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The Difference Between Credit and Debt

As you may know I’m currently taking the Dave Ramsey Financial Peace University classes.  (I’m doing weekly reviews of the classes over at Enemy of Debt)  In general I like Dave’s message and I’m basically a fan.  But there is one big area where we disagree.  The Credit Score.  He doesn’t think it’s important to have a good credit score.  I disagree.  I think it is important.  

Dave Ramsey jokes and says he couldn’t rent an apartment but he could buy the whole complex with cash.  Good for him, but how does that help you?  Can you pay cash for an apartment complex, or even one condo?  Me neither.  So we have no choice but to rely on our credit in order to find a place to live.  I like shelter.  I’m assuming you do too. 

He also says his credit score is zero, which annoys me.  There is no such thing as a zero credit score.  The credit score range goes from 350 to 850.  You might not have a credit score at all but that doesn’t make your credit score zero.  There is no such thing!

Lastly, he says that a credit score really an “I love debt” score.  It’s not.  It’s a credit score.  Credit and debt are two different things.  Credit is an offer someone (a bank) has made to loan you money.  So if you have a credit card with a $5,000 limit you have $5,000 in credit.  How you handle that credit affects your credit score.  You do not have to use the card at all in order to maintain or improve your credit score.  You can just have the account open and forget all about it.  You don’t have to pay any interest or use the account at all.  If you use credit responsibly you will have good credit.  It has nothing to do with how much interest you pay or how small your balances are.  (Big balances will hurt your score.) 

Debt is different from credit.  I know you know what debt is.  Debt is money you have borrowed.  You don’t have to have debt to have good credit score.  “They” do like to see different kinds of loans on your credit such as installment loans (like car loans or mortgages) or revolving credit (like credit cards or home equity lines of credit) but you don’t have to currently be in debt to have a good credit score. 

Payment history and total amounts owed is 65% of your credit score.  If you owe nothing and therefore pay nothing your credit score is not damaged.  If no payment is due it’s reported to the credit bureau as paid on time.  The only time something other than “paid on time” is reported is when you are actually late.  Make sense?  I’ve worked for the banks and I’ve seen the actual system used to report to the credit agencies and that’s how it works.  As far as amount owed is concerned the less you owe the better.  Not less credit, but less actual debt.  A zero balance on a $5,000 credit line is better than a $1,000 balance on the same line of credit.  It’s also better than a zero balance on a $4,000 credit line. Credit is good (to a point). Debt is bad. 

Before I let you go I need to say this;  I do not believe in any way, shape, or form that you should go out of your way and take a loan you don’t need in order to increase your credit score.  Don’t send me hate mail saying that I’m encouraging people to take on debt for the sole purpose of upping their score.  I’m not saying that.  I’m simply saying that good credit is something that should be in the back of your mind when making financial decisions.  Don’t go closing your old accounts for no reason.  If you are the type of person who has trouble resisting the credit cards and if they are open you will overspend, then fine, close them and to hell with your credit score.  But if you don’t have that kind of problem then leave them open and reap the benefits of a slightly higher score.

I’m also not against those who choose to opt out of the whole credit system.  If you hate credit and don’t want anything to do with it that’s fine with me.  I’d certainly perfer that attitude to loving debt.  But do it with the knowledge that you might be making things more difficult for yourself down the road.

8 thoughts on “The Difference Between Credit and Debt”

  1. I agree with your distinction on credit and debt, but I would assume Dave is calling a credit score an “I love debt score” because you’re almost always going to use your credit score to go into debt through something such as a mortgage or auto loan. Sure, you can have lines of credit through a credit card available if you want to maintain a credit score, but, ultimately, you’re going to use that score to secure a loan, right? Otherwise, I really see no point to maintaining a credit score either.

  2. Yeah I agree with Jeffrey. Though you can technically have a credit score without “borrowing money” how many people do you actually know that do? Most people follow the myth that you HAVE TO have a credit score in order to survive, and as you know I disagree with that. I think that mindset and belief is why this country has such a problem with debt these days.

    I hate the credit score and think it’s a bogus system that sets people up for failure since most people go into debt in order to build that score.

    I think Dave is saying he has a ZERO credit score for dramatic effect and it’s not entirely untrue. In 2010, when I checked my credit report and took a look at my credit score info (out of curiosity), it said it did not have enough information to calculate a score. It didn’t say it was 350, it just didn’t give me a score at all. I would call that a zero credit rating. However, this year when I checked, my score it was supposedly in the 700’s.

    I think that alone proves you don’t need “credit” in order to have a score. We haven’t borrowed money since 2007, nor have we had a single line of credit since.

    I think the credit score is a joke and not only is it not important to us, but there’s not a single financial decision I would make based on what my score might do. I honestly don’t care to even have one. 😀

    My problem with the credit score is that it is system that forces people to apply for “credit”, which usually turns into debt, all in the name of having a score that declares them financially responsible. You and I both know that the credit score system wasn’t designed for people to open up a line of credit to forget about it in order to have a good score. It was designed to judge people on how well they acquire debt and then pay it back. I think Dave’s calling it an “I love debt score” is a perfect analysis. 🙂

    P.S. We’ll have to battle it out on this at #FINCON12. LOL Grrr. 😀 Can’t wait to see you again. We had lots of fun!

    WOW! did I just write a blog post? 😉

  3. I agree with you wholeheartedly, Ashley. Credit scores are not just used to obtain loans. Many employers now check credit scores to ensure that you (as a prospective employer) are trustworthy and stable.

    Also, if you ever fall on hard times, having a good credit score can allow you to borrow for the time being.

  4. I never focused on my credit score, but I made sure I paid my bills on time and remained conservative in my borrowings. I have a number of credit cards with credit limits that are epretty high, but no balances. The credit score is the result of responsible financial behavior.

  5. I do keep track of my credit score and feel it is very important (esp. with a probability of mortgage within the next 2 years). I see the point in Dave’s argument but in reality I don’t/can’t pay cash for everything. So I need to maintain my credit score to not be the one getting the highest interest rate.

    And KC, I disagree with your slightly. If you in the market for any kind of loan (I know you are not, I am saying in general) or even insurance, ignoring credit score and hoping good financial behavior would take care of it is not a good idea. There are a lot of ways your score could mess up incorrectly (from the credit agencies reporting wrong data in your credit report which in turn is used to calculate the score). Monitoring credit report/score is part of good financial practice.

  6. prisoners of interest payments

    I agree there is truth in this article about how important it is to have a decent score, but outside of that point this post is flawed. First of all there is more to a credit score than having a credit card and if you’re the type of person that prefers to hold on to their vehicles rather than trade them in at every chance you get the system does punish you. My own experiences were enough evidence of this when despite the fact that I had already paid off 5 vehicles, was never late with a payment and even paid them off early I still had to get a co-signer for my 6th vehicle, and the bank where I got the loan from charged me with such a high interest rate that I ended up having to pay nearly twice the amount of the total sum of the vehicle! I should also add that I had no other unpaid debts or bad credit situations. However, everytime I go to buy a vehicle they tell me that the 5 years I went without making a major purchase using a loan like another vehicle or house was responsible for making me get a co-signer and the cause of me paying higher interest rates. It is the same thing with credit cards, if you don’t use them often enough they do get cancelled on you.

    I think it is time more people start waking up to this type of interest payment imprisonment. As a free society we should not have to be forced to profit any type of industry, including the credit/banking industry. If I want to pay fifty dollars for a pair of boots instead of two hundred dollars (via credit interest) than that should be my right without being punished for it. Also let’s face it, vehicles are not cheap and it is wise for many people to hold on to a vehicle for as long as possible, but yet the system punishes us for that as well.

    Some people may respond to what I wrote with something like “well it’s their money and if you don’t contribute something why should they help you when the inevitable time comes for that loan”. Believe it or not I can actually agree with this, but when more and more laws are being made favoring the loaning industry and with more employers/agencies using our credit, or lack of against us I’ll ask how anybody can think that this is fair? As the years go on it is becoming systematically more difficult to survive without profitting the banking and credit industries. There is a trend of forced purchase of a product that is increasing and veering in a horrible direction, and this product we are becoming forced to purchase is interest, or should I say the freedom to pay more than the actual value of the product.

    Not all of us ‘credit deadbeats’ are wealthy enough to purchase expensive products with cash, which is why many of us do not make unnecessary purchases to begin with, unless we can afford to with our hard earned cash. Ok, it’s their (banking industry) money, but don’t hinder us from being able to survive because we choose to not make interest payments.

  7. Prisoners of interest payments:
    I’m sorry to hear that you’ve had bad experiences financing cars. In this article I used credit cards as an example because I was trying to illustrate the difference between credit and debt.

    Revolving credit lines are the only way to have credit without having debt. Car loans are different, car loans are just debt. They offered credit, the borrower borrows it, and then they have debt, the credit portion is gone.

    I disagree that you must pay interest in order to have good credit. How much interest you paid is not reported to the credit agencies. If someone has extended you credit and you haven’t paid late that is reported.

    I do get what you are saying about how if you want to opt out of the whole credit system you are punished for doing so. I also think that is wrong. I think the way to change it for more and more people to “opt out”. Not an easy thing to do but it’s necessary if we want to get society to change our minds.

    It’s kinda like forclosures. 10 years ago you were looked down upon if you had a forclosure on your credit. Now, it’s so common that no one thinks twice.

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