Yahoo Finance Dave Ramsey Says This Is the Best Way To Improve Your Credit Score
Most financial advice you hear about credit scores is how to improve it or raise it, so you can be better positioned to get good rates on things like home loans, car loans and other situations.
I’m a Financial Advisor: Here’s the No. 1 Piece of Advice I Would Give My Younger Self
Check Out: Pocket an Extra $400 a Month With This Simple Hack
Finance expert Dave Ramsey has a different approach to improving your credit score: Do everything you can to make your credit score non-existent.
What now? That might sound like some startling advice, but he explained further.
Sponsored: Get Paid To Scroll. Start Now
Live Outside of a Credit Score
Ramsey believes that a life lived without credit — and thus debt — is the best way to live, because then you are always living within your means. He recommended you pay off your debt, avoid adding new debt, which includes any kind of loans, and essentially let your credit score “dwindle until it’s completely extinct.”
He swears that you can live quite well without a credit score and can even buy things like a home without one.
‘Shark Tank’ Star Barbara Corcoran: Why I Live in a Mobile Home (and Why I Paid $1 Million for It)
Understand How Credit Scores Work
Before you ditch it fully, he explained what a credit score is and how it’s determined.
Essentially, your credit score is a three-digit number that communicates to lenders your debt repayment likelihood. High scores are 800 and above. A low score is around 579 or below. This number comes from reports by popular credit agencies, such as FICO and VantageScore, he said.
What Goes Into the Calculation?
Your credit score is comprised of five key things, according to FICO, Ramsey explained:
Payment history — 35%
Amounts owed — 30%
Length of credit history — 15%
New credit — 10%
Credit mix — 10%
Ramsey said that a credit score really is just “a measure of how comfortable you are taking on mountains — and mountains — of debt.”
Yet despite lenders rewarding a higher credit score, Ramsey insisted that a score does not actually reveal how well you handle money. It doesn’t give them a picture into your financial habits, how well you budget or your investing savvy. A credit score is ultimately just a representation of how well you’ve paid back your debts.
Raising Your Score, Traditionally
The actions that lead to credit agencies increasing your credit score include:
Paying your bills on time
Paying off debt
Carrying a balance that’s less than your credit limit
Disputing inaccuracies
However, Ramsey suggested that “all they care about is padding their pockets.” In other words, credit card companies make money on the interest you accrue by carrying a balance. He suggested they’re plenty happy to keep people “stuck in the cycle of debt.”
Skip Credit Altogether
Thus, a return to Ramsey’s thesis: that it’s time to ditch your credit score by not using credit at all. To do this, you first have to pay off any debt you currently have, and then live a “debt-free lifestyle,” he urged. That would mean not taking out loans or using credit cards. Simply put: you would never borrow money. If you did this, your credit score would eventually register as “undeterminable,” which he considers a kind of freedom.
Of course, in Ramsey’s ideal picture, the reason you stop needing to use credit or have a credit score is that you’ve built up your savings and your retirement accounts, are investing wisely and living well on your income.
How To Buy a Home Without a Credit Score
Ramsey knows that people’s first worry will be how to buy a new home without a credit score. Not to worry, he said, you can engage in “manual underwriting” — a process that takes your financial picture into account and looks beyond a credit score.
No longer relying upon credit scores isn’t the only thing you need to do to secure your financial situation, but if you begin to take steps toward doing so, Ramsey suggested you’ll find yourself living a financially stable life.
More From GOBankingRates
This article originally appeared on GOBankingRates.com: Dave Ramsey Says This Is the Best Way To Improve Your Credit Score
