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Is Putting a 20% Down Payment on a House Realistic?

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I understand the argument behind the advice of putting at least a 20% down payment on a house purchase. No one wants to pay private mortgage insurance and the idea of getting two different loans to avoid it isn’t that great either. I imagine if you are a previous homeowner and have some equity from a previous house to put down on a new one, a 20% down payment is very feasible, but what about first time home buyers?

Saving Up The 20% Down Payment has Huge Opportunity Costs

In the area that I currently live, the average home price is about $175,000 for a decent starter home. That’s actually a pretty low price compared to where I grew up across the state, where you can’t get a decent starter home for under $275,000. Let’s say someone wanted to buy a home for the first time. A 20% down payment for an average house in each area would be $35,000 and $50,000 respectively (and that doesn’t even include closing costs) Who has that kind of cash readily available? Not many people. So the advice many are given is to save up and wait.

Let’s look at what that would look like. Say you are able to save $500 a month towards your down payment. You are able to knock down your costs and pull aside that much every month. It would take you almost 6 years of saving $500 a month in order to afford the 20% down payment in the less expensive city and over 9 years to afford the one in the pricier area.

What if you were able to save $1,000 a month? Then it would take you 3 years and 4.5 years respectively. But saving $1,000 a month is quite difficult when you are trying to fund a retirement account and live day to day. Especially for up to 9 years. Most first home buyers are younger – probably in their 20s. In the best case scenario, you need to save for 3 years – in the worst case, it would be 9 years (this is assuming you already have a sizable emergency fund to take care of unexpected expenses).

It is even harder when you start looking at this from a market standpoint. House prices will rise. I don’t care what the housing market looks like now – eventually, the values will rise again. Let’s say values rise at a conservative 1% per year. In 3 years, each “average” house will cost at least $5,500 and $8,500 more, respectively. In 9 years, each house will cost at least $16,000 and $25,000 more, respectively.

Everyone who finally reached their 20% down payment goal will now need more money than originally thought for the down payment of a home that is now more expensive. Not to mention the money lost on throwing away rent rather than building equity (however small that amount may be in the first few years). Add to that the tax deductions missed and the missed opportunity to profit from the market’s increasing values. Ouch! Those numbers aren’t pretty. You have to spend money on housing either way – why not get some benefits from it?

Chances are, if you are saving a huge chunk of money each month for a large house down payment, you aren’t contributing the max to your retirement account. Your early investing years are the most critical for your future because of the wonderful concept called compounding interest. You could lose some very valuable interest time by waiting to invest (or increase your investment amount).

It Is Perfectly Reasonable To Buy A Home For Less Than 20% Down

Perhaps there are some people for which putting a 20% down payment on a house is not only possible but also a perfect fit for them. I personally don’t know any of those people and am not one of them. We chose to buy our house with no money down and use our monthly extra to invest more, stock up our retirement fund, fund our emergency savings, and make improvements to our house that will increase the value when we go to sell.

The funny thing is that our mortgage is not outrageous, we are not struggling to keep up with our payments and we are not in jeopardy of defaulting on our loan. The fact of the matter is that there are people who are a high risk to mortgage companies who will likely default on their loan if they get into a house with no money down. But there are also responsible people who will pay their mortgage on time every month who just want to have a choice of what to do with their extra money and how to best use it.

Can You Get A Mortgage For Less Than 20%?

Yes. You can get a mortgage for less than 20% down. The best way to find out if you can do this is to start making calls. You’ll want to talk with a mortgage broker. Probably you’ll want to talk with several. A good starting place might be USAA (they have great customer service) as well as your local credit union. Stay away from the bigger banks, they sometimes have incentives that are perverse (for example, by pushing low money down loans or adjustable rate mortgages).

How Soon Should I Refinance My House?

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Refinancing your mortgage can be a smart move. Sometimes, you can secure a lower interest rate, make your payments more manageable, or even access equity to make improvements or consolidate debt. However, figuring out whether it is the right time to refinance your home isn’t always easy. Interest rates frequently shift, and your financial situation (and credit scores) may be different compared to when you last got a mortgage, making it hard to predict what sort of rate or terms you may be able to access. Luckily, there are things you can do to figure out if now is the right time based on your unique circumstances. Here are some points to examine.

Interest Rates

One of the biggest reasons people cite for refinancing is landing a better interest rate. Depending on your credit score and when you initially secured your last mortgage, now may or may not be a good time to refinance.

Usually, experts recommend only refinancing if you can get an interest rate that is at least one percent lower than your last one. If your credit score has improved – such as by going from 660 to 720 – then you might be able to just that. When your credit score is higher, you may be eligible for more favorable terms, though this can depend on how much it has gone up and how lending standards have changed.

Similarly, if mortgage interest rates have declined significantly since you locked in your last loan, you might be able to get a better one even if your credit score is unchanged. For example, the average rate in November 2008 on a 30-year fixed-rate mortgage was 6.03 percent. In 2018, the average rate sat at 4.54 percent; that’s a decrease of 1.49 percent.

Whether mortgage rates are in your favor depends on the interest rate currently associated with your loan and your credit score. You’ll need to examine your loan account and credit score to see if refinancing to secure a better rate is a smart move today.

Additionally, you need to consider the possibility that interest rates may rise throughout 2019, and possibly beyond. This could make acting sooner rather than later a better decision if today’s rates are lower than your current one. However, mortgage rate changes are somewhat hard to predict, so there is no guarantee that the upward trend will continue.

Going Fixed

If you are currently paying off an adjustable rate mortgage – also known as an ARM – refinancing into a fixed-rate mortgage instead could be a smart move. Periodic rate adjustments can cause your mortgage payment to keep creeping higher, particularly if an upward trend continues.

However, it does mean you won’t automatically benefit from interest rate declines. An ARM interest rate can shift both upward and downward depending on market conditions, while a fixed-rate mortgage remains unchanged throughout the life of the loan. But a fixed-rate mortgage can provide you with peace of mind, as you’ll always know what you need to pay every month.

Eliminating PMI

If you didn’t put 20 percent down when you bought your home, there’s a good chance that you are paying for private mortgage insurance (PMI). PMI gives the lender some additional financial protection in case you are unable to pay your mortgage, as there may not be enough value to cover the remaining principal on your loan.

Once you pay down your loan and have 20 percent in equity, PMI doesn’t automatically go away. Unless you refinance your mortgage, you could be paying this additional expense for the life of your mortgage.

By refinancing, you may be able to eliminate PMI as long as you maintain at least 20 percent of your home’s value as equity. Typically, PMI costs somewhere between 0.5 and 5 percent annually based on the original loan amount. If you originally financed $125,000 and have a PMI rate of 1 percent, your PMI payment would be $1,250 a year, or about $104.17 a month.

Getting rid of PMI can make refinancing a smarter choice even if you can’t reduce your interest rate by a full 1 percent.

Watch Out for Fees

If you decide to refinance, you are essentially applying for a new mortgage. As a result, you are going to encounter a variety of fees you’ll need to pay.

For example, lender origination fees can cross the $1,000 mark. While you can usually wrap these up into your mortgage, it will impact your monthly payment and the amount of interest that accrues.

There are also numerous third-party fees when you get a mortgage. You might have to pay for an appraisal out of pocket as lenders rarely allow that cost to get rolled into the loan. Lender title insurance fees can also get quite high, at times nearing $1,500. Escrow fees can be several hundred dollars, and the assignment recording fee can be a few hundred dollars more.

All of these fees add up, hence why experts usually only recommend refinancing if you get an interest rate that is at least 1 percent lower than your existing one. That way, what you save in interest usually outweighs the impact of these costs.

Payment Considerations

If you refinance your current mortgage into a longer term, either by starting the 30- or 15-year clock over or by flipping from a 15-year to a 30-year loan, you could end up with lower monthly payments. For homeowners who are struggling to make their current payment, this could provide some level of relief, as long as you don’t lose any savings through higher interest rates or lender fees.

Similarly, if you have equity you can tap, a cash-refinance loan could allow you to consolidate other higher interest debts. This is another path that can lower your total outgoing payments, which may make it easier to manage your budget.

Ultimately, whether now is the right time for you to refinance depends on your situation. Examine your interest rate, check your credit score, and see if you have PMI you could eliminate. If you have equity, you can also explore debt consolidation through a cash-out refinance to see if that improves your situation. Until you take a look at the entire picture, you can’t be sure whether refinancing is a smart move, so do a little research and decide from there.

Have you recently refinanced your home? Are you thinking about refinancing now? Tell us why in the comments below.

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When to Refinance a 15 Year Mortgage to a 30 Year Mortgage

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Refinancing your mortgage can provide you with a range of benefits. If you manage to score a lower interest rate and aim for a similar term, saving thousands of dollars over the life of your loan could be possible, depending on your existing principle.

The decision to refinance a 15-year mortgage to a 30-year mortgage usually isn’t about financial gain. Typically, 15-year mortgages have better interest rates. Plus, a 30-year mortgage, at a minimum, doubles your repayment term, so you are almost guaranteed to spend more in interest before you pay it off.

However, that doesn’t mean refinancing to a 30-year mortgage is always a bad idea. If you are trying to decide what is right for you, here are some points to consider.

Lower Monthly Payments

When you extend the length of the repayment timeline, your monthly payments are typically lower. For example, if you refinance $200,000 in principle over 30 years with a 4 percent interest rate, your monthly payment would be around $955. That same amount and interest rate on a 15-year loan would have a monthly payment of $1,479. That’s a difference of $524 a month.

Even if the 30-year loan came with a 5 percent interest rate, the payment on a $200,000 mortgage would be $1,074. That’s still $405 less than a 15-year loan for the same amount at 4 percent.

If you are struggling to make the larger payments associated with a 15-year loan, refinancing to a 30-year term could relieve some of the burden. Your monthly payments could be dramatically smaller, suggesting the interest rate you qualify for is similar to your existing 15-year loan.

Higher Total Cost

While your monthly payment on a 30-year loan would be smaller, the total cost is significantly higher. Using the same $200,000 mortgage as an example, having a 15-year loan at 4 percent interest, the total you would pay over the life of the loan is $266,288.

In comparison, a 30-year loan with the same interest rate runs $343,739 over the life of the loan. You’d pay $77,451 more using this approach than sticking with a 15-year mortgage.

A 30-year loan with the 5 percent interest rate is even worse, costing you $386,510 over the life of the mortgage. That means this 30-year loan costs you $120,222 more in the end, suggesting you stick to the original payment schedule.

Other Factors

There may be other factors that impact how much refinancing could benefit you. For example, if your current loan has PMI, but you now have at least 20 percent in equity, a refinance could allow you to rid yourself of that extra cost. This applies whether you refinance into a new 15- or 30-year loan.

If your current 15-year mortgage monthly payments are only unaffordable because of PMI, refinancing into a new 15-year loan could allow you to experience a reduced payment without the drawbacks of an extended term, suggesting you can get the same interest rate.

Additionally, if you are in a 15-year adjustable rate mortgage, refinancing could allow you to get a fixed interest rate instead. While switching to a fixed rate means you wouldn’t automatically benefit if interest rates fall, it also keeps your interest rate from climbing. This approach provides a level of stability that makes it easier to budget for your payment. You know exactly what you need to pay and when which is often better for budgeting.

When to Refinance a 15-Year Mortgage to a 30-Year Mortgage

Ultimately, whether refinancing into a longer term is a smart move depends on your unique situation. In most cases, refinancing to a 30-year mortgage means a lower monthly payment but practically guarantees that you will pay more in interest over the life of your loan.

However, if you choose a mortgage that does not come with a prepayment penalty, you can offset some of the difference if your financial situation improves. For example, you can make extra payments toward the principle when you have the opportunity, reducing the amount of interest you’ll pay over the remainder of the loan.

Similarly, if freeing up some money each month means you can avoid or pay down credit card debt (which usually comes with much higher interest rates compared to mortgages), you might come out financially ahead overall. This could apply even if refinancing into a 30-year mortgage means having to take on a higher interest rate than you had with your 15-year loan, suggesting that the new mortgage interest rate is lower than what you have on your credit cards.

As of April 2019, the average interest rate on a 30-year fixed mortgage was about 4.3 percent. In comparison, the average credit card APR is about 17.5 percent. That’s a 13.2 percent difference.

Deciding When to Refinance Your Mortgage

If you are trying to decide, take a look at your entire financial picture first and foremost. Examine all of your current interest rates and determine if you could pay off high-interest debt faster if your refinance. It may also be wise to craft two versions of your budget, one reflecting your current situation and one based on your possible mortgage payment if you refinance, to give you a better idea of how your financial life would compare.

In the end, the choice is yours. But, by using that approach, you can better assess the pros and cons based on your unique situation.

Have you ever refinanced a 15-year mortgage to a 30-mortgage? What about the other way around? Tell us why in the comments below.

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Spring Cleaning Decisions: Keep It Or Throw It Away?

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I spent Christmas visiting my parents. When I am at my parents’ home, I am always amazed that nothing is ever out of place. I can walk into the house and know exactly what I will see and where it will be. I know what’s in every drawer and every closet. If they’ve purchased something, it will be obvious immediately. Mum thrives on order. She rarely seemed to question whether to throw something away or keep it.

The same was true of our home growing up. Even now, almost 20 years since my parents sold my childhood home, I still can picture all of the furniture and the contents of every drawer, cupboard, closet, and attic. Even the garage was always properly arranged. My parents knew what to keep and they knew what to donate to charity. If an item was no longer in use, it was no longer deemed useful and removed from the home, unless I salvaged it as a memento of my youth.

The things I saved are not necessarily things that I would ever use. Some I saved purely for sentimental reasons. I still have an old sweater that my Dad wore in the early 1970s and a shirt he wore about the same time. When I was 4 years old, my dad wore this sweater whenever he worked in the yard. Although I’ll never be able to wear the sweater because I’m much bigger than my Dad, but I’ll always feel a connection to him just because I have it.

Throw It Away or Keep It?

Knowing what to keep and what to throw away or donate or sell can be a difficult assessment. This past week, I decided to re-organize my office. More specifically, I removed all of the furniture and used it to update my wife’s office. In doing so, I had to sort through a lot of the assorted knick-knacks and collections that I have amassed over the years, but which my wife really does not want in her office.

Some of the items I realized I had no basis for keeping as they were long past having any practical utility (a cracked coffee cup that I used in the early 1980s) or which had no identifiable nostalgic association for me (a telescope that I still do not know how I acquired). Those things I eliminated. Other things (a toy pistol that I got as a souvenir during a trip to Disney World in 1976) I kept because, like my Dad’s sweater, they are evocative of memories that I am not willing to lose.

My Annual Spring Cleaning

Every year at this time, I require my sons to do a full cleaning of their respective bedrooms. Of course, they clean their respective rooms regularly, but a full cleaning requires them to try on all of their clothes and look at every item, and then to decide whether it is something that they really need to keep. I don’t require them to eliminate anything (other than broken items which could injure someone if used) but I remind them that whatever they do not eliminate, they will have to constantly clean around or organize throughout the year.

One son embraces the annual clean up and eliminates a significant percentage of the contents of his room. Clothing that won’t fit, books that he will no longer read, games that he has outgrown and not played in years all go into his “yard sale area” (a portion of our garage in which I let him store anything he wants to sell at our community yard sale).

Additional Benefits of Decluttering

By getting rid of the clutter in our homes, we avoid the need for extra storage, whether that means bookcases, shelving, blanket chests or cardboard boxes. We also save effort because the less we have, the easier it is to know where everything can be found. Knowing what we need to keep, and being willing to part with what we do not need, is not always easy, but the simplification of our lives that comes from parting with the unnecessary can make life much easier. That, of course, allows us to spend more time doing things that we find more meaningful than dealing with all of our accumulated “stuff.”

How do you decide what you need and what you do not need? Do you sell what you do not need on eBay or in yard sales? Do you donate your unwanted things to charity or simply toss your old things into the trash? As the new year begins, let us know how you deal with the things you have gathered in years past.

Keep it or throw it away? How do you decide?

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Follow These Steps to Pay Off Your House Early

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pay off house earlyNearly 27 million Americans own their home outright and are free of the challenging financial burden of paying a mortgage. And, many people want to join their ranks. A 15- or 30-year loan doesn’t mean you have to take that long to repay the money. Unless the early repayment penalties are incredibly severe, paying off your house faster can free up your budget dramatically. If you want to pay off your house early, follow these steps.

1. Contact Your Lender

You don’t have to tell your lender that you want to pay off your house faster than originally planned.  However, you do still need to speak with them. Some mortgage companies have specific rules about extra payments, or they may charge borrowers prepayment penalties. These penalties effectively punish you financially to make up for the interest your account won’t earn.

By reaching out, you can learn about any rules associated with your loan that may hurt your goal of paying off your house early. Plus, you can find out how you need to submit extra payments to make sure they apply to the principal balance and don’t just reduce your next monthly payment.

2. Set Up Biweekly Mortgage Payments

One of the easiest options for accelerating your mortgage repayment is to schedule biweekly mortgage payments. All you need to do is take your mortgage payment, divide it by two, and then schedule that amount to pay every two weeks.

Over a year, you end up making 26 half-payments. Not only does this add one full payment each year (13 full payments instead of 12), but it can also help you save on interest if it compounds daily.

By using biweekly payments, you could save yourself thousands of dollars. Plus, you could cut years off of the length of your loan.

For example, if you have a $200,000 30-year mortgage with a 5 percent interest rate, your monthly payment would be just under $1,074. Over the 30-year term, you’d repay the principal plus over $186,500 in interest.

However, if you make biweekly payments (about $537 every two weeks), you’d pay just shy of $151,000 in interest. That’s a savings of about $35,500. Plus, you’d shave about five years off of the loan repayment time, making you mortgage-free in around 25 years instead of 30.

3. Put All Bonuses, Raises, and Extra Cash Toward Your Mortgage

If you get bonuses, commissions, or raises at work, consider funneling that extra money toward your mortgage. While the amount you send may vary, every additional principal payment helps you pay off your mortgage faster.

For example, if your extra income is the equivalent of one extra monthly payment every three months, and you put that toward your mortgage each quarter, you can save a ton in interest and cut your total repayment time by more than half. Using the same example as above, that extra $1,074 each quarter saves you about $86,000 in interest. Plus, you’d have your $200,000 mortgage paid off in less than 13 years.

Any time you can send an extra $10, $100, or $1,000 toward your mortgage without creating a financial hardship, consider doing it. Even small amounts add up fast.

If you can only send an extra $10 a month to your mortgage, that still saves you $4,575 in interest over the course of the loan (based on the $200,000 mortgage example). It even shortens the repayment timeline by 7 months. Most people can find an extra $10 each month by doing something small, like avoiding two lattes from a coffee shop or bringing lunch to work instead of buying fast food once or twice a month.

Make the extra payment $100 a month instead of $10, and you will avoid $36,825 in interest and shorten your mortgage by 5 years. While this may require more adjustments to your budget, it can be worth the effort.

You Can Pay Off Your House Early

By following the tips above, you can pay off your house early. And the best part is, it doesn’t require much effort on your part. With a little bit of planning, you can save a ton in interest and pay your mortgage off fast, allowing you to eliminate this monthly payment from your budget as quickly as possible.

Are you striving to pay your house off early? Share your approach in the comments below.

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21 Reasons Dave Ramsey Sucks at Giving Credit Score Advice

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There are huge disadvantages of having no credit score. I actually know this better than most. After living over ten years in Japan, I came back to the US naively assuming that the credit history I had built over there would transfer back to the US. That wasn’t the case and I found myself having to deal with numerous situations without a credit score. From my personal experience of having to deal with all the negatives that come with having no credit score, as well as knowing a number of others who experienced a similar situation to me when they returned, I can say with conviction that Dave Ramsey gives horrible credit score advice.

For those unfamiliar, Dave Ramsey refers to a credit score as the “I-Love-Debt Score” and makes the statement that “the only way to have a good credit score is to go into debt, stay in debt, and continually pay your accounts perfectly — without adding too much debt or paying too much off. In other words, stay in debt for as long as you can.” This is patently false as I currently have no debt whatsoever and yet have a good credit score. Others do too.

He then advises that since you are working to become debt free, once you reach that goal you “…don’t need a credit score, anyway, since you don’t plan on using credit!” While this might sound nice, I can attest that even when you are debt free, a good credit score comes in extremely handy. I would even argue that having one is essential if you want to truly be financially savvy since it can save you a lot of money. If you care about getting the most out of your money, a credit score, whether we like it or not, is important to have.

While you may have heard some of the below arguments before regarding why a credit score can be important, my guess is that some of my arguments you may never have considered before. Below are 21 reasons that it’s important to keep a good credit score even if you’re debt free (and why Dave Ramsey sucks at giving credit score advice).

Wasted Time

This one is huge and one that I rarely see mentioned. I can’t over emphasize this point enough, and I would argue for this reason alone, you want to keep a good credit score. Not having one will mean that you will have to spend a lot more time when it comes to numerous financial situations, including any of the ones mentioned below. If you believe that your time is worth something as I do, wasted time can be a huge cost. Even when you are able to get what you want, you usually have to spend a lot more time explaining why you don’t have a credit score even though you don’t have any debt. I had to spend countless extra hours, many being extremely frustrating, sorting out my financial situation which should have been straight forward and simple all because I had no credit history.

Difficulties Even When Successful

Another problem with having no credit score is that even when you successfully get what you want, it’s much more difficult to get it than if you had a good credit score. Not having a credit score often means going through several layers of management until you can reach someone who will approve what you need. The fact is that for most entry-level employees, if anything isn’t exactly correct, they can’t approve it. That means that people who don’t have credit scores have to work much harder to get things than others that have a good credit score can get without any hassles.

Poor Customer Service

This is another aspect of not having a credit score that is often not mentioned, but the reality is that if you have no credit score, you don’t get treated nearly as well in many situations as you do when you have a good credit. When institutions look up my credit these days, they always seem to come back with a smile and an attitude that they are willing to do anything they can to help me. When I had no credit score, they always came back with concerned looks and a demeanor telling me that it was going to be difficult to help me even if they did the best that they could. The fact is, having a good score means that you will get better treatment from anyone who looks it up.

Lack of Financial Flexibility

Having a good credit score gives you a lot of financial flexibility that isn’t available for those with no credit score. When you have a good credit score, there are many financial institutions that want to work with you. That’s not the case when you have no credit score. Having a quality credit score means that you can get a much better deal when it come to virtually any financial transaction than you could get with no credit score at all. When the unexpected happens and you need to get funds for something that you had never anticipated, you simply have more flexibility in getting them than you do without a score to your name. This include the flexibility of financially helping out others if you choose to do so.

Increase Large Transaction Risks

One of the things that I immediately realized when I was still trying to get a credit card (which I was having trouble doing because I didn’t have a credit score) was the additional risk that came when making large purchases. I have always put the purchase of my airline tickets on credit cards because years ago I had a ticket on an airline that suddenly went bankrupt. Since I had made the purchase with a credit card, the credit card company refunded the amount back to me since I never received the service I had paid for. Had I not paid with a credit card in that instance, I would have simply lost the money. I had to make a number of large purchases upon arriving back in the US and although I was able to make them in other ways, I felt a bit uneasy knowing that if things went wrong, I really had no protection simply due to the lack of a credit rating.

Emergency Cash

Having lived through the Great Hanshin Earthquake (along with a number of smaller natural disasters), I know the importance of having access to emergency funds. When these disasters happen, it’s often impossible to get access to money that you have in your bank account (in the case of the Hanshin Earthquake, it was over 2 weeks before I had access to those funds). It helps to have cash in the days immediately after the disaster when many of the electronic transaction systems are down, but it also helps to have a credit card. During that time, my credit card was a lifesaver in securing a hotel room and other needs when I needed to spend thousands of dollars to get out of the city and find other lodging, but still didn’t have access to my bank accounts. Living in an area of the US where I knew a similar disaster could take place, I found that I needed to keep a lot more cash on hand in case of an emergency. I ended up losing interest on the cash I took out of the bank account plus there was the risk that it might get stolen, or in an emergency I wouldn’t be able to get to where I kept it in my house. Even with a large amount of cash on hand, I still felt my financial preparation was far from adequate had a true emergency happened. That is not the case now that I have good credit and credit cards.

Debit Cards Have Drawbacks

It’s often argued that there really is no need to have credit cards if you have a debit card, but in my experience, there are some definite drawbacks to this argument. I had a friend who had his debit card stolen and his account compromised. While he eventually got all the money that was taken out of his account back, his account ended up being frozen for a few weeks while an investigation took place. During this time, he had no access to any of his banking funds. As mentioned above, in an emergency you might need to access more funds than are in your debit card account with no way to transfer additional funds to it. It also doesn’t cover you with large transactions like an airline ticket refund if an airline goes bankrupt.

Difficulty Getting Security Clearance

One of my friends who came back after living overseas for a number of years landed a great job, but the job required security clearance. The lack of a credit score turned out to be a major stumbling block for him to get his clearance. He eventually did, but it took a lot of time and effort since his lack of one sent up a red flag, and even ended up meaning much more scrutiny in other areas of his life as well to get the clearance. Again, if you consider time and aggravation as a cost, then there is a definite one when you don’t have a score to your name.

Difficulty Getting an Apartment

I remember talking with one apartment manager when returning to the US that told me as soon as I mentioned that I didn’t have a credit score that I wouldn’t get approved for an apartment in his complex. He explained that there was high demand for the apartments so it simply wasn’t worth the risk to management even though I had a good explanation as to why I didn’t have one. While I did eventually find an apartment, the lack of a score caused some type of issue at each complex I looked at, making the entire process much more difficult than it ever should have been, and definitely much more so than if mine had been good.

The Possibility of Divorce

Nobody ever thinks they are going to get divorced when they first get married, but the truth of the matter is a high percentage of couples do. If you go into a divorce without a credit score, this can cause a number of issue both during and after. When people believe that they will never have to take out another loan when they become debt free, they are probably at a point where they never think they will get divorced either. The problem with divorce is that it can be an extremely expensive process and can quickly wipe out any savings and emergency funds that you might have had. Once divorced, financial circumstances can greatly change to where loans you thought you would once never need, might be needed to bridge gaps until you can create a new budget for your new reality. Hiring lawyers, finding a new job, getting a new place to live all become more difficult without a score in an already stressful time.

Difficulty Getting Loan Approval

If there is ever a situation when you need a loan, not having a credit score will make it many times more difficult to secure it than if you have a good credit. The thing is, even if you anticipate never needing to get another loan again, circumstances change and life could place a wrench into your best laid plans. Even if you are debt free at a moment and don’t anticipate ever needing a loan, that can quickly change if you unexpectedly lose a job and are unable to find a new one as quickly as you hoped. Life throws curve balls from time to time and if you are thrown one without a good credit to your name, recovering from it can be a lot more difficult than if you had it.

A More Expensive Mortgage

If you need to take out a mortgage, you will end up paying much more if you don’t have a credit score. The problem is that no credit score is equivalent to a bad credit score to most lending institutions. If they have no records that you can pay off your debts, they assume the worst and assume that you can’t. This means no score is the same as having a terrible score in the eyes of lending institutions. While you still may be able to secure a loan (and you may not), you will end up having to pay a larger interest rate to do it which can mean paying tens of thousands of dollars more over the lifetime of the loan.

Difficulty Securing Utility Services

When I needed to get utilities in my name after returning from Japan, I couldn’t just call and have them turned on like I expected. Several required me to pay a deposit in order to put the service in my name since I had no credit history of paying these bills in the past. It makes for an extra step in the process, it takes more time to get the service and you lose the interest that you could have earned from the money that you must give as a deposit.

Trouble Getting a Cell Phone Contract

Upon my return to the US, I was actually denied the first cell phone contract I tried to get due to no credit history. I was eventually able to secure one, but I ended up having to pay a deposit to do so much like I had to when it came to the utilities. While the deposit wasn’t a huge amount, I did lose the interest that I could have been earning on it. Far more frustrating was the extra time and headaches (and the costs associated with them) caused by not having a score that would have never come into play if I had a good one.

Possible Negative Effect on Job Opportunities

One thing that many people fail to realize is that as many as 70% of companies will check the credit history of a candidate for a job before they hire. With so many qualified people in the job market these days, it’s often the little things that end up determining who gets hired. A lack of a credit score compared with someone with the same qualifications that has a stellar one could be the difference in who gets the job. Similar small details can make the difference on promotions within certain corporations, especially for sensitive positions. If you lose a job or are passed over a promotion, that can mean thousands of dollars in lost income.

Pay More for a Car

There have been a number of surveys over the years that show that some car dealers have a tiered system on how much they mark-up a car depending on the credit score of the individual buying the car. Those who are deemed the least credit worthy, which would include those with no credit score, can be charged as much as 3.5% more for a car than those with top scores. This has nothing to do with the interest rate on a car loan, but the actual amount that is charged for the car. That means that even if you don’t need a car loan, you can potentially end up paying more for a car when you don’t have a score.

Another way that lack of a score can cost you more, as pointed out by Anni in the comments, is that you can often get dealer discounts by financing a car worth thousands of dollars, then pay off the car loan soon after. I know that this situation arises because I did it once for one of my car purchases. I had the cash to purchase the car in full, but there was a deal to save $2000 through the credit section of the car maker if I agreed to finance the car, so it made good financial sense to do so. I took the $2000 discount and the loan, but as soon as the $2000 credit came through, I paid off the entire loan. The key here is that to take advantage of these car maker financing discounts, you have to qualify for them, and if you don’t have a credit score, you’re not likely to do so.

A More Expensive Car Loan

If you do need to take out a car loan, you will end up paying thousands of dollars more in interest charges with no score than you would with a good one. Interest rates for those with good credit are usually in the low single digits, while those without will pay double-digit interest rates on the exact same loan. While you may not think you will ever need to take out a loan again, something that you never expected like a divorce or a lost job could result in you needing to get one.

More Expensive Insurance

The insurance industry is in the business of assessing risk. They look at a wide variety of things to determine the risks of the individuals and families that use their services. One of the things that they look at is your credit score. Having one that is poor makes you a higher risk than an individual who has one that is high. The problem is that having no score doesn’t allow them to determine whether you are a higher or lower risk, so they will always make the assumption that you are a higher risk when the risk is unknown. What that all means is that if you have no score, you will end up paying more for life insurance, car insurance and homeowners insurance than you would if you hade a good score.

Difficulty Getting a Credit Card

One of the things that Dave Ramsey says is that you don’t want credit cards, but this is only true if you can’t control yourself. The truth is that credit cards are only a disadvantage if you don’t pay them off fully each month. Once you are out of debt and have built an emergency fund so that there is no need to put expenses on your credit card that you can’t pay off in full each month, credit cards are actually a financially savvy tool to use. They give you insurance in many transactions you may not have otherwise, they may provide additional insurance for you with certain purchases such as airline tickets and car rentals, and they can even pay you cash back for purchases you would otherwise make. The problem is that if you ever find yourself in a situation where you need a credit card, but you don’t have a score, it can be extremely difficult to get one. Even when you do, you can expect to have a very low credit limit that will take years to grow to where it can be useful for larger purchases. I know because the only credit card I could qualify for when I returned was with a bank that I had been with for over 20 years, and they still would only give me one with a $500 limit to start.

Difficulty Getting School Loans

If you ever decide to go back to school, having no score can make it difficult to secure loans. Again, many assume that they will never need to go to school again, but further education might be the only way to secure a job if you happened to lose the one you have. If you can’t qualify for student loans from your school or federally funded loans to pay for your education, you will have to turn to private loans which have interest rates much higher and can end up costing you thousands of dollar more for the same education.

Difficulty Getting Business Loans

If at any time you decide that you would like to start a business, not having a score can hurt you financially in trying to secure a loan for the business. When banks give business loans to individuals, they want to see that they have a track record of paying out the other loans that they have taken out. With no score to your name, that record doesn’t exist and you become a greater risk to give a business loan to. With no score, you might not be able to qualify for one at all without putting up a large amount of collateral, and even if you do, you are likely to pay a higher interest rate on the loan than if you had good credit. You will definitely have a much more difficult time securing the loan which can mean many more hours (if not days) trying to get the money you need.

Dave Ramsey gives lousy credit score advice because he fails to take into account that life can get messy in ways that we never anticipate. In addition, he doesn’t take into account the costs associated with the extra time and aggravations that can come with not having a score. If it were true that you needed to always remain in debt in order to have a good credit score as he states, I might give him some slack, but the fact is that this statement is patently false, I know because I’m currently debt free with a good score. While I’m certainly not saying that all the advice that he gives is bad, the advice he gives regarding credit scores sucks.

Finally, if you don’t like my analysis and want to see what Dave Ramsey has to say, think about getting a copy of his book The Total Money Makeover. The book is an combination of educational handbook, inspirational coaching guide and self study manual. It has sold something like 5 million copies – so its a good example of his best work.