9

I am 23, and I'm following Dave Ramsey's TMM plan. I am concerned, however, about completely closing credit accounts etc. due to the fact that I am not yet a homeowner. I do not want to dig myself into a hole I cannot get out of. Dave Ramsey says credit scores do not matter in life if you pay everything with cash.

I agree with this for cars, clothes, and things, but there is no way I can work long enough to pay for a house. He suggests saving 20% (no problem) to put down on a mortgage. My question is : what real, viable, and practical options do I have when it comes to getting a mortgage without a credit score? My score is currently a 680. Should I be working that up, or disregarding it and letting it become incalculable as Dave says? I don't want to follow any plan blindly, so I'm just doing more research.

  • 1
    What credit accounts do you have that you are considering closing? – Hart CO Feb 22 '18 at 19:30
  • @HartCO ~$10,000 in cards. The rest of my debt is student loans. – Jaken Herman Feb 22 '18 at 19:34
  • 7
    Paying those down will help your credit score, you don't necesarily have motivation to close the credit card account(s) when they are paid off, unless they are a temptation to spend more than budgeted. – Hart CO Feb 22 '18 at 19:36
  • 2
    You'll have a credit score after you finish repaying these, your score won't be incalcuable for many years after they stop reporting. I don't think it's worth taking on debt in order to improve credit score. In my opinion avoiding damaging your score severely with late payments is all that's worth worrying about. – Hart CO Feb 22 '18 at 19:48
  • 1
    @Hart CO: Technically true, though personally I only think of it as real debt if I can't/don't pay it off before they start charging interest. Thus the fact that I have several $K outstanding on a 0% interest card doesn't bother me. – jamesqf Feb 23 '18 at 21:14
20

credit scores do not matter if you pay everything with cash

  1. Even if true, there are a few things that it makes a lot of sense to borrow for, most notably, a house. Sure, you could save your money until you have enough cash to buy outright. But the whole time you're doing that you're paying rent on an apartment. Or perhaps living with your parents, or in a homeless shelter, or a cardboard box under a bridge, or some other undesirable situation.

    Don't get me wrong, I strongly believe in avoiding debt. But buying a house is a special case because by buying the house you avoid the expense of renting. If you don't have a working car and need a car to get to work, it is not unreasonable to borrow money to buy a car. If the alternative is that you will lose your job because you can't get to work, this is a sensible course of action. I think it's a very bad idea to borrow money for a vacation or any other form of entertainment.

  2. It is simply not true that if you pay cash for everything that you don't need a credit score. Landlords today routinely check your credit score before renting an apartment to you. They want some evidence that you will actually pay the rent now and then. Many employers check your credit score as an indication of how responsible a person you are.

    And it's always possible that you will have some emergency that leads you to be willing to break the usual rules. Like if one of my children had a terrible disease and there was a large bill not covered by insurance, I can't imagine that I'd say, "Dave Ramsay says not to borrow money, so I'm just going to let my son die rather than get this life-saving operation because I don't have the cash on hand to pay for it."

In practice, it's a good idea to make some effort to keep a good credit score. Even if you have no plans to use it, it doesn't hurt. I'd advise any young person to get a credit card, use it to make a few purchases here and there, and then pay off the card 100% every time you get a bill. Personally, I use credit cards regularly for the convenience of not having to carry cash or worry about getting checks accepted.

If you find that you just can't deal with credit cards responsibly, that you go crazy and buy things you can't afford just because you have the card, and then a couple of days or weeks later you are kicking yourself for this stupid, unnecessary purchase, yes, then you should get rid of your credit cards. I'd put that in the same category with, If you can't have just one glass of alcohol and stop, but any time you have one drink the next thing you know you are waking up with a hangover in a gutter in a pool of your own vomit, then maybe you should stop taking that first drink and quit hanging out in bars. But if you can have one drink with friends at dinner and then stop, there's nothing wrong with that one drink. Etc for numerous other things in life.

  • 8
    +1 for the comparison to alcohol. That’s exactly how it seems The David treats credit cards. Just because one can abuse alcohol (even a number of my close family) doesn’t mean I can’t enjoy a beer responsibly. And I have little respect for someone who speaks in absolutes, e.g. “there is no responsible use for credit cards.” Even if 2/3 of users are carrying huge balances, 1/3 still pay in full. – JoeTaxpayer Feb 23 '18 at 1:42
  • It's a difficult issue, though @JoeTaxpayer. Your own analogy - that a few people can handle even the most dangerous things - really only proves the other point. There are many, many things which society bans because they are incredibly hard to handle. Examples abound .. machine pistols, LSD, etc. In those cases you would say "Certainly, a few people observably can handle those things without it leading to massive societal harm, but because they observably and overwhelmingly lead to massive societal harm, of course they are banned." .... – Fattie Feb 23 '18 at 14:24
  • (... cont) Literaly nothing (other than sugar) causes more overwhelming, massive, broad, societal harm, and in a higher percentage of users, than plastic. (Naturally, I myself am one of the handful of people who believes they can use cards responsibly :) But even in this case, it would be better if they didn't exist.) Anyone who's ever had trouble with cards, should certainly never touch them. – Fattie Feb 23 '18 at 14:28
  • 1
    @Fattie: We will have to disagree that society bans the things you mention because of inherent dangers. IMHO, it's because we have a law enforcement community that uses scare tactics to justify its existence and even-increasing budgets. – jamesqf Feb 23 '18 at 18:42
  • 3
    @JoeTaxpayer: And there are so many things made easier with credit cards, like buying something on-line, or even filling your gas tank. – jamesqf Feb 23 '18 at 18:43
7

Mortgage lenders do not just look at credit score -- they also consider your income (eg, paystubs), your assets (eg, bank statements), payment history (eg, utilities), etc. Credit score is just one factor.

So you can get a mortgage without a credit score -- see Can You Get a Mortgage With No Credit History? on nerdwallet -- but you may find it more difficult to get approved, and at a higher interest rate than if you had good credit.

  • 3
    That article is unfortunately almost certainly totally incorrect. Unfortunately today in the US there are no "smaller lenders" where there's a nice old grandpa with nose spectacles who "considers" your "history," and so on. Nobody "considers" anything. As of now, 100% of rofl mortgages in the US are just sold on to the government agencies. There's a simple computer checklist - and that's it. They can only pass it on to Fannie if it ticks the computer checklist, so that's the end of it. – Fattie Feb 22 '18 at 21:10
  • 1
    FHA loans explicitly allow mortgages to those with no credit scores, but alternative payment histories. – Magua Feb 22 '18 at 21:38
  • 2
    @Fattie - here's another article (from the same source) that explicitly explains the rules for "no credit". It would be odd for a well known source to completely fabricate the entire process: nerdwallet.com/blog/mortgages/… (Basically it says it is still automated, but without a credit score.) – TTT Feb 22 '18 at 21:41
  • 2
    I would just say, this passage "Turn to smaller lenders. Plenty of lenders out there are more flexible.., some online lenders and smaller banks might give you the one-on-one attention you need .." is wrong. All mortgages now are just sold on to the Fannie- entities. There's a checklist, that's it. There's no "personal" or "flexible". – Fattie Feb 22 '18 at 22:07
  • 1
    @Fattie "All mortgages now are just sold on to the Fannie- entities. There's a checklist, that's it. There's no "personal" or "flexible"." - That's not correct, I am in the US, and have a mortgage that is held in house by a smallish, local bank. My credit union also offers the same. They will not do a 30 year mortgage this way, but your blanket statement is incorrect. – Najel Feb 23 '18 at 14:21
5

I highly recommend you use a site like Credit Karma to track your score and see the impact of your $10,000 balance. No answer here discussed the nature of a credit score, its composition, and what you can do to improve it. Your score is being impacted by utilization. This is simply the amount owed vs your total credit line.

When I recently applied to renew my HELOC, I saw my utilization was high for the fact that I run most of my budget thru my credit cards. For the next few months, I paid the bill in full, and then some, before the balances were reported. An 850 credit score got me the loan with a 10 minute phone call and copies of my 401(k) and IRA statements. Gaming the system took me from a respectable 790 to the maximum score. In your case, paying the $10K off will put you well over 700.

Note, my credit report still shows accounts I closed in late 2008. If you really wish to go off the grid, there’s a decade delay.

If you are really planning to do this, I suggest you try a few things first -

  • rent a car without using the card
  • reserve a hotel room without the credit card
  • ask your bank what they will do for you if you buy something with your debit card and find the business closed before they shipped your item.

People can, and do, mess up with their cards. I am certain that if a card user starts with one rule, “do not charge any item that you don’t have the cash to pay in full the day the charge hits” that s/he will fall into the group of responsible card users who use it to their advantage. No different than the cook who knows how to use a cooking knife vs those who slice into their hand while cutting a bagel.

The celebrity and entertainer Dave Ramsey has a view that cards have no responsible use. Clearly, our opinions differ.

Edit - your comment response "buying within 5 years with 20% down," reinforces my opinion that your best path is to simply continue with your plan. Paying the card aggressively will let you be done with it well before you apply for the mortgage.

  • 1
    The point about renting a car, hotel rooms is a great one. You will need a pre-paid Green Dot type of card and the high fees that come with those. Also, many places won't accept those and will require a credit, not debit card. Also the buyer protections with a credit card are a huge benefit. Debit card, you're SOL. – red_squiggly_line Feb 23 '18 at 2:39
4

Maybe search some active personal finance forums or subreddits and try to find people who have actually gotten those small, personal, no-creditscore-needed mortgages in the last 10 years. I would wager those people are unicorns.

I tried to get one a few years ago and it was going to be a major uphill climb. Getting a mortgage with a good credit score was still no cake walk. I asked our mortgage broker about the Ramsey approach and he mentioned it may be possible, just like building your own car from parts and raw materials is possible.

But, you know there are other things I want to do with my time.

Ramsey has a wide dogmatic streak I found to be a turnoff. He has some excellent points but it's all information you can find in numerous other sources.

BTW, his method of paying off your smallest credit card first, no matter the interest rates of other debt you may have isn't great advice either, in my opinion. It's a neat idea for people who truly struggle with personal finance or like buying into a catchy system. However, it may (likely) cause you to pay more interest than attacking other debt with a higher rate.

  • 3
    +1 - When I challenged a blogger what he'd pay off first, the 10 $1K loans that had 1% rates vs the single $10K loan at 24% and he said he'd still with the David method, I knew he drank the Kool-Aid. – JoeTaxpayer Feb 23 '18 at 3:17
  • 3
    Drinking the Kool-aid is a very apt term for some of Ramsey's most vocal supporters. – red_squiggly_line Feb 23 '18 at 4:02
  • Ramsey belongs in the same category as fad diets and the like. You can produce big changes in outcome by making small changes in behavior at the margin, but people find this counterintuitive. So, someone like Ramsey comes along and tells them the only way to save themselves is some grand, dramatic gesture, and they buy into it. I guess it's better than being overweight or drowning in debt, but it would be better still to learn how to think about what you're doing and make responsible choices. – Nobody Feb 23 '18 at 15:34
  • 1
    @RPL fad diets is a good comparison. I think they both offer an attractive pre-built signaling mechanism that shifts focus from personal responsibility to the system's effectiveness. I don't lack self control, the diet plan was terrible, I didn't create the diet plan so when I failed at the plan it wasn't actually my fault. Also, you can see I'm serious about making changes since I spent money on buying into the system. – red_squiggly_line Feb 23 '18 at 17:08
4

Work the debt snowball, get rid of the debt and feel great and be free! I did.

I have no current open credit accounts other than my mortgage and old credit accounts (7 or more years old) that are closed paid as agreed, no late payments etc. I have a credit score of 750.

I understand that this is not your situation as you are worried about not having much credit on your credit report after paying everything off.

Dave talks about Manual Underwriting, in which manual means it's not an automated calculate my score and make a yes/no decision, but a human underwriter actually looking at your credit worthiness, possibly ignoring lack of credit accounts. There are companies that do manual underwriting. Probably not the large banks or highly advertised online quick/fast mortgages, but there are those that do.

Also consider finding a smaller local bank or Credit Union and going in and talking with a loan officer to see if there is a more manual process that is not a yes/no based on FICO.

As long as you don't have bad credit (late payments, over extensions, collections, etc) and have whatever proof they request (satisfactory rent payments, satisfactory salary etc) then you should be OK.

I don't do it, but I wouldn't begrudge someone (Dave would) that had one credit card that they used sparingly and always paid in full every month for the sole purpose of building credit. But this could be dangerous depending on your spending habits and personal traits and behaviors. That's what the TMM is aiming to change.

  • "There are companies that do manual underwriting." As of 2018, there are not. (If you know one, state the name.) – Fattie Feb 23 '18 at 11:50
  • @Fattie - there may be just one. I suggest you search for it, I'd prefer it not be promoted here. – JoeTaxpayer Feb 23 '18 at 12:05
  • "But this could be dangerous ..." unfortunately this is akin to saying: So, you were once a heroin addict living in the gutter. You're slightly recovering. You decide to use just a little bit of heroin. "It could be dangerous!" – Fattie Feb 23 '18 at 14:45
  • @Fattie:Ha, except one is a physical addiction and the other could just be from being young and ignorant about money and finances. Much like my friend who is good with money, fairly wealthy but is good at playing the credit card game for points, miles, cash back etc...I don't play it but some can, some get burned. – AbraCadaver Feb 23 '18 at 15:52
  • @Fattie Churchhill – Lan Feb 23 '18 at 19:38

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.