An alternate universe: one without credit
In our day and age, it is impossible to imagine a world that does not revolve around credit. Credit is required for everything: renting a car; renting an apartment; buying a car; buying a house; being applicable for a loan; the list goes on and on. We are judged by a single number that is supposed to reflect our entire financial history and stability. We are graded on how well we manage our credit, but are often not provided the tools and education necessary to do so.
We also buy everything on credit. The days of saving up and waiting until we have the funds to make a purchase are long gone. And we have no incentive to wait since we live in a society that values the now. Plus, we need those credit cards to help build credit so we can buy other things. It’s a vicious cycle.
But it wasn’t always this way. Here is a list of compiled facts about credit in America. Be sure to check out the links as a few of them have interesting infographics:
In 1899, the Retail Credit Company is founded. It is now called Equifax and is the oldest of the three major credit agencies in the U.S. (Visual Capitalist).
The credit boom started in 1908 with the sales of Ford’s Model T car in Detroit. General Motors made a car model that was accessible to many people, but not everyone. In 1919, GM started loaning money to the families that could not pay for the car outright (Visual Capitalist).
In 1930, other U.S. factories followed the GM model and families were able to purchase things ranging from appliances to radios in installments (Visual Capitalist).
The first credit card, the Diner’s Club Inc., debuted in 1950 (Britannica).
In 1958, the BankAmericard (which is now Visa) debuted in Fresno, California. 60,000 cards were mailed unsolicited to customers. (Visual Capitalist, Britannica, American History USA).
1989 (the year I was born!) the FICO score was introduced (Visual Capitalist).
“Since the Great Depression, the wisdom of saving 10% out of a paycheck had been as deeply ingrained into the American mentality as free speech, apple pie, and baseball. By the mid-2000s, the personal savings rate was effectively zero and many millions of people were deeply in debt -- not from productive investment but from living beyond their means.” (American History USA).
“The average American has a credit card balance of $6,375, up nearly 3 percent from last year, according to Experian.” (CNBC)
Total credit card debt is at its highest ever at $1 trillion in 2017 (CNBC)
Before consumer credit (credit cards from banks, retail stores etc.) took off, people saved up for what they wanted, or paid off purchases in installments. This mindset made more sense to me for several reasons:
You only purchase what you have the means to purchase. This means that you either save up to buy something or you don’t buy it if it is beyond your means. No instant gratification.
If you are making a purchase, you have to plan to make that purchase. You have to know how much money you have and decide if you can buy this thing or not. Even if you do a purchase by installments, you are still consciously deciding to do so and planning out when and how you can make those installments. You are more in control of your money, and less prone to impulse buying.
Purchases mean more! This is obviously my personal opinion, but if you have to save up and wait to make a purchase, it means more because you’ve not only made the purchase, but you've accomplished saving up to do so. You’ll probably take more care of that thing because you know how hard it was to get it in the first place.
You were saving. This is a lost art. If you can make the case to save for a purchase, you can make the case to save for an emergency, or for retirement. This is a skill we all could do better at cultivating.
I mentioned in an earlier blog how much I hated using a credit card because I didn’t like the feeling of owing someone. As I read more about credit, I decided I didn’t like the whole industry and culture around credit. Dave Ramsey agrees with me and says that you should either have a good credit score (670-739 according to Experian), or a credit score of zero. I am aiming for a credit score of zero.
But how is this possible, Denée? You started off this post listing all of the things you need credit for.
I’m glad you asked. Getting to a credit score of zero is no easy task. (My current credit score is 665 according to Credit Karma.) Actually, I don’t actively work on getting it down. What I did do was cancel my only credit card account. Paying off my student loans helped my credit score, but now that they are gone, my credit score has gone down.
Instead of actively trying to reduce my credit score, I instead inoculated myself from the need of getting a credit card. Baby step number 1 in Ramsey’s Total Money Makeover is building a baby emergency fund of $1,000. This baby emergency fund is to help you with any emergencies that come up while you are in the process of baby step 2: paying off your debt. It is to help prevent you from reaching for your credit card (a debt you are trying to get rid of) to pay for something unexpected that came up.
Once you have paid off all your debt, you build a fully funded emergency fund. This fund differs from person to person. Your fund should cover your living expenses (what you pay each month) for 3-6 months. If you are single, it should be 6 months because if you are out of a job, you have no income. If you are married, or have a life-long partner, 3 months is okay because potentially one of you will still have an income if the other loses his/her job. This emergency fund serves as a buffer between you, life's unexpected punches, and the need for a credit card.
Beyond the emergency fund, there are plenty of things you can do without a credit card if you have a debit card. You can rent a car and book a hotel room. The caveat is that they may hold a little more money for potential damages than when you use a credit card. Rest assured, you will receive that money back...unless you caused damages.
You can also buy things outright instead of putting them on credit. I do this with airfare and hotel rooms. I just research ahead of time for a price range, save up the funds or add it to my next month's budget, and purchase it when I have the cash in hand. I am also currently saving up to buy a car outright (more on that later). It will take some time, but if it means I don't have to fall back into debt or get a credit card, I consider it worth the wait.
You can live without credit. You just have to take it one step at a time. Make a commitment that you won't use your current credit cards, and pay off any existing debt from them. Build up your emergency fund, and decide to enjoy the anticipation that builds up as you wait to make a purchase.
For those of you who are ready to take the plunge, you can visit this website: Prescreened Credit and Insurance Offers. It is through the Federal Trade Commission. This provides you information on how you can get rid of unsolicited credit card offers for 5 years or permanently. I got rid of those offers permanently.
Of course, this is your financial journey. So if you aren't ready to take a walk on the wild side and get rid of credit cards altogether, consider reducing the amount of credit cards you have. Consider making sure you have the money before you purchase something. Make sure you are able to pay off the full monthly amount so you don't get slapped with interest. You can control your credit just like you can control your funds.