Liz Weston: Can a person get away with not having a credit score at all?

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Dear Liz: As I counsel my teenagers on their personal finances, I wonder if they can live without a credit score.

It is surprising that in order to get a good credit score, you have to have debt, or at least a credit card. Wouldn’t living debt free be better? With FICO ratings becoming de rigueur, is it reasonable for anyone to get away with zero credit scores, especially if the only debt they would ever consider is a mortgage?

In addition, credit reporting companies now have ancillary services that provide reports based on rent and utility payments that could be useful. How effective are these reports?

Reply: Credit scores are not meant to gauge how well you are managing your money. They are meant to gauge how well you are managing credit. If you don’t have and don’t use credit, you won’t have a score, and lenders will be reluctant to give you credit when you want or need it.

You may also have to pay higher down payments for utilities, miss out on the best mobile phone deals, and struggle to rent an apartment. In most states, credit information also helps determine property insurance premiums. In fact, your credit may be more important than your driving record in determining auto insurance premiums.

It’s a myth that you have to be in debt to have good credit scores. You just need to have and lightly use a credit card, and you have to pay it off in full each month. Another option is a credit builder loan, whereby the money you borrow is placed in a savings account or certificate of deposit that you can claim when you’re done making 12 monthly payments.

There are services that will add rent and utility payments to your credit reports. However, the most commonly used versions of the FICO score do not include this information when calculating scores.

Liz Weston, Certified Financial Planner, is a personal finance columnist for NerdWallet. Questions can be sent to him at 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the “Contact” form at asklizweston.com.


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