10 Ideas for Living a Life Without Credit or Debt

Every Tuesday is Finance & Family Day at Zen Habits.

My dad and I were talking about his recent financial turnaround, and one of the things he said was that he loves being free of debt.

My dad doesn’t have the best of credit, and he isn’t wealthy. He has a decent income, an old car that seems to run fine and doesn’t belong to a bank, no personal loans or mortgage (he rents), no credit card debt.

Being free of the burden of debt is liberating, he says. Of course, with his credit history, he can’t get a car loan on his own, or a mortgage, so life isn’t perfect. But I advised him: forget about borrowing money. Stay debt-free and frugal, and you can bank your income and live a credit-free life.

That’s not the life for many people, of course, because as with anything, there are trade-offs. Sure, you can live without the burden of debt, but it’s harder to travel without a credit card. It’s also hard for many people to rent for most of their lives, instead of getting a mortgage. And in some areas it’s hard to even rent without a good credit history (it’s not an issue where I live).

However, for my dad, who lives a pretty simple life these days, it could work.

Here are some ideas for living a credit-free life, if that appeals to you (if it doesn’t, skip this article and don’t start a debate in the comments!).

Save an emergency fund. Many people use their credit cards as a sort of emergency fund — if there’s an unexpected expense, the card comes out to the rescue. Instead, use the money you aren’t paying towards debt to build up a healthy emergency fund, keeping you out of debt when something unexpected comes up. Living without credit can be risky, but having a strong emergency fund (aim for $1,000 initially, then build it up to 3-6 months or more of expenses).
Save for goals. Once you’ve got the emergency fund adequately covered, you can start saving for other things. Set savings goals for yourself: do you want to travel, or buy a car, or save for college, or renovate your home, or buy a yacht? Decide on your highest-priority goals, and set a dollar figure. Now save towards those goals. Without debt, it should be fairly easy.
Get a debit card. If you need to use a credit card in certain situations, such as buying something online, often you can use a debit or check card instead, if it has the name of a major credit company such as Visa or Mastercard. I went several years without a credit card, but using a Mastercard debit card, and had no problems at all. It actually worked every place you would need a credit card, but I wasn’t buying stuff on credit — it was debited straight from my checking account, meaning I would need to have the money first before purchasing anything.
Earn interest instead of paying it. The problem with debt or credit is that you waste money paying interest. It eats away at your finances. Instead, make your money work for you by investing it. With the magic of compound interest, your investments will grow over time, meaning that money you would have been paying toward interest is now earning interest instead and multiplying. That’s good math.
Buy a car on cash. For those who have been buying vehicles with auto loans all their lives, it may seem impossible to buy a car on cash. But it’s very possible, and many people do it. My grandparents, for example, always buy their cars with cash (and always have, except for their first car 50 years ago). So instead of making loan payments, and paying double the price of the car or more over the term of the loan, they make savings deposits, and end up with the amount it costs to buy two cars in their bank account over the course of five years. This is something I’m trying to do myself — I’m going to use my current car as long as possible, save the amount that I’m now paying for my loan every month (it’s almost paid off now), and then buy my next car in cash. It’ll be a used car, but it’ll be all mine.
Invest for retirement. This is just common sense, no matter what your credit or debt situation, but without debt payments, it makes sense to accelerate your retirement investments (as one of your savings goals). Then you can retire early, thanks to not being in debt.
Travel without credit. It’s a common belief that you can’t rent a hotel room or a car without a credit card. This is false. It’s easy to rent a hotel room, for example, with a cash deposit. You just need to call around to find the right hotels. The same goes with car rentals (see this article for more evidence of this). And if you want to find a cash-only car rental company, see this listing.
Rent without credit. While no credit checks are done for apartment or house rentals on Guam, where I live, in many places a credit check is standard practice. However, there are options you can use to rent without a credit card or a credit check, including a larger deposit. See this article for more options.
Buy a home without credit. Now, if buying a car on cash seemed impossible, surely buying a home on cash just cannot be done. But it can, and people have done it. I’m even considering doing it myself. First of all, in many cases, renting a home instead of buying (and investing the savings) is smarter financially. If you can invest the difference and let that grow over time, you can buy a home on cash. And at the same time, you won’t pay triple the value of the home (as most people do over the course of a home mortgage, due to interest). This item actually deserves a full post on its own, as it requires a longer explanation, but I don’t feel qualified to write it. Suffice it to say that it can be done, and has been done.
Use PayPal online. I’m not a big fan of online shopping — well, actually I love to shop online, but I think it’s bad for your finances, only because it’s so easy to do. You end up buying stuff online that you might have resisted in the real world. But if you must buy something online, and don’t want to get a credit card (or a debit card), in many cases it can be done with PayPal — meaning that you have to have the money before you make the purchase. I’ve heard of people who don’t like PayPal, but I haven’t had a problem so far.

See also:

10 Ideas for Living a Life Without Credit or Debt

Every Tuesday is Finance & Family Day at Zen Habits.

My dad and I were talking about his recent financial turnaround, and one of the things he said was that he loves being free of debt.

However, for my dad, who lives a pretty simple life these days, it could work.

Here are some ideas for living a credit-free life, if that appeals to you (if it doesn’t, skip this article and don’t start a debate in the comments!).

Save an emergency fund. Many people use their credit cards as a sort of emergency fund — if there’s an unexpected expense, the card comes out to the rescue. Instead, use the money you aren’t paying towards debt to build up a healthy emergency fund, keeping you out of debt when something unexpected comes up. Living without credit can be risky, but having a strong emergency fund (aim for $1,000 initially, then build it up to 3-6 months or more of expenses).
Save for goals. Once you’ve got the emergency fund adequately covered, you can start saving for other things. Set savings goals for yourself: do you want to travel, or buy a car, or save for college, or renovate your home, or buy a yacht? Decide on your highest-priority goals, and set a dollar figure. Now save towards those goals. Without debt, it should be fairly easy.
Get a debit card. If you need to use a credit card in certain situations, such as buying something online, often you can use a debit or check card instead, if it has the name of a major credit company such as Visa or Mastercard. I went several years without a credit card, but using a Mastercard debit card, and had no problems at all. It actually worked every place you would need a credit card, but I wasn’t buying stuff on credit — it was debited straight from my checking account, meaning I would need to have the money first before purchasing anything.
Earn interest instead of paying it. The problem with debt or credit is that you waste money paying interest. It eats away at your finances. Instead, make your money work for you by investing it. With the magic of compound interest, your investments will grow over time, meaning that money you would have been paying toward interest is now earning interest instead and multiplying. That’s good math.
Buy a car on cash. For those who have been buying vehicles with auto loans all their lives, it may seem impossible to buy a car on cash. But it’s very possible, and many people do it. My grandparents, for example, always buy their cars with cash (and always have, except for their first car 50 years ago). So instead of making loan payments, and paying double the price of the car or more over the term of the loan, they make savings deposits, and end up with the amount it costs to buy two cars in their bank account over the course of five years. This is something I’m trying to do myself — I’m going to use my current car as long as possible, save the amount that I’m now paying for my loan every month (it’s almost paid off now), and then buy my next car in cash. It’ll be a used car, but it’ll be all mine.
Invest for retirement. This is just common sense, no matter what your credit or debt situation, but without debt payments, it makes sense to accelerate your retirement investments (as one of your savings goals). Then you can retire early, thanks to not being in debt.
Travel without credit. It’s a common belief that you can’t rent a hotel room or a car without a credit card. This is false. It’s easy to rent a hotel room, for example, with a cash deposit. You just need to call around to find the right hotels. The same goes with car rentals (see this article for more evidence of this). And if you want to find a cash-only car rental company, see this listing.
Rent without credit. While no credit checks are done for apartment or house rentals on Guam, where I live, in many places a credit check is standard practice. However, there are options you can use to rent without a credit card or a credit check, including a larger deposit. See this article for more options.
Buy a home without credit. Now, if buying a car on cash seemed impossible, surely buying a home on cash just cannot be done. But it can, and people have done it. I’m even considering doing it myself. First of all, in many cases, renting a home instead of buying (and investing the savings) is smarter financially. If you can invest the difference and let that grow over time, you can buy a home on cash. And at the same time, you won’t pay triple the value of the home (as most people do over the course of a home mortgage, due to interest). This item actually deserves a full post on its own, as it requires a longer explanation, but I don’t feel qualified to write it. Suffice it to say that it can be done, and has been done.
Use PayPal online. I’m not a big fan of online shopping — well, actually I love to shop online, but I think it’s bad for your finances, only because it’s so easy to do. You end up buying stuff online that you might have resisted in the real world. But if you must buy something online, and don’t want to get a credit card (or a debit card), in many cases it can be done with PayPal — meaning that you have to have the money before you make the purchase. I’ve heard of people who don’t like PayPal, but I haven’t had a problem so far.

See also:

Posted on 14 August 2007 in Finance & Family |
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Comments (38)

Steve Says:

August 14th, 2007, 7:00 am

This is a great list. Being 25, I have yet to get a credit card.

_______________
http://www.TehGamr.com

Rick Says:

August 14th, 2007, 7:29 am

This is a very good article. I am 28 and I also live with out credit cards and debt. It is very liberating. I recommend everyone give it an honest try.

Andrew Terry Says:

August 14th, 2007, 7:34 am

I’m aiming for the same thing, and should be debt free (including mortgage - yaay me!!) early next year.

Something worth noting is that your Paypal account also enables you to create “one-time use” credit card numbers, allowing you a) to make credit card-like payments on sites that don’t accept Paypal and b) obfuscate your real credit card details when shopping on-line.

eli Says:

August 14th, 2007, 7:39 am

Solid advice. I’m 30, and I have only my mortgage, the only sort of ‘constructive’ debt. Yes, one could buy a house on cash, there are people who have done so. My method of saving could be number 11. It’s pretty aggressive in the age of negative income, but it works for me:

I run my 401(k) at 10%
With every paycheck, I calculate 20% of my gross*, and transfer it to savings.
I also transfer the balance of my checking account before my monthly deposit into savings.
Any money made from the sale of used personal items (I sold my old PowerMac, etc) goes right into savings, which I consider completely off-limits.

*in other words, pretending Uncle Sam didn’t take a big chunk of my monthly salary.

I’m just starting out on this plan, but two months in, and I’ve already saved a bunch of cash! It’s also an incentive to watch my spending and to question purchases because the more I don’t spend, the more that goes into that account.

gitsul Says:

August 14th, 2007, 7:45 am

Being virtually debt free is very liberating. We have a mortgage, but then if we rented we’d have monthly rent payments. We have used loans to buy vehicles, but then we work like crazy to pay them off early. It feels good not having to pay the credit card companies each month. And it feels even better paying cash for things and knowing I won’t be getting a bill for that.

LeslieT Says:

August 14th, 2007, 8:45 am

When I bought my first car, I took out a car loan. When the loan was paid off I continued making the same payments into a special account. I used the account for expensive car repairs, but mostly it was the basis for the cash I would need to pay for my next car. It worked fine.

I don’t know why it’s necessary to go through so many hoops, though, to avoid owning credit cards. In my view, there’s nothing wrong with owning a credit card, as long as you pay it off in full every month. I have an Amazon credit card, so I charge lots of stuff on it, but pay up every month, so have no interest costs. In fact, I’m following your rule about earning interest instead of paying interest because every time I’ve spent $1500 on the card, I get a certificate for $25 at Amazon.com. (I like to read, so I can always use an Amazon.com certificate.)

Red Zinnia Says:

August 14th, 2007, 8:51 am

The biggest financial advice I try to teach my kids is to stay out of debt. If you can’t pay cash, you don’t need it.

We are debt free now except for our mortgage, but have carried credit card & medical debt in the past. What a mistake! In my view, debt (especially credit card debt) is almost a form of slavery. It limits your options in the present, and it shackles your future.

~ Lisa

Leo Says:

August 14th, 2007, 8:55 am

@LeslieT: I appreciate your viewpoint, but like I said in the article, I don’t want to start another debate in this comment thread about credit cards. :) These tips are just for people who are interested in the goal of living a debt-free and credit-free lifestyle, which is perfectly legitimate.

Robert Janeczek Says:

August 14th, 2007, 9:05 am

I generally agree with your points, but have serious doubts regarding no-mortgage policy. I will pay twice as much for my apartment as I would have paid in cash, but not having to pay it in cash means that I can invest the money I have. Assuming that I will be able to get more than 4-5%/year from my investments I will gain on my mortgage. Additionally, I expect that value of the apartment will grow within next 30 years, which gives me virtually profit for free.

Carl of PseudoPower Says:

August 14th, 2007, 9:59 am

I have to admit I was a huge fan of spreading credit card cash back programs.

However, I think I may have gone astray. I started noticing people like my sister abuse her credit cards and not pay them fully every month like I do.

I finally see why credit cards make so much money despite me getting tons of money back in cash back, 0% balance transfer, and sign up bonuses.

Hmmm…

Anita Lewis Says:

August 14th, 2007, 10:21 am

I do not necessarily equate debt-free with not using a credit card. I have been debt free most of my life and in my early days, I felt great relief to get into that state.

I have found using the credit card very useful. I have a policy of spending only the money that I have already in the bank and paying it off each month; so I have no interest to pay. I get cash back on the one card I have; so I put everything I can on it. So far it has been a plus for me.

gwinne Says:

August 14th, 2007, 11:27 am

I agree with some of the comments. I use a credit card for almost all purchases over $5 because I *always* pay it off at the end of the month and wind up earning money from cash back awards. (Even considering the couple times I’ve had a late payment fee, I’ve made hundreds of dollars over the years on cash back awards.) I just opened a department store credit card to get 10% off on new furniture. I don’t anticipate ever using the card again. I have a stellar credit report, and the only “debt” I’m in is my mortgage.

Angie Hartford Says:

August 14th, 2007, 12:37 pm

I love the way your first two goals start with the word “save.” How appropriate, on so many levels!

Fees Says:

August 14th, 2007, 12:43 pm

Always great tips. As news events of the past few days have illustrated, living off credit is a terrible idea so it’s time to get debt free! I knew it would come to a head at some point. On behalf of the Merchants Payment Coalition, I wanted to be sure you’re aware that credit card companies like Visa and Mastercard still get you with a hidden fee known as interchange. It costs households over $300 dollars a year. Stores are forced to build the interchange fee into the final cost of the product so people who don’t use credit cards are hurt the most. Just another dirty trick the card companies don’t want you to know about.

C4G Says:

August 14th, 2007, 12:52 pm

You can rent both hotel rooms and cars on debit cards now-a-days, I have done both with my trusty debit card which does not pay any interest on my debit charges…I dunno where you got THAT info from. A debit card is not a credit card. I also have never had a problem with paypal and thier customer service has been outstanding when I call with a question (once I called about a charge I did not recognize because I forgot about a purchase that showed up almost a week later. But they were very helpful in tracing what it was for and when I bought it).

Kim Isaac Says:

August 14th, 2007, 12:53 pm

I enjoyed this post and it is timely for my family. We are in the process of becoming debt free and it is hard. I wish I had started a debt free lifestyle fresh out of college. I bought into the myth that you had to use credit for cars and houses. I follow the steps that you spoke about and my family and I are slowly becoming debt free. I can’t wait for the day when that last check is written to pay that last debt.

Beth Says:

August 14th, 2007, 12:57 pm

Have you ever heard of a Susu? Its where a group of people contribute a fixed amount of money every week and everyweek a member of the group gets the pile of cash, taking turns. I am interested in trying this out, but have no idea how it works or even how to join one. Do you know anything about this?

ethan Says:

August 14th, 2007, 13:07 pm

The advice on not buying a car (maybe) and home (definitely) on credit is bad. I could have bought my last car for cash, but the car company offered me a 4% loan (and, no, I couldn’t have gotten cash back instead). My savings account pays over 5%, FDIC insured. Why would I pay cash for a car when I can keep the money in my savings account and earn enough interest to cover the loan, plus an extra 1%? The same goes for a house: my investments (over the long term) earn far more than a mortgage costs. In both cases, the goods being purchased will outlast the loan, and I’m making more money with greater investment diversity than I would if I paid cash. Of course, I agree with being debt-free: never buy anything under $10,000 on credit, and never have a loan that lasts longer than the good it was used to purchase.

Also, I make over $500 per year on my credit cards (AmEx Blue Cash, Chase Dividends), which pay me well over 1% on my purchases. Of course, I pay the bills in full every month, so that $500 is pure profit for me. And if a card is lost or stolen, my checking account doesn’t get messed up (the banks say they’ll fix it eventually, but it takes time…). Do debit cards do that?

gerryc Says:

August 14th, 2007, 13:24 pm

SuSu -They’ve done that at a number of jobs i’ve worked at. To me they are absurd. 10 people pay $10 every payday. Each pay day a different person gets the $100.00. The ones I’ve seen are for at least $50. per check., sometimes $100.00, so the pot could be $500 or $1000. Put it in the bank, what if someone quits? I don’t get it. Credit union, savings bonds, anything
I will be out of debt by march, 2008. The progess I’ve made is thrilling. I even have a tiny little savings I’ve accumulated so i don’t have to increase the debt during an emergency. It reminds me of the book and movie, Mama’s Bank Account (true story).
As far as the above, I’ve had success with most of them.

C.M.Green Says:

August 14th, 2007, 14:55 pm

I’m 62 and I haven’t had a standard credit card for 15 years. I’ve traveled in Europe, Great Britain and Mexico as well as the U.S. using only a VISA debit card with no problems whatsoever. I’ve rented apartments in Italy, and reserved many hotels abroad via the internet - no problems. There is no reason that I can see for having a standard credit card, paying interest and fees. A debit VISA lets you pay as you go, and you remain debt-free. I also rent, and have moved 3 times in the past 7 years because of work. My lack of credit history has never created a problem - I’m an ideal tenant, always pay my rent on time and leave for the next place with sterling references from the last landlord. I maintain a healthy cash reserve in a high interest savings account and invest the rest in a retirement plan. Landlords are looking for cash in the bank (in case of job loss) and good references from other property owners. The corporate consumer engine wants you to buy into the credit merry-go-round by convincing you that you have to have one or you can’t function in today’s society. It’s just not true. What is true: Cash is King.

Michel Says:

August 14th, 2007, 22:41 pm

“It’s a common belief that you can’t rent a hotel room or a car without a credit card. This is false. It’s easy to rent a hotel room, for example, with a cash deposit”.

Don’t they take cash?

Abel Says:

August 14th, 2007, 23:59 pm

I can tell you the feeling of being debt free is simply FANTASTIC (I don’t care if you argue that debts are good, sometimes). You know that the financial burden is not there. You are a free man!

Having a credit card and not paying it is the culprit. Also, it’s our greediness - to buy things more than we need. I used to crave for the latest models in everything. But having gone through the years, I find that simple living is the best. Over at Zen Habits, you can find tons of tips how to achieve this.

Patrick Allmond Says:

August 15th, 2007, 8:25 am

Idea #11 - Don’t keep credit cards on you. I don’t keep any credit cards on me at all. They are all in a drawer in my office.

As far as the hotel comment - you an do with a debit card without a problem. Just be prepared for the entire amount of your stay + extra to be put on hold for a couple of days. They will do an authorization every couple of days to make sure that money is still there. Once they push through the final charge your authorization will drop off.

Aimee Says:

August 15th, 2007, 12:52 pm

well done! we are in the process of becoming debt free. we may or may not decide to live without credit cards in the future, but if you can really do everything without them, more power to you! :)

deliriousnewyorker Says:

August 15th, 2007, 13:16 pm

Using a credit card is fine IF you have it set up to be paid in full automatically each month.

In most cases, even in places with lower real estate values, it is cheaper to rent than to buy when you consider taxes (after refunds), interest and the big one - maintenance. In some areas of the country it is hard to find decent rentals (that is the only time it really makes sense to buy in my mind, unless you plan on living in the same place the rest of your life).

The big part of the puzzle that is harder to address is large school loans. If you can pay them off, lucky you, because if they’re too high it’s pretty much like you bought an expensive house that you’ll never live in.

mike Says:

August 15th, 2007, 15:07 pm

I love the Paypal idea. They have the Virtual Debit Card, which another poster mentioned, but they also have a physical debit card, and it pays fairly decent rewards.

jmoney Says:

August 16th, 2007, 11:36 am

I have an Amazon credit card, so I charge lots of stuff on it, but pay up every month, so have no interest costs. In fact, I’m following your rule about earning interest instead of paying interest because every time I’ve spent $1500 on the card, I get a certificate for $25 at Amazon.com.

Wow 1.66666666667% Return on your investment. How do I get that deal?

Harlot Says:

August 16th, 2007, 18:56 pm

I left the US with bad credit and no hope of every rectifying it. I came to Europe and started a new life for myself and my family. I never knew how much the credit agencies ruled and controlled my life in the US until I got here. Within a year, I had a great job, a new life and an outlook I could have never had in the US due to the ridiculous control the big 3 hold on every single human being in the US. I am not a bad person or unethical, I, just like others ran on hard times. I would not have anything if I had stayed in the US. I now have a unscathed credit record with any line of credit I want without question. Sometimes people just need a break, a second chance. The big 3 ain’t hearin’ it. God bless anyone with credit problems in the US.

Charles Says:

August 17th, 2007, 1:01 am

Read or listen to Dave Ramsey. This is very much a philosophy of his, and I couldn’t help being reminded of this when I read this post.

Henrik Says:

August 19th, 2007, 11:58 am

good article!

but i think it is not at all to have a credit card at all, or buying online or not.

it’s a matter of thinking of it. If I use my credit card only for that sum that I can pay back end of the month - ev’rything’s fine. If I consider online-buying the same GOOD than real world buying - it’s the point.

so not having a credit card can be a help. But the thing is: negative financing (with money I don’t have) or not!

disha Says:

August 20th, 2007, 5:26 am

Great blog . I really liked it. I have also created a lens in same niche. This is my first time , hope u guys like it. Here’s a brief intro: Your thoughts and feelings really do create your reality. It may seem absurd to some of you, but the easiest way to health and wealth is by constantly monitoring your feelings. If you start feeling any negative emotions, you must find ways to improve those even slightly. With time, it becomes easier and easier. This lens is here to provide some basic information on the law of attraction to help you get started on your own path to success.

Hannes Calitz Says:

August 21st, 2007, 9:20 am

Fantastic Article. I have a lot of debt that I am slowly but sure paying off, and here are quite a few handy tips for when the debt is finally paid off.

Chris Says:

August 22nd, 2007, 16:50 pm

Harlot– where did you move to? I assumed most countries wouldn’t let you stay unless you had the resources, etc. It feels like I will never recover from my previous fiscal mistakes here…

Alex Says:

August 29th, 2007, 15:55 pm

AVOID paypal - they can clean out your bank account(s), encourage binge shopping, and in general are well, evil.

A site that will keep you updated on the latest horror stories and class-action lawsuits is: http://www.paypalwarning.com

Leo Says:

August 29th, 2007, 16:28 pm

@Alex: Thanks for the info. I’ve actually seen that site before, but in truth, I’ve been using PayPal for awhile, to receive payments from my ads, from my freelancing work, and from donations, and I sometimes use it for online purchases … and I haven’t had a problem yet. But it’s good to be warned nonetheless.

JP Says:

September 5th, 2007, 17:14 pm

I see some of you saying you like your cash back rewards programs. Just a little FYI. in order to fill up your tank at 35 dollars you need to spend 875 dollars to pay for 1 tank. Where exactly is the reward in that? Same thing with reward miles. on Capital ones program you need to spend 48 thousand dollar in order to earn 480 dollars in flight miles….Again where is the reward in that? 3% to 5% isn’t really a reward when your paying 5% to 15% interest…..Think about it people!!!

Clover Says:

January 22nd, 2008, 17:02 pm

Terrific article.

It’s a shame though that so many people have to use the comments as a “look how responsible I am with my credit cards!!1!” or to nitpick. I promise you the vast majority of people with credit cards don’t pay them off monthly so some prefer to avoid temptation altogether. And if you don’t like the article points, it clearly doesn’t apply to your needs. Chill out.

Thoughtful comments from C.M.Green, Kim Isaac, and others are lovely. Thanks.

Tom777 Says:

January 23rd, 2008, 11:57 am

The “recession” we are in now (January 2008) is in reality millions of Americans who have finally realized then need to STOP SPENDING and SAVE more.

Retail sales are down… Yea, people are giving up the materalistic lifestyle of the 1980’s-1990’s. People are going back to SIMPLE values.

Such a bad thing?

In our grandparents generation DEBT was a dirty word. To barrow money was the act of a POOR person or a begger. To be Debt Free was everyone’s main goal.

Where are we today? In a society where people look at you like an Alien if you dont have debt.

I think we are all waking up to a NEW America. A DEBT FREE America. Well… Hopefully.