Is a high credit score really just a measure of how much you love debt? Seems like a tough question especially when you put the words “love” and “debt” right next to one another. I’m sure you are cringing right now just reading that.
The financial services industry pounds the table on how to have a high credit score. In fact, I’ve read in multiple places online that a high score is “crucial” to one’s financial success. Without one you can’t get ahead and live the life you want. Hmmm…interesting.
So what does a high credit score look like?
Scores range from 300 – 850 with anything over 700 being considered a good rating. Excellent level ratings kick in around 750. The higher the score the more likely a lending institution will consider providing you with a credit card, mortgage or other loan.
In a credit driven society a high credit score seems like a must. The only problem is that to get a high credit score you HAVE to go into debt and stay in debt over time. There really is no way around that fact.
How Is A Credit Score Calculated?
Credit scores take into consideration five categories as this image from MyFico.com shows:
As you can see, we have Payment History making up 35% of the equation. Essentially this examines how you’ve managed to pay your debt over time. A person can positively impact this piece of the pie by paying their debts on time.
How much a person owes in total accounts for 30% of the score. In other words, how much debt you currently have.
How long you have been in debt accounts for 15%.
The types of credit you possess (mortgages, credit cards, retail accounts) will make up another 10%.
Lastly, 10% of the equation is attributed to any new credit you have managed to acquire. Opening too many new accounts in a short period of time may negatively impact your credit score.
When I look at how a credit score is calculated, I see every single component in the equation is related to debt. The only way to attain a high score is to have a long credit history and pay off that debt consistently and on time. Then when those debts are paid, take out new debt so that you can pay that off on time. And on and on the cycle will go.
There are no points given for paying off all your debt and then staying out of debt, which is the path my wife and I have chosen. Pursuing that lifestyle will result in your credit score declining. I used to have an Excellent rating in the upper 700s. Since we quit using credit cards, paid off our mortgage and have no other outstanding loans our score is now below 700, which is only a fair rating. My credit score is being penalized because I’m no longer pursuing any debt obligations.
I guess it’s theoretically possible for it to go to zero now that we are managing our lives this way and only using debit cards and cash for payments.
And quite honestly I don’t really care if it goes to zero. We will not be taking out any loans in the future.
So in your pursuit of a high credit score are you secretly saying “I love debt?” I think a case could be made for that based on what’s factored into the equation.
Questions: Do you think a high credit score reflects how much you love debt? Are there other reasons to have a high credit score other than access to loans? For someone living a 100% debt free lifestyle is there a downside to having a low FICO score?
Next Post: Proof It’s the Thought That Counts
Prior Post: My Parents Were Frugal But Sometimes I’m Not