Either out of anxiety or necessity, Americans are reducing their reliance on credit. Use of revolving credit such as credit cards and home equity lines of credit has been in decline since the financial crisis hit in 2008, falling 13 percent in the 4th quarter of 2009 alone, according to Federal Reserve consumer credit data.

Furthermore, only 56 percent of consumers used credit cards at all in 2009, compared to 87 percent in 2007, according to a recent study by the research firm Javelin Strategy & Research.

While many are cutting back on debt but still using credit for their day-to-day finances, some consumers are taking their aversion to debt to another level, dedicating all their financial energy to withdrawing from the credit grid entirely.

Elissa Burton, a financial planner with Francis Financial in New York, says that she has clients who feel uncomfortable carrying any kind of debt, even for big-ticket purchases like homes.

“Some of our clients just hate debt. They can’t sleep at night, knowing that they don’t own their home outright,” says Burton. “Those are the type of people that we recommend either paying cash for their home or paying it off as quickly as possible. It’s not a financial decision that makes sense when you crunch the numbers, but for some people it is right.”

One woman living off the credit grid

J. Mohammad, a Tennessee-based accountant, decided in 2001 that she’d had enough of the constant stress she felt over $11,000 in credit card debt, her mortgage and a host of other bills. Inspired by Dave Ramsey’s radio show on life, money and debt, she decided to pull out all the stops to reach her goal of “financial peace.”

To get there, she worked at as many as seven extra jobs, even cleaning buildings at night, and she and her husband kept to a tight budget. It was tough going, but by 2005 she was debt free, having paid off her credit card debt and even her mortgage, she says.

Now, she sticks to a strict budget and banks all the money she used to plow into monthly payments to service debt into savings and a new-car fund.

Benefits of a credit-free lifestyle

Living off the credit grid has a lot of advantages for those who are willing and able to do it, says Lisa Kirchenbauer, president of Omega Wealth Management in Arlington, Va.

“Some of the (benefits) are obvious. If you’ve been living on credit, you’re paying somebody else interest,” Kirchenbauer says.

Not paying interest means you get to keep a lot more of your own money over your lifetime, she says.

Not being dependent on credit can also help you weather bad economic times. Mohammad says she’s glad she convinced her siblings to go debt-free. When the economy soured and they were laid off, being debt-free made it a lot easier to stay financially solvent because they didn’t have to use scarce resources to service debt.

Perhaps the biggest benefit of going to a cash-only lifestyle is that it forces you to keep closer tabs on the way you spend money, says Kirchenbauer.

That’s especially true for those who have a hard time controlling their spending. Living off the credit grid can remove the temptation and the means for shopaholics to seriously overspend, says Burton.

She cites one client who would use her credit card and go on shopping binges, racking up as much as $6,000 in credit card debt in a few weeks. Working from cash only makes such binges much more difficult, she says.

A potential pitfall

However, not all of the financial consequences are positive. Not using any form of credit can eventually hurt your credit score, says Burton, and even the most diehard fans of living off the credit grid need a decent credit score if they ever do decide to go into debt or look for certain types of jobs.

She suggests keeping one credit card open in your name that you use occasionally, being sure to pay it off every month.

“It would be very rare that someone could make it through their entire lives and never need credit, and one of the things that we’re seeing now to is potential employers looking at credit reports,” says Burton. “Even if you’re totally off the grid, you may work in a field that requires them to pull your credit history.”

And any way you slice it, if you’ve been heavily relying on credit, you can probably expect to take a hit to your standard of living.

“A lot of our clients are spending a lot less. Their lifestyles are not nearly as extravagant as they were,” says Burton. “You might not have as many lattes as you used to, you may not be shopping at the most expensive stores anymore. People are doing ‘staycations’ instead of extravagant vacations. But people are really proud of themselves for being able to take control of their spending, change their habits and start saving more.”

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