How Cash-Only Spending Affects Your FICO® Score
Embracing cash spending can help with budgeting and money management, but it can hurt your FICO® Score if it means avoiding credit of all types.
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As interest rates rise and more businesses charge a fee for using credit cards, more people are opting to tuck their credit cards away and embrace a cash-only lifestyle. Returning to cash does have some appeal. Many people find that using cash makes it easier to stick to a budget and steer clear of debt. Relying on cash can also save money since it eliminates credit card interest and allows you to avoid credit card convenience fees.
However, abandoning credit cards means trading the perks that come with using a credit card. For instance, you miss the opportunity to earn rewards and forgo protections like extended warranty coverage and purchase protection. Opting out of credit can impact your FICO® Score and progress toward reaching your financial goals. Here are two key ways that this could impact your FICO Score:
You may not have a FICO® Score
Since cash payments aren't included in your credit report, which holds the information used to calculate your FICO Score, cash-only spending doesn't impact your credit. Your credit report needs at least one credit account that's been open and active in the past six months to generate a FICO Score for you. It's possible to experience a loss of scorability if your credit file becomes stale, meaning your accounts aren't updated for several months.
Younger consumers in particular may be impacted by cash-only spending. In a recent FICO survey, 29% of Gen Z answered that they don't have a credit score or don't know if they have one, compared to just 8% of Boomers.
Without a scorable credit history, it's challenging to access credit-based products and services since businesses often rely on credit information to approve applications and set pricing. That means you could face roadblocks when you're buying a house or car, renting an apartment, or even purchasing a cell phone on an installment plan.
Note that having no FICO® Score at all is different from having bad credit, which is the result of mishandling credit accounts. Likewise, you won't have a zero FICO Score, since scores range from 300 to 850. You simply won't have a score at all.
Your FICO® Score may not be high enough to get approved
Even if you only have one or two accounts listed on your credit report, like a student loan or being an authorized user, your FICO® Score might not meet the minimum requirements set by certain lenders.
Your FICO Score takes into account the types of credit you have—your mix of credit—and it contributes to 10% of your score. Showing that you can manage different types of credit helps increase your FICO Score. This means having both revolving credit and installment loans with a history of on-time payments.
Sticking to cash can make you a responsible spender, but that doesn't necessarily show that you're a responsible borrower. Because so many life choices involve your credit history, finding a responsible balance between cash and credit is important to responsibly building credit.
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LaToya Irby is a financial writer with over 14 years of experience. She's been quoted and published as a credit expert in several major publications including USA Today, U.S. News and World Report, TheBalance.com, and The Chicago Tribune.