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.