Yes, that’s right. I said it. You don’t need a credit score. Now, before you tar and feather me or fill the comment section with mean-spirited comments, just hear me out and then decide.
We have been raised in this country to believe that in order to get anything worth having, you have to get it on credit. We have been conditioned to believe that it is only natural to get what we want, when we want it, regardless of whether or not we have stopped to think about if we should have it. (Whew, that was a long one!)
What we are talking about is going to school without a plan to pay for it beyond a student loan, getting a car without a plan except an auto loan, buying furniture with no plan except a line of credit at the furniture store. I’m sure that most of you know what I mean, but, that is also the problem – most of you know what I mean. And you know what I mean because you’ve done it. I’ve done a lot of this too, but, at 30, I have found that this is not a good life plan.
By accepting debt into our lives, we are paying for today on the promise of tomorrow. In other words, we are borrowing on the assumption that we will continue to be able to make those payments in the future. And in the current state of the economy, that is not a great assumption to make.
However, when we save up for big-ticket items (such as cars and furniture) then we get to take our time and decide what is best for us as well as having the satisfaction of ownership. After all, when you lose your job or take a pay cut or take time off to start your own business, wouldn’t you rather have the peace of mind to know that you don’t have any payments to keep up with? I know I would.
What does any of this have to do with your credit score? Your credit score is really just a number that shows lenders, employers, and insurers how good you are at paying back money you have borrowed. That’s it. It is not an indication of your worth or integrity. It doesn’t tell an employer that you are a hard-working individual who is honest to a fault. And it doesn’t tell an auto insurance company that you have money to pay for repairs for your vehicle and that’s why you are a better insurance risk.
When employers and insurers use credit scores to make these decisions, they are missing an important part of what makes us individuals and how we make our decisions. This is especially true if you no longer borrow money and are just working to pay back your obligations.
We have heard of the great and all-powerful FICO score. But does anyone take the time to tell you how it’s composed? Here are the components of a FICO score according to the official Web site (myfico.com):
- Payment history
This includes late payments and the length of your late payments. On time payments keep your score high while late payments drop your score.
- Amount owed
This amount is shown along with your total credit available when you look at your credit report. The more you owe in relation to your available credit, the lower your score. So, as you pay off your debt, your score will rise, but will eventually go down if you do not take out any more debt.
- Length of credit history
Your credit history begins the day a company begins to report your payment activity to the credit reporting bureaus. In general, as you continue to take out debt, a longer credit history will result in a higher score. This is also true because negative marks can only remain on your credit report for a certain amount time. As the negative marks go away, then your score will rise.
- New credit
This is for anytime you open or apply for new credit. This will also usually result in a drop in your score.
- Types of credit used
Revolving lines of credit, loans, and other types of credit are what this refers to. My understanding is that revolving credit is not as good as loans, but I could be wrong.
So, now that you know what your FICO score is made up of, you can see that it is, what radio and TV show host Dave Ramsey calls an “I love debt” score. It basically shows how good you are at getting, keeping, and paying for your debt. But it really does not give a complete picture of your ability to handle money.
If you worked through college and graduated with no student loans, paid for everything with cash, and went to apply for a job at a bank, they would see that you probably have no credit history. And because you have no history of dealing with debt products, you might not get that job. But that doesn’t show your potential employer that you could do the job and are actually really good at handling money.
You could be a cash millionaire and still not have credit score. Dave Ramsey is a multimillionaire and has a credit score of zero. I remember the show when he had tried to order his score but was told it could not be computed. He had gone so long without debt that there was nothing left to report on his credit report. Therefore, no score. The sad part is that he could buy an apartment building with cash, but he wouldn’t be able to take out a mortgage (based on FICO score).
(You can take out a mortgage with no FICO score if you use a lender that does manual underwriting. You just have to ask around. But there are people who have gotten out of debt and then saved for a house and paid cash. It is possible.)
You don’t need a credit score unless you plan on borrowing money. And, remember, borrowing money means you have to pay it back. Repayment may be an acceptable idea for you right now, but there are things that come up in our lives where our enslavement to debt prevents us from living the life we want. And does that mean you should never check your credit report? No. You will want to check that every year so that you can fix any errors.
When your life is dominated by paying payments and then wonder why you never have any money, it’s time to reevaluate your financial priorities and what you value. Keeping yourself in debt to have a high credit score may keep you from taking the job you really want, taking time off to spend with family, volunteer, start your own business, reduce your hours to part-time, etc.
Do I have debt? Yes, I do. But, I have had no new debt in about 2-3 years. The only plastic in my wallet with a Visa or MasterCard logo are my debit cards. That is how it will be. When I took the time to see what a credit score was really about, I realized that I don’t need it. I should, instead, concentrate on being financially responsible.
When you kick your credit score to the curb, you will find yourself less worried about an arbitrary three-digit number and concern yourself with living your life.