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Don’t Stress About Your Credit Score!

I frequently write about ways you can improve your credit score, so this post may appear hypocritical. But I’m seeing so many people obsess about their FICO score and other credit scores these days and, quite frankly, I don’t think it’s healthy. Honestly, when it comes to getting your finances in order, your credit score should probably be your last priority.

It’s far more important to live within your means, get out of debt, and save money than it is to have a fantastic credit score. Yes, a good score of 725, 750, or 800+ will help you get approved for loans more easily and get you the lowest rates. A good credit score alone, however, cannot determine your financial future. If you’re stressed about a low credit score or obsessed with improving an already high score, consider a few points:

Credit scores have just one function: To predict your risk level as a borrower. Credit scores give lenders an easy way to compare potential borrowers’ risk levels. The higher somebody’s credit score, the more likely they will pay back a loan…or so the lenders think. Credit scores do not take into account somebody’s income, their assets, or their personality. They measure only what the credit bureaus have deemed factors important to predicting future creditworthiness. And that’s it.

The credit scoring system rewards debtors. The only way to get a good credit score is to take on debt. In fact, the higher your credit limits and, to a point, the more credit cards and loans you have open (assuming you pay them all on time), the faster your credit score goes up. As we know, the less debt you have, the more financially secure you can be. So there’s nothing wrong with saying “no thanks” to debt and living with a mediocre credit score. If you learn to live without credit, you may never need your credit score anyway!

Higher credit scores don’t do that much for you. Jim over at Bargaineering wrote an interesting article the other day asking: What’s a good credit score? He made a great observation: Once your credit score reaches a certain level (between 720-760), improving the score won’t get you much.

The lowest mortgage and auto loan rates go to consumers with FICO scores in that range or higher, so what good is having a higher score going to do? The only thing I can think of is that increasing your score gives you a “buffer” so that if you screw up and do something to damage your score (like making late payments), your score won’t automatically dip into the “poor” territory.

Your credit report tells more of a story. It’s unusual for a lender (or an employer, landlord, or insurer, for that matter) to look at your credit score alone. They’ll also want to see your credit report. After all, it’s possible to be mired in debt and still have a high credit score. Similarly, it’s possible to have a limited credit history (and thus a low score) but have your credit report indicate you have paid one or two accounts faithfully. This is especially apparent when you try to get a mortgage: Lenders will give mortgages to home buyers with average credit scores if they are relatively debt free, but will probably not approve anybody who still has a ton of debt, regardless of their credit score!

Although it’s a good idea to check your credit report every now and then to know where you stand; there’s no reason to obsess over your score. Focus on saving and paying down debt on time, and the score will follow.

About David Weliver

David Weliver is the founding editor of Money Under 30. He's a cited authority on personal finance and the unique money issues we face during our first two decades as adults. He lives in Maine with his wife and two children.

Comments

  1. Great article. I definitely agree with you on some points. A lot of people have come to me, and they don’t even have credit!

    Here’s what I’ve told them:

    First, if you do not have credit, lenders and banks may look to other factors that can help them decide if you are a credit risk or not. So you want to be sure that your are managing your day-do-day finance related activities in a way that can help you get their attention:

    Like opening a checking and savings account at a major bank. When you have active bank accounts in good standing, you are creating a history of being able to manage money. I advise starting with a major bank for two reasons: 1) After establishing a relationship with the bank, you will want to apply for a credit card or small installment loan. Major banks are more apt to offer special programs for consumers who are trying to establish or rebuild credit; and 2) Major banks report to all three credit bureaus usually every 30 days, which is what you will need to establish credit quickly.

    And then, paying your rent and utilities on time. If you do not have established credit, you are not completely out of luck. Some lenders will pull a report that will show them whether or not consumers pay their rent and utility bills on time. If they like what they see, they may approve you for credit. That is why it is extremely important to pay these day-to-day living expenses on time.

  2. It’s been my experience that the people who obsess don’t have 700 scores. Usually, its a person who needs to make a major purpose and only just found out their credit score was damaged.

    Your best bet is to find out what the lender requires, credit guideline wise, then pull your own credit report at least 3 months before making any major purchase. That should give you sufficient time to catch and correct any errors, plus make any adjustments your lender would find favorable.