What Does a Zero Credit Score Mean?

The FICO scoring system has a range of 350 to 850, but some people tout the benefits of a zero credit score. This is really an exaggeration, mostly used by financial guru Dave Ramsey as a rejection of the importance of credit scores as opposed to getting out of debt or preventing debt.

A credit score of zero really means the borrower lives a mostly cash-only existence and does not have enough debt for the credit scoring agencies to rate his profile. Some financial experts, such as Ramsey, claim that this is a good thing, because debt means you pay for more purchases and could take on loans you cannot afford.

Taking out a loan to build credit diverts your resources from more important parts of your financial portfolio, such as emergency money or investing. Although most lenders base interest rates and approval on the FICO score, not all lenders do this. About 20 percent of lenders use traditional, informal methods of loan underwriting, such as looking at canceled checks and personally reviewing your financial history.

Besides having a harder time finding a loan, you might pay more for noncredit related items. Insurances companies, for example, usually charge more to customers without a credit score and you might need to put down a deposit for utility services and cell phones. Employers often run credit checks on potential hires, so if the employer has to make a choice between two equally qualified candidates, he might use a good FICO score to tip the scale.

A zero credit score is not the same thing as a poor credit score. A credit profile with negative items, such as bankruptcy and collection accounts, is always terrible for your financial outlook. If you have unpaid debts, you should settle them, because the creditor or collection agency can pursue a judgment in court and extend the life on it indefinitely -- some states allow creditors to renew judgments for the entirety of a person's life.