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If you are tired of being in debt, a “credit-free” life might sound appealing. All you have to do is pay off all of your debts, cut up your credit cards, close any other accounts, and get yourself completely off the credit grid. Then you can live within your means in a completely cash-based system. Being credit-free has plenty of perks, but it also has complications you need to understand if you are thinking about making the transition.
Advantages of Being Credit-Free
One of the biggest perks of not having any credit-related accounts is that you do not have to pay interest or make debt payments, which frees up your money, giving you greater discretionary spending ability. For example, the typical household credit card debt of $7,000 at a 15% interest rate costs over $1,000 per year in interest. If you are not carrying that debt, the $1,000 will be available for you to spend or save as you like.
People who tend to overspend on credit cards will reap financial rewards from being credit-free because it becomes impossible to overspend. When you do not have credit, the decision of whether or not to buy something is not tied only to emotion, but also to how much money you have available in your wallet or your bank account.
In addition to the financial advantages, you also have emotional perks. Being in debt is stressful because you spend your time and energy worrying about making payments or working extra hard to get out of debt. Many people feel a sense of freedom when they live credit-free.
Disadvantages of Living Without Credit
The main disadvantage of living without credit is that you will not have a credit score. Because your credit score is derived from data in your credit report, you will not have a score at all if your report is empty. This may make it difficult if you ever decide to get credit again, to buy a car or house for example. Also, insurance companies and employers sometimes check credit scores as well, and you may run into difficulties with them if you do not have a score.
The other disadvantage of living without access to credit is that you do not have the ability borrow on credit to use as a financial safety net. You need to build up significant savings to be your new safety net, and sometimes it is hard to know exactly how much money you will need to have saved.
Tips for Making a Credit-Free Life Work for You