Credit Scores Are Important

budget budgeting credit cards credit score debt finance investment wealth Feb 11, 2023

You want to save tens of thousands of dollars? Pay your bills on time. 

This raises your credit score. The higher the credit score, the lower the interest rate.

If you're in the position to pay bills on time - do it.

If you aren't in that position right now, don't worry, we will get you out of debt.

There are some personal finance gurus who tell you your goal is to pay everything with cash so you have a ZERO credit score. 

Dangerous advice that will cost you tens of thousands of dollars over the life of the loan. 

If paying tens of thousands of dollars in interest is ok with you, I recommend you stop reading and find another blog. This one isn't for you.

If you don't want to pay thousands of dollars in interest, then keep reading.

A lot of people confuse a credit score with a credit report. A credit report is a detailed statement with your credit activity and history. Lenders report all your dirty little secrets to the 3 major reporting boroughs. Did you pay on time, did you borrow a lot, what kind of loan was it. A part of your money history is there in black and white.

When you go to borrow money for any loan, creditors will use the credit report to make decisions. They will use the report to either approve or deny you, if approve, your credit score decides what the interest rate is.

 Fyi – most credit reports have errors that will hurt you.

Credit scores

Having a low credit score or no credit score keeps you a slave to poverty.

For most people, buying a house with cash is not an option.

Ironically those same gurus also say they know it’s impossible for most people to be able to purchase their home with cash and need a mortgage. When you pay cash for EVERYTHING, you are not raising your credit score. You will pay a higher interest rate. Those gurus are hypocrites giving you bad advice that will cost you thousands of dollars.

Why is a good credit score important?

  • You will get a lower interest rate on mortgages and car payments that can save you tens of thousands of dollars over the life of the loan.
  • Many people do not live in an area where they can pay cash for a home. There are situations where you don’t want to do that.
  • You pay less for car insurance
  • Cell phone companies look at your credit score
  • Many landlords pull your credit report

What exactly is a credit score? It’s a 3-digit number that banks claim can predicts whether you are credit worthy and will pay back the loan.

How is this magical mystical number calculated?

  1. The most important factor is your payment history. Pay on time means a higher score.
  2. Credit utilization: it’s your total credit card balances divided by credit card limits. The higher the numner, the higher the debt. It’s recommended to keep that number below 30%
  3. Length of credit history. The longer the history of good credit, the better it is. I’ve made this mistake. I’ve closed old accounts because that’s what the gurus told me to do. It hurt my credit score.
  4. Credit mix and types: different types of loans help you build credit.
  5. Credit inquiries I think this one is BS. My credit score can be affected because I’m shopping around for a car loan.

 Negative items: they remain on your credit report for 7 years and then they fall off.  Bankruptcy is 10 years

There are 3 main credit reporting bureaus Equifax, Experian and TransUnion.

What’s a FICO score? What’s a VantageScore? These are 2 brands of credit scores. They take the info from the credit reporting agencies and calculate the score. You don’t have just 1 score. Credit card applications, auto loans and mortgages all have different scores.

There are other factors that go into lending decisions. Joint accounts, Steady job, income and available collateral. Race and gender are not supposed to influence lending decisions. They do in subtle ways.

Study after study have shown that women and people of color are put at a disadvantage when it comes to credit scores and loans. People and communities of color have been disproportionately targeted for high-cost, predatory loans. These loans have lead to higher delinquency and default rate.

The government is trying to make credit reporting and scores more transparent. Hopefully the legislation will pass making banks and lenders more transparent and accountable.

Key point: credit scores and credit reports matter a lot more than we realize. If you want to get out of debt, grow your wealth and become financially independent, you must build up your credit.