6 upsides and downsides to living without credit


Paul Sisolak

Paul Sisolak

Blog author Paul Sisolak

As a personal finance journalist, Paul specializes in financial literacy, loans, credit scoring and the art of negotiation. He's covered some of the nation's most inspiring financial success stories for national publications including CNN, and US News & World Report and has a passion for helping Americans overcome their debt.

Published December 16, 2016 | 5 min read

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How often do we seem to have a love-hate relationship with credit?On the one hand, credit plays such a positive role in our lives that it’s hard to imagine living without it. More than 75% of Americans have at least one credit card, 44% of which maintain regular, revolving balances each month. Use your credit wisely, and it can bolster your credit score, qualifying you for mortgages, auto loans and other credit accounts at the lowest interest rates and best terms.On the other hand, credit can play such a negative part in life that it’s easy to picture going without it forever. Poor spending habits have led American consumers to carry $721 billion in outstanding credit card balances, according to the Federal Reserve, and the average household has nearly $133,000 in total debt (including mortgages).Based on those stats, it seems like there’s a lot of chemistry between us and our credit, but not often enough compatibility, and that can make things heartbreaking for our finances. Sometimes, it might be time to explore our options -- like seeing if a fling with a cash-only lifestyle is worth the commitment.But is it feasible to intentionally live a life without credit? Take a look at what the upsides and downsides of going credit-less are before dumping credit to run off with debit.

The pros of living without credit

You’ll have no debt

If you have no credit cards, no loans, or no accounts with an APR attached to it, you can’t have any debts to pay off. There will be no additional expenses associated with having debt in your name, either, like outstanding balances, due dates, or penalty fees or interest rates if you forget to pay your monthly bill. That’s because you won’t have a monthly bill. Paying with cash or debit is a simple money in, money out, deposit/withdrawal exchange without having to borrow and repay to a lender charging you interest as they wait for their money.

There’s less risk of overspending

Credit cards can give the illusion of having access to unlimited funds, tempting you to buy things you can’t afford up front, overspend, max out your card and go into debt. It’s a never-ending cycle of borrow, repay, borrow, repay with someone else’s money. But with cash or a checking account, that money is yours; once it’s spent, it’s gone. Knowing this can encourage people to consider the cost of an item before they buy it. Without credit, you simply buy what you can afford now. Spend too much, and you can’t borrow more, but you’ll become aware you’re broke much faster.

Budgeting becomes more of a priority

Credit is like a crutch. We can always fall back on it if we’re slim on cash or light in our bank accounts. Acquire a higher credit limit, and it’s even more excuse to live beyond your means without needing a genuine financial plan in place. But when you have no credit as a safety net, it becomes your number one financial priority to make sure the cash reserve you have is enough to live on. Credit is not money you can invest -- but cash is. Living without credit is a chance to wisely create a personal or household budget, find new ways to save, and spend more frugally.

The cons of living without credit

You’ll have no credit history (and need to save up for everything)

Unless you always have tens of thousands of dollars on hand at any given moment, chances are you’ll need to take out a loan for something in your lifetime, like a house, a car, a college education or even opening a credit card. No credit means no real opportunity to build a credit score or create a credit history, the two things that lenders look at before deciding to lend you money. Without either, you’ll be perceived as an inexperienced credit consumer with zero history of borrowing and repaying money. It’ll become harder to qualify for loans, and if you do, it’ll be with a high interest rate tacked on. If you’re denied outright, you’re out of luck; you’ll have to spend forever saving up for something you could have had your hands on by taking out a loan.

Traveling and renting becomes troublesome

It’s not because of those pesky neighbors making a racket at 2 a.m., or the annoying passenger taking up all the room in your aisle on the plane. It’s because without an established credit history, you may not even have the chance to rent an apartment or book travel reservations. Many landlords and property management companies require a credit check as part of the rental application process. Many airlines, hotels or car rental agencies also won’t accept reservations without a credit card. That doesn’t mean it’s impossible, but you may be required to front a larger down payment or security deposit, and even that might not be enough to gain approval.

There’s zero chance to earn rewards

The best credit cards reward customers with redeemable shopping points, travel miles and cash back just for using the card regularly -- perks you just won’t find on any ordinary debit card. Missing out on cash back rewards become the biggest irony of shunning credit; by going cash only, you’re passing up the chance to earn more cash if you incorporated credit into your finances. Moreover, credit cards, for instance, offer various modes of fraud and identity theft protection that keep your finances safe and sound. While debit cards also offer the same security, the same can’t be said for using cash -- if it’s misplaced or stolen, it’s difficult to prove it.

Your best bet: Utilize credit wisely

Cash and credit don’t have to be mutually exclusive. There’s no need for consumers to choose one or the other -- ideally, using cash/debit and credit/lending together in harmony is the perfect balance you should aim to reach. Here’s how:

  • Use your credit sparingly**. Believe it or not, it doesn’t take a whole lot to build your credit score. Charging too many transactions onto your card can hurt your credit score, since it gives the impression that you rely on credit too much. Stick to a plan. Limit the amount of cards you own. Use them exclusively for gas and groceries, and debit/use cash for everything else. This will give you enough revolving credit activity without going overboard. When it comes to loans, find ways to budget, save and earn money for a larger down payment (on a house or car, for example) to minimize the amount you borrow in the long run and avoid spreading your budget too thin for other expenses.

  • Build up an emergency fund**. An emergency fund of three to six months’ worth of money can help cover any major health expenses, job loss, car repair or other urgent issues life may throw your way that your credit limit or cash reserve might not be able to support. Investing it into a high-yield savings account that allows immediate withdrawals can help build interest to maximize the money you save.

  • Emphasize "good" debt**. There is a difference between "good" debt and "bad" debt. The former is buying something that appreciates or gives value in return, i.e. a mortgage or student loan; the latter, anything that depreciates or holds no lasting value, like a car loan or credit card. If you’re still adamant about living without credit on purpose, limit your options to good forms of debt that bring purpose to your financial and personal life.

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