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5 ways to make life without credit cards work

Rachel Hartman

February 19, 2014

It may be tempting to live life without credit and, therefore, no debt.

No car loan hanging over your head. No ridiculously high interest rates to pay each month on your credit cards.

But a certain amount of debt is actually good for your credit score, and living off the credit grid can put a damper on your plans for a new car, house or vacation.

“Building up your credit score is harder to do without a credit card [or other loans] in your name,” notes financial adviser Ken Mahoney, founder of Mahoney Asset Management, an investment firm based in Chestnut Ridge, N.Y. That's because you won't be able to create a record that shows you make payments on time and can properly manage debt.

And while it's not impossible to live without credit, it takes planning.

Here are the five biggest challenges to life without credit, and how to make it work.

1. You don't have a credit card for emergencies

Without funds or credit available for unexpected costs, you could find yourself in a tough spot. “Whether it's a car issue, or something with your home, the bills are usually not cheap,” notes Doug Minor, credit counselor and expert witness based in Westlake Village, Calif. Losing your job or going through a medical crisis can also cause financial stress.

The solution: If you don't have credit, you'll need to save three to six months of expenses to cover unexpected costs, says Jason Cabler, founder of Celebrating Financial Freedom, a personal finance site.

“If you're in the process of getting out of debt, you can start with a smaller emergency fund of $1,000 or so,” notes Cabler. This way, you'll have a cushion to work with should you face any surprise bills.

2. You'll have to pay more for a car loan

“If you don't have a credit score or enough information to have a score, it's going to be difficult to get a car,” says Minor, unless you pay cash up front. And even if you are able to a get a loan, it will most likely have a higher interest rate attached to it.

The solution: For those living without credit, cash may be a better route. “A car loan is simply out of the question,” notes Brad Chaffee, founder of BeyondDebtFreedom.com. He and his family have been free of a car loan since 2008 when they sold their 2004 Pontiac Vibe, which carried a $300 monthly payment. Then, they paid cash for a 1986 Honda CRX.

“Since then, we have upgraded more than a few times, paying cash for each purchase,” says Chaffee. The family's last upgrade was to a Mazda MPV, which cost about $7,000.

3. You could have trouble taking out a mortgage

If you don't have a credit history, taking out a home loan can be problematic, especially if you're working with large, traditional banking institutions, notes Miranda Reiter, certified financial planner and founder of She & Money Financial Planning. “With these types of organizations, the decision is often not in the hands of the banker in front of them,” she says. The bankers simply input the data from your application into the system, where there is already an algorithm in place. If you don't meet the present guidelines, such as a positive recent history of using credit, in all likelihood, you will not be approved, explains Reiter.

The solution: Taking out a mortgage when you don't have a recent credit history may still be possible in some situations. Look into manual underwriting, which means your mortgage worthiness is judged by a human instead of a computer, says Cabler. This way, the lender can take into account things such as if you pay your bills on time, and what your income and savings are. Not all mortgage companies do this, however.

For those without any debt to speak of, a credit score from eCredable might be an option. The credit reporting agency takes into account the regular bills that are not typically reported to the national credit agencies, such as utility bills and insurance premiums. “This can also help in getting a mortgage,” says Cabler.

4. Travel can require extra steps

“Credit cards often come with guarantees and insurance not afforded to you when you pay with cash, such as rental car liability insurance,” explains Reiter. In fact, if you rent a car, you will usually be asked to pay with a credit card. The same is true when making a hotel reservation.

The solution: If you don't have a credit card, you may need to prepay for things such as hotels and car rentals, says Steve Stewart, host of the MoneyPlan SOS podcast.

To rent a car, you'll need to look for a company that accepts debit cards. In these cases, the rental agency will likely ask you to make a deposit, in addition to the cost of the rental.

When using a debit card for a hotel room, a hold may be placed on your card. This hold might include an extra percentage of the room's cost. For instance, if the room costs $100, the hotel may place a hold of $120 on your account.

5. Renting an apartment could be more expensive

Many landlords check your credit before offering you a lease on an apartment. And if you don't have a credit history that shows you've consistently paid bills on time, that credit check might not go so well.

When trying to rent an apartment without an active credit report, you could be turned down, asked to pay a higher rent or be required to give a higher security deposit, notes Reiter.

The solution: If you're credit free, expect to walk through a couple of extra steps when renting an apartment, says Stewart. You may have to look for a lender who understands your situation and is willing to offer you a lease. But plan to pay more for a deposit or be required to pay several months' rent up front.