Editor’s Note: We have been talking a lot about credit card churning in recent weeks. While we wouldn’t recommend using credit card rewards or credit card churning for everybody, we feel that it is a great way to “make” extra money when it is done right. However, one of the questions that gets asked frequently is, “What about your credit score?” The following post is our answer to that question. It was originally published in July 2012, and has been slightly updated. Enjoy! (Read this post to find out how we’re paying for our next vacation with credit card rewards)
Do you know what your credit score is? The last time I checked, mine was about 800.
That’s great, right? I should be absolutely, undeniably stoked.
Well…I’m not…really. In fact, I couldn’t care less.
The lending industry has bombarded us with propaganda about credit scores for years. They would have us believe that everybody should be striving to increase their credit score. They make us believe that the only way to financial security is through a high credit score. If your credit score is low, you may be up s#it creek without a paddle.
Now, I don’t deny that a high credit score can help you to secure a loan. However, what I am here to tell you is that their line of thinking is hogwash. Yep, I said it. It is a big pile of crap. In fact, I believe that the credit score is one of the most deceptive and meaningless marketing tools that the lending industry uses to control your financial behavior. Don’t believe me? Here’s why.
What is a Credit Score
A credit score (a.k.a. a FICO score) is essentially a tool that lenders use to determine the level of risk that they are accepting by granting you a loan. The type and age of the accounts you hold, your past history of late or delinquent payments, and the total amount of debt that you have accrued are just some of the many factors that determine your credit score. According to Experian, while most credit scores fall between 600-750, a score above 700 is considered good credit management. Essentially, the lower your score, the bigger risk you pose to a bank who is willing to lend money to you. The higher your score, the less risk you pose.
For many years, people have been taught good credit equals good financial stability. That is a flat-out deception. In fact, financial stability should be measured by how little debt you owe rather than how much debt you are allowed to accumulate. There are plenty of extremely wealthy people who have low scores because they don’t use credit. Instead of you being worrying about how your score affects your financial stability, you should be much more worried about the effect your debt is having.
But why? Why would the banks try to convince you of this mythical numbers importance? The answer is simple: to get you to purchase more credit so they can make more money.
The Credit Score Myth
To me, the lending industry perpetuates the myth of the credit score in a way that is similar to how your friendly local drug dealer peddles his products. The lenders make it easy for you to get your first taste of credit. From the time that you turn 18 years-old, they start bombarding you with direct mail, offering you the chance to get your first credit card. Often times, they’ll partner with colleges and universities to “sell” those cards. “Build your credit and help your school at the same time,” is a promise that offers – not only – the opportunity to buy things you can’t afford, but the illusion of freedom at the same time. What 18 year-old doesn’t crave freedom?
Once the lenders worm you into their system, they really have you hooked. The credit score simply is another way for them to keep you buying their product. First, they tell you about all the wonders of what credit can do for you. “Want a brand new car that you can’t afford? Don’t worry, just use a little credit. Want a new pair of Louis Vuittons but you’re a little strapped for cash? Go ahead! You can afford it! Just charge it! Come on, you can do it. It feels soooooo good!”
After they’ve spun all the fairy tales of a brilliant future that is paid for with “free money,” chances are that you are already addicted to their drug. Still, occasionally, one of their clients has the bright idea that they will break free from their credit addiction. In order to squash a mass exodus, the debt pushers use fear to whip their remaining clients back into line. By downgrading the scores of those who no longer use or require credit, the banks “punish” those who have slipped through their clutches by “taking away” the thing that their loyal customers crave most – more credit. By convincing the masses of the value of their precious credit score, banks have conned most of us into staying perpetually in debt to them. It truly is a brilliant marketing plan.
Credit Equals Debt
In truth, the term “credit score” shouldn’t be termed a credit score at all. You see, credit is just a prettier way to say the word debt. If this metric were named a “potential for debt score” instead of a “credit score,” I think that it would probably lose a lot of its appeal.
To be sure, we have used credit before and used it successfully to our advantage. Without credit, we would have never been able to buy the house that we live in. Although we couldn’t afford them at the time, we never would have been able to purchase our two rental houses – which now seem like one of the best financial decisions we ever made. Luckily for us, everything has worked out as planned – at least so far. In other ways, easily accessible credit has changed the course of our lives.
The Allure of Credit
The attraction of credit is a very real and addictive thing. Credit makes purchasing so easy, especially when it comes to purchasing “big-ticket” items. For example, my wife and I recently paid one last giant payment toward a car that we originally purchased using credit. What we thought was going to be a joyous and triumphant moment felt more like a funeral. We were sure that it would feel great to have that car payment behind us. Now, after the fact, it does. But, the actual moment where we had to write that huge check really hurt. We had worked so hard to save that money, and it was gone in an instant.
You see, it felt like we were paying for something we had already purchased. We had deluded ourselves into thinking that the money we had in our possession was actually ours. Unfortunately, not only was the money not really ours, but the car wasn’t either. Using credit had masked the true cost and – thus - the pain of the actual purchase. For us, the moment became less of a triumph and more of a lesson about not repeating our past mistakes.
Really, it should hurt to make large purchases. It is this “buy now, pay later” mentality that has gotten Americans into trouble over the last several years. Americans have bought into a mentality that believes that “the bill will never come due.” While carrying debt works fine during good times, major problems begin to surface when everything doesn’t go as planned.
Why I Don’t Care About My Credit Score
While my credit score is high, from this point forward, I truly couldn’t care less about it. Why? Because I am determined to no longer use debt to fund my lifestyle. I refuse to use credit to buy things that I can’t afford. A high credit score does nothing for somebody who always pays his debts.
The only real way to win this game is to not play. To do that, make a zero-sum budget, become debt free, don’t buy things you can’t afford, and don’t go back into debt for any reason. Then make sure that your assets are protected with the proper amount of income protection insurance. Only then can you truly know the taste of financial security.
How do you feel about credit scores? Am I way off base? Let us know in the comments below!