Experts Agree Debt Is a Double-Edged Sword

To use credit, or not to use credit? That is the question.

The answer really depends on whom you ask. Even the experts don’t always agree.

Though debt generally has a bad reputation, it can actually be a very valuable asset, says author and AARP Bulletin columnist Jane Bryant Quinn, based in New York.

Meanwhile, radio talk show host Dave Ramsey will tell you, “Debt is dumb, and cash is king.”

Ditching credit cards and going strictly cash might seem like a great idea, but going without credit for too long would leave you without a credit score, destroying any track record of financial responsibility. That would hurt your chances for insurance, apartment rental or getting a mortgage.

“If you have no debt at all, you have no credit score,” says Quinn. “While a low credit score is a strike against you, if you lack a credit card, your score is zero, and you essentially do not exist.”

Ramsey, a syndicated radio show host based in Nashville, Tenn., who prides himself on avoiding all debt and having a zero credit score, says there’s a difference between having an indeterminable credit score and a low credit score.

“Undeterminable means you’ve had no interaction with debt or that you’ve been debt-free for so long they don’t have enough data on your interaction with debt to give you a score,” he says. “Since you have no debt, you probably have money.”

When it comes to mortgages, Ramsey says there are still lenders who will provide manual underwriting services, which do not rely as heavily on credit scores for loan approval. Going this route might be a little more difficult, but it’s far from impossible, he says. The same is true for renting an apartment.

“The key is to have lots of documentation,” he says. “Show verification of your income for the (past) 12 to 24 months, and a steady payment history of at least four regular monthly expenses. These include things like past rent, utility bills … and insurance payments.

“Although it’s common these days for insurance companies to use credit scores in setting premiums, there are still those who don’t and are willing to insure those who fall off the FICO radar.”

Maxine Sweet, vice president for public education at credit-rating company Experian in Costa Mesa, Calif., says consumers will not have a credit score unless they have a credit report, which serves as a credit reference. A score is simply a reflection of what’s in the credit report.

“It’s just as important to have a credit reference as it is to have academic credentials, job or work references and character references,” Sweet says. “People who don’t have credit references and can’t be scored don’t have access to traditional financial services, and have to use payday loans, title loans, and must pay a deposit when applying for utilities, and have difficulty getting a cellphone. People who have established credit take for granted all the services we receive and don’t realize how many are blocked from access to those services.”

Someone who has no debt and does not use any type of credit could become “unscorable” as soon as six months after closing credit accounts or lenders stop reporting an inactive account to credit bureaus under the FICO credit-scoring system, Sweet says, adding that people still have a credit score while paying off any debt.

Sweet says that about 3.8 percent of the 220 million consumers on file in the credit-reporting database are unscorable, which means they applied for or established credit at some point and then fell off the credit-scoring radar screen.

Quinn says there is a difference between using credit and carrying debt. She recommends consumers carry one or two credit cards, use them two or three times a month for everyday items and pay them off at the end of the month.

“When you get to the wonderful place where you are out of debt, use only one or two cards and pay them off monthly,” Quinn says.

There are only a couple of instances where Sweet says someone should avoid credit cards altogether.

“If you’re one of those people who absolutely can’t resist the temptation to overspend, you’re better off not having credit cards, even if it means having a difficult time buying a house or car,” she says.

“The other instance is if you are wealthy enough and are absolutely sure you won’t need credit services and can pay cash for everything; but otherwise, it’s always smart to have a credit card as an emergency fall-back.”