed interest rate loans that won't increase. However, if the federal funds rate was relatively high (it went up to 20% in the early 1980's), a variable interest rate loan may be a better decision as you would be charged less interest should the rate drop without the need to refinance.
The federal funds rate also has a major impact on your investment portfolio. The stock market reacts very strongly to any changes in interest rates from the Federal Reserve, as a lower rate makes it cheaper for companies to borrow and reinvest while a higher rate may restrict capital and slow short-term growth. If you have a significant portion of your investments in equities, a small change in the federal funds rate can have a large impact on your net worth.
Whether you're leaving a job involuntarily, departing for something new, or just want to prepare for the unknown, it is smart to understand all your options regarding your 401k.
Frugal gifting often gets a bad reputation. However, this shopping method does not make you cheap — it makes you practical. Frugal gifts often avoid waste and overspending and can be just as meaningful (if not more so) as any other present.
With the National Retail Federation predicting each consumer this holiday season to spend upwards of $1,000 on holiday gifts amidst an economic recession —this year might be the perfect time to reconsider your spending budget. We've formulated the ultimate list of frugal gift-giving ideas to get you started.