You Don't Need A Credit Score
Jul 01, 2024
We have always been told that credit scores play a significant role in our financial lives, influencing our ability to secure loans, rent an apartment, or even land a job. However, they are often misunderstood, leading to myths and misconceptions. In this blog post, we'll debunk common myths about credit scores, shed light on what they truly represent, and explore alternatives for those who choose not to rely on them.
What Is a Credit Score?
A credit score is a numerical representation of your creditworthiness, typically ranging from 300 to 850. It is calculated based on your credit history and provides lenders with a quick assessment of your ability to manage debt responsibly. The higher your credit score, the lower the risk you pose to lenders.
Myth 1: People Worship the Credit Score
One of the most pervasive myths is that your credit score is the ultimate measure of financial success. While a good credit score is undoubtedly valuable, it's not a comprehensive indicator of your financial well-being. It doesn't account for factors like savings, investments, or your overall financial stability. Focusing solely on your credit score can lead to neglecting other essential aspects of your financial life.
Myth 2: You Need A Credit Score
Contrary to popular belief, you have options beyond relying on your credit score. If you're looking to buy a house, you have the option of using manual underwriting to secure a mortgage. When we are in the market for buying a car, the best thing to remember is that if you can't pay cash for the car then you can't afford it. Having a written budget that has a line item for future car purchases is something to consider adding if you can't pay cash today.
Myth 3: Checking Your Own Credit Hurts Your Score
In fact, this is the complete opposite of what most people should be doing. I have had several clients tell me that they were looking to get a loan for a car or house and when they had their credit pulled it was very low because someone had committed fraud using their identity. This happens more often than it should. The recommendation is that everyone pull their credit report and validate every debt that is on the report. Don't worry, checking your own report or score won't lower your credit score.
Manual Underwriting for Mortgages
If you're interested in purchasing a home but don't have a credit score or prefer not to use one, manual underwriting could be a viable option. Here's how it works:
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Demonstrate Financial Responsibility: Lenders will evaluate your payment history for non-traditional bills, like rent, utilities, and insurance, to assess your financial responsibility.
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Stable Income: Having a steady income and employment history is crucial. Lenders want to see that you have the means to repay the loan.
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Reserves and Savings: A substantial savings account or emergency fund can boost your chances of approval, as it shows your ability to handle financial emergencies.
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Credit References: Providing alternative credit references, such as letters from landlords or utility companies, can support your application.
We have been told that credit scores are essential in many financial transactions and a high score is desired, in all reality, they are not the be-all and end-all of your financial health. It's crucial to understand the myths surrounding credit scores and recognize that there are alternatives like manual underwriting for those who prefer not to rely on them. Ultimately, your financial well-being is a multi-faceted picture, and a good credit score is not and should not be the center of the puzzle.