America has a debt problem. Not just the country as a whole, but also its individual inhabitants. We have a mountain of it, with credit card debt now hovering near the $1 trillion mark, auto loans at $1.3 trillion, student loans at over $1.5 trillion, and mortgages capping it off at a hefty $9 trillion. And that’s not even all of it.
For the most part, this mountain of debt has interest. We love our debt, but we pay dearly. We pay for many things over and over through interest charges. If we really knew the cost of these things — including interest — we would probably buy far less.
For many people, debt is a problem. It’s not just because of what they initially borrowed, but because they don’t seem to be able to make significant headway against the relentless accumulation of interest. The credit card payments tighten the budget, leaving little or nothing left over. This results in any unanticipated expenses getting charged, and thus the cycle repeats. There’s got to be a better way.
Some experts recommend going completely debt-free. They advocate cutting the cord and cutting up the cards. Certainly, that will eventually lead to being done with the onerous burden of interest. However, it comes at a cost. Let’s look at the ins and outs of a credit-free lifestyle.
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The Disadvantages of Living Without Credit
Living without credit is hard — or at least, harder. It is difficult to save for everything in advance. Cars cost a lot of money, and they’re difficult to save for. Homes are worse.
Pre-saving for every single purchase requires delaying many purchases and often settling for less.
A credit-free lifestyle doesn’t mean you use only cash, although some people do. Most use a debit card. In addition to not having to carry large amounts of cash, you can use a debit card for online purchases and other situations where cash just doesn’t work. But you will still have challenges.
Not every rental car company will take debit cards. You have to be careful when traveling to be certain you can use your debit card, and that the card doesn’t become tied up with too many holds.
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Saving for items like a car requires a great deal of discipline. It helps to treat it like a payment, allocating a specific amount into a car fund on a monthly basis to build the funds for your next car.
Saving for a house can seem nearly impossible. Many credit-free types allow this to be the one exception. They’ll allow themselves a mortgage to get into a house, but then pay it off as fast as possible. This makes a lot of sense. In a strong real estate market, prices may rise as fast or faster than you can save. But living credit-free will make it both harder and more expensive to get a mortgage. You’ll have fewer options and will pay a rate premium.
The Advantages of Living Without Credit
While the list isn’t long, the numbers are big. Living without credit means living without interest expenses. Many people spend a significant portion of their income on interest: mortgage interest, auto loan interest, credit card interest — perhaps others. A credit-free lifestyle returns those interest dollars back to you. It’s you or the credit company.
Across an average lifetime, we're talking about hundreds of thousands of dollars in interest payments that you don’t have to make.
This is the major appeal of living without credit.
A credit-free lifestyle also helps prevent the problem of unmanageable debt. You don’t have missed debt payments or the additional charges associated with them. If you have trouble paying bills in a timely fashion, this can also be a significant advantage.
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An ancillary benefit of living without credit is that you tend to actually spend less. It’s not just interest that you save. You’ll probably spend less on a car. You’ll probably also spend less on a home. Often, people find they spend less across the board as they become more conscious of where their money goes and the real cost of things.
The challenges of a credit-free lifestyle lessen over time. As you get used to pre-saving, it becomes easier. It becomes your norm, your routine. It may have felt punitive when you were transitioning, perhaps paying off a car loan while trying to save for its replacement. But once you’re driving a nice bought-with-cash car, saving for the next one is no longer a burden. It may even start to be kinda fun.
I would be remiss to not address other issues of credit. In some states, your credit score affects your car insurance premiums. And many employers (when allowed by law) check the credit of job applicants. Some people feel they need to build credit for these indirect uses of credit.
These concerns are usually not a significant issue. Employers who need to look at your credit can do so only when it’s pertinent to your prospective job. They’re looking to make certain either that applicants are not in credit trouble, or that they’re able to be responsible with money. Being able to live without the use of credit shouldn’t work against you in those situations.
There may be some additional costs, such as not getting the most favorable auto insurance rates. But you can still shop around and manage your coverages carefully. Any increased costs you incur due to not having a credit score will likely be very minor in comparison to your interest savings.
If you’re transitioning to a credit-free lifestyle from a position of poor or bad credit, your credit record can follow you for a while. Negative payment histories stay on your credit report for up to seven years. And unpaid judgments or liens can remain on for up to 10 years. But if you have that problem, it’s because you already have it. Switching to a credit-free lifestyle won’t make it worse.
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Making the Right Decision
There’s not one right answer for everyone, but everyone has a right answer. You can save a lot of money by going debt-free. That’s a lot of money that would otherwise have become the property of some financial institution that loaned you money. Financial institutions are very good at turning your money into their money. That’s their job.
The transition, especially if you're beginning with a lot of debt, can be difficult. But it also doesn’t have to be done overnight. You can take baby steps, getting a little better each month.
Living without credit isn’t something most people would be willing to do. It’s simply not how they would choose to live their lives. And that’s fine. But by looking at the advantages a credit-free lifestyle can bring, perhaps they’ll take some steps in that direction.
That said, you don’t have to live credit-free to make responsible financial decisions. You can still budget and pre-save for many expenses. You can live a financially literate and financially healthy lifestyle with debt or without it. It’s a matter of understanding your options and choosing what works best for you.
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