There are a some very smart and successful personal finance experts that feel you don’t need a credit score. That you will be able to get a loan without one. That you should have a credit score of zero. Personally I disagree.
Disclaimer: These are my opinions. I am basing this off of my own personal experience, conversations with friends, and my own research.
An excellent credit score is important. Your credit score is checked when you are applying for any kind of loan so they can determine your interest rate. It is also checked when you are applying for a credit card to see if you meet the minimum requirements. I used to think those were the only times your credit score is checked but that is not the case. Insurance companies are starting to factor in credit scores to decide whether to provide coverage and how much they will charge you for it. Landlords may require a credit check to determine your security deposit. Utility companies may request your credit score to determine whether they will require a deposit and how much it will be.
Having a very low credit score or no credit score could be a major hassle when you are making big life decisions.
Unless I win the lottery or somehow make millions super fast I will not be able to pay for a house in cash. It is just not realistic for me. I will need a mortgage loan which means they will evaluate my credit score to decide my interest rate.
What affects my credit score?
The top six factors that have an effect on your credit score are:
- Credit Card Utilization (high impact)- amount of your total available credit you are currently using
- Payment History (high impact)- the percentage of payments you’ve made on time
- Derogatory Marks (high impact)- collection accounts, bankruptcies, foreclosures, or tax liens on your report
- Age of Credit History (medium impact)- the average length of time your accounts have been open
- Total Accounts (low impact)- total number of open and closed accounts on your report
- Credit Inquiries (low impact)- the number of hard inquiries on your credit report for things like credit applications in the last two years
What are credit inquiries?
There are two types of credit inquiries, hard inquiry and soft inquiry. If you check your own credit score this is a soft inquiry. It will not have an effect on your credit score. A hard inquiry is when you apply for credit (such as a credit card) or you give someone permission to access your credit report (such as an application). This means don’t apply for 10 apartments (or other applications) at the same time or you will have 10 hard inquiries on your credit score.
How often should I check my credit score?
I check my credit score at least once a month. This way if something looks off I can figure out what it is and make sure it is fixed. It is important to check your credit score at least 6 months (a year would be better) before you need a loan or will be applying for anything that will check your credit score. This gives you plenty of time to look at your credit score and learn ways to increase it if needed. Check out my post 5 Helpful Resources For Financial Planning for information on how to check your credit score for free. One website I use to check my credit score for free is Credit Sesame.
So why should I really care about my credit score?
- Loan Interest Rates: an excellent credit score will help lower your interest rate on any type of loan. For example if the interest percentage is 1-2% lower, the savings on interest payments over the life of a 15 or 30 year mortgage loan is substantial. You would save tens of thousands of dollars with a lower interest rate on a mortgage loan.
- Ability to Negotiate: with a excellent credit score you can negotiate with lenders. You will be able to shop around for loans, credit cards, etc. instead of just taking anyone who will offer you a loan.
- No Security Deposits: like I stated earlier many utility companies require a security deposit for customers who have low credit scores. With an excellent credit score they will waive the deposit.
- Credit Card Opportunities: some of the cards with the best rewards require an excellent credit score. Of course it is important to be responsible with your credit cards and pay the balance off each month.
Aren’t credit cards bad?
I know credit cards scare some people because they might have had a lot of credit card debt in the past but I personally think when credit cards are used correctly they are good. It does take self control and you have to realize it is not free money. While on your journey to financial freedom if you feel you need to cancel your credit cards that is fine. You have to do what is best for you. When you have your financial situation under control they could be beneficial.
I understand that this might not be the opinion of every personal finance blogger but to me this makes the most sense. An excellent credit score shows you don’t have a lot of debt, you are making payments on time, and you have no derogatory marks. If you credit score increases it is evidence that you are headed in the right direction. At the same time you shouldn’t make financial decisions based on your credit score but what is best for you personally.
What are your thoughts? Do you think having an excellent credit score is important? Let me know!