If you live a debt free life, then you are not using credit cards (at least in my family we don’t ). One thing I have heard people ask about is their FICO score (i.e. credit score). If they don’t have debt, won’t this go down?
It is true, your FICO score is based upon your debt and how will you repay it back to the debtor. Your FICO score takes several components into consideration:
10% based upon your type of debt
10% based upon new debt
15% based upon the length of time you have been in debt
30% based upon your debt level
30% based upon your debt history
What is important to realize is that your FICO score does not take into consideration your debt to income ratio. It also does not consider what you have in savings. So, if your debt to income ratio is only 15% and you have $25,000 in the bank, is your score really indicative of how you manage money? Of course not.
If you want to maintain a good FICO score, you have not choice but to stay in debt. Forever. Once you have no debt, your score will start to drop off. However, because you are financially independent and smart with your finances, you should no longer have a need to borrow money.
The one thing I know many worry about is getting a new mortgage with a low FICO score. The honest truth is that if you go through manual underwriting through your mortgage company, it should not be an issue. To help yourself when applying for a mortgage, there are some things you can do:
Save and put 20% down
Choose a 15 yr, fixed rate mortgage rather than 30
Show a strong work history and income background
Prove you pay your bills with proof like 12 months worth of cell phone bills, utilities, etc.
Of course, not all lenders will go through manual underwriting, so make sure you ask when you are shopping for a good mortgage broker/company. It is not impossible, but you do have to do a little homework first.
And when it comes to purchasing a new vehicle, you will be living a cash only life style, so you shouldn’t need a loan. Between the ash you can save (by not paying someone else every month) and by selling or trading in your current one, it should pay for the cost. That means if you know you will need a new car in 2 years, you should start saving that money now so you can make sure you can walk in and pay for it in cash – no debt needed!
Whatever you do, do not let your FICO score control how you handle money. It is one small part of finances, but what matters most is the manner in which you live your life – debt free to live like you want rather than being tied to a three digit number.
(I am not a financial advisor and the information listed within these posts is not to be construed a financial advice. Financial concerns/issues should be addressed with a professional in order to receive advice and assistance.)