Laura, a self-reliant farmer living in New England, has chosen not to use credit: no credit cards, no car loans, no mortgage. She saw her parents abusing credit and witnessed the consequences, and she vowed that it would never happen to her.
“I think my parents were making up for being dirt-poor for so many years until my mom started making a decent income as her five kids got older,” Laura said. “Although my dad didn’t make much money, he somehow acquired and maxed out a $75,000 credit card with nothing to show for it other than fishing trips, lawn tools and guns. They had to take out a third mortgage to pay it off. The other mortgages were for a brand-new house that was nicely decked out with high-end furniture.”
To Laura’s dismay, it wasn’t just her parents who ran up tremendous debt. Laura said, “My sister has a thing for fine jewelry, but not necessarily the means. When she got married – with a $30,000 wedding courtesy of my mom’s credit – and had a baby, things like groceries and diapers were bought with her credit card. It spiraled out of control and she wound up declaring bankruptcy. She still has most of the jewelry.”
My family was always stressed and complained about being broke, yet they had all this ‘stuff.’
Her family’s financial meltdown turned Laura into a pragmatist who proudly goes without “stuff” if she can’t afford it. She said, “My family was always stressed and complained about being broke, yet they had all this ‘stuff.’ This went on for decades. It seemed so obvious to me what the problem and solution were, so I opted to not go that route and be basically stuff-free. If I don’t have the cash, I don’t get the stuff.”
Laura abhors having a monthly payment of any kind – it makes her feel anxious and guilt-ridden – and she’s comforted knowing she’s beholden to no one financially. As a result, she has no credit history and no credit score. While not a path most financial experts would consider wise, it’s the right choice for her.
For millions of Americans living on the credit fringe, however, doing without credit is not a choice; it is a hardship. One in 10 Americans has no credit score, meaning they have no file with the three main credit bureaus (Experian, Equifax and TransUnion). Additional millions have a “thin file,” which means the credit bureaus have a little information about their credit history, but not enough to determine whether they can be trusted to pay back debt. As a result, it can be impossible for these Americans to rent a car or make a hotel reservation, much less borrow money to buy a home.
“It is possible to live life without credit,” said Bruce McClary, Vice President of Communications at the National Federation for Credit Counseling, “but there’s a point at which credit becomes helpful, if not necessary, in obtaining some of the things you might want to. For example, for those with the goal of homeownership, or those who’d like to finance the purchase of a car at a competitive rate – these are made possible largely by the fact that lenders can see they have a track record of paying back their debt.” McClary adds that for many people, the driving force behind the desire to establish credit is to have more choices.
Karen Dooley, another New Englander with no credit history, falls into this camp. While she is crystal-clear she does not want a credit card until she can afford to pay it off every month, she feels life without credit is “like swinging from a flying trapeze without a net.” There’s so much that she wants to do (“fix my used car, put all my bills on auto pay, go on a vacation”), but without enough income, and with no credit, she has to keep putting it off.
I didn’t want to go back to school until I knew what I wanted to do because I was afraid of the debt I’d have to take on. Huge mistake in retrospect.
When Karen graduated from high school, her parents cut her off financially. She desperately wanted to go to college but she knew she’d be footing the bill entirely on her own – until she found a benefactor who offered to pay her tuition. She enrolled in a local university, but her benefactor passed away before paying her tuition bill. She finished the semester but was left owing thousands. She said, “I didn’t want to go back to school until I knew what I wanted to do because I was afraid of the debt I’d have to take on. Huge mistake in retrospect. I should have just sucked up the student loan debt.”
Now, at age 36, Karen dreams of going back to college, but having never established a credit score and still owing tuition to her first university, she must wait. Karen said, “I’m stuck. I would love nothing more than to go back to school.”
To begin to establish credit, she could apply for a secured credit card with a high annual percentage rate (APR). But, like Laura, Karen is skittish about credit cards. As a young adult, she was living paycheck to paycheck and ran up $500 in credit card bills buying basics like gas and food. With a 23% APR, it took her years to pay off the balance. The anxiety it produced – the feeling of never being free of the debt – is still so palpable that she hasn’t had a credit card since.
Karen is dejected by what she describes as “a series of unfortunate events that have made me less financially stable at age 36 than I was at 21.” But when she looks around her, she sees many in the same boat, and it brings her comfort to know she is not alone. “I live in a neighborhood with a large refugee population, and that keeps me from totally giving up. I know those folks escaped horrific circumstances to get on the same footing as I am. If new Americans can see opportunity, so can I.”