The Importance of Having Good Credit

good-credit

You’ve heard the phrase “Bad Credit, No Credit, No Problem!” countless times, haven’t you? But I bet you never thought I’d agree that it is a true statement, did you? If you have bad credit or no credit, it really is no problem because you don’t need credit to survive.  Your FICO Score does not define you.  You are worth more than the money you can borrow.  Don’t let your existence be like the schoolboy who passes FICO (his beloved sweetheart) a note to ask if she likes him.  We aren’t in elementary school anymore.  As Americans, we have been fed the lie that our self-worth is based on what we do for a living and how much stuff we can accumulate.  Today I’m going to give a sermon encourage you as to why this is simply untrue. I wrote a post about this a while back, but I think there is much more to the discussion.

I want us to dig deeper into why it is or is not important to have good credit (or any credit at all). Beyond having the easy ability to borrow money (which I believe is a bad thing), there are only a few of potentially viable reasons for worrying with your credit score:

  1. Employers sometimes run credit checks before hiring.
  2. Potential Landlords sometimes run credit checks before renting out property.
  3. Insurance companies will sometimes use your credit score as a measure of your risk.

Let’s look at each of those:

Employers

Do you want to work for a company that uses your FICO score to determine whether or not you’ll be a good employee?  Me neither.  If the company really uses this measure as a major determining factor in your hire, you should be looking elsewhere.

Landlords

It is true that some landlords are lazy enough to only pull a credit score to see if you have good credit. But why is that going to determine if you’re a good lessee?  If a landlord actually pulls a report and looks to see if you have a lot of bad debts on there, that is an obvious red flag.  Otherwise, who cares about the score?  Wouldn’t a better measure be to look at your history of paying rent at previous places or to look at your work record or other items? Get a letter from your previous landlord or your employer.  There are always ways around this without going into debt just to have a three-digit number that determines you’re worthy to live somewhere.

Insurance

Your insurance company is all about minimizing risk. As a company, they have to calculate whether or not you’re a risk to them and then price insurance to you accordingly.  Some companies use your FICO score to help in that calculation.  How this is used is a bit of a mystery, but even if it cost me a few extra bucks a month in insurance, I’d much rather pay that than keep up with minimum payments on debt (which would cost a heck of a lot more in interest!).

Have I convinced you yet? If you can even get a mortgage without having ever before borrowed money (trust me, you can – it’s referred to as nontraditional credit – Fannie Mae, FHA and VA do it all the time), what good reason is there for “building your credit?”  I challenge you with this – a FICO score is not a measure of how wealthy you are.  It is a measure of how willing you are to take on debt and stay in debt for long periods of time.  We don’t live that way around here and I won’t teach you to do it either.  In my counseling sessions, I always bring a pair of scissors. There is no reason to be in bondage to a piece of plastic or the monthly statements it brings.  There is no reason to be victim to bad circumstances that you could have easily avoided.

Since I’ve been pretty direct (okay, BLUNT) in today’s post, I encourage your comments, whether you agree or disagree.  But before you make any response, please picture yourself as the parent of an 18-year-old who just got their first credit card offer in the mail. He asks you what you think about it.  What do you do?  It is your shining moment to alter the course of your family tree, but it is up to you.

Disclosure: Some posts include links to sponsors or affiliates, which give me a small percentage of the sale. You are not obligated to use these links when you make a purchase, but when you do so it helps to support this site, so thank you!

About Barry

Barry is the husband half of the Stacy Makes Cents team, responsible for all the marketing, website development, sanity management and taste testing. Barry writes about personal finance issues, helping people get out of debt, live on a budget and make the most of every cent that comes into their hands. He is the author of From Debtor to Better: The Details of Debt and How to Get Out! and writes periodically on his own site, Debtor to Better.

  • J

    I agree with your statements but have noticed that all of the insurance companies we have had do use the FICO score and not to our advantage. Each time we have sold a home and moved our score took a hit and we paid approximately $20 more a month for insurance. Apparently the scoring system does not like it when we change locations. This has happened with three different insurance companies so it appears to be a practice within the industry. I don’t think it is fair but a lot of things aren’t.

    • Barry

      I wish I knew the formula insurance and other companies use, but even FICO won’t tell you exactly how they calculate your score. I wrote about that in my book (www.debtortobetter.com/the-book/) and while I understand they don’t want people gaming the system, it just seems a little fishy to me that so much of the average person’s life is dictated by a score they don’t even know how to calculate. That’s sort of like a pop quiz in a class where you have no clue what you’re supposed to have been studying!

  • Shauna

    Couldn’t agree more! My husband and I, after experiencing a foreclosure and a business that put us into major debt many years ago… vowed to never use credit again. And, to this day, we haven’t. If we can’t pay cash comfortably for something, we don’t get it. The whole credit score thing.. our view.. who cares! God is our provider and like you said, if an employer or landlord uses “credit score” to make their decision, so be it. God always has something better!

    • Barry

      I love this outlook. It is usually those who have learned the hard way (as you have) that credit gone wrong is a horrible experience and one that can usually be avoided.

      • Chrissy

        That is true…our experience with debt scarred us and scared us…never, ever again.

  • http://www.simplyhomemaking60.blogspot.com Yolanda

    You certainly make some good points!

    • Barry

      Thanks!

  • Amanda

    I never considered the possibility of NOT building credit before obtaining a mortgage. Didn’t know that was an option! My husband and I both had credit scores going into our marriage; thankfully we had also both been seeped biblical money management instruction and only used the cards to build monthly credit (payed gas each month and always paid it off without interest). If you really don’t need a score to buy a house, I’ll instruct my kids differently…

    • Barry

      Be forewarned going into a home purchase without any credit is “weird” to most people and so there won’t be as many banks who will lend to you. That being said, I would still ALWAYS rather have to choose from a smaller contingent of banks for my mortgage need than have to play with the snakes (credit cards and other “easy ways to build credit”).

  • http://Heathfamily7.wordpress.com Tara H

    Agree! Unfortunately with all of our bad choices with money we have plenty of score…all good though, not that it matters! ;)
    This year is our year to change our family tree! I can’t tell y’all how excited I am! Thanks for all of your encouragement!

    • Barry

      YOU CAN DO IT!

    • Chrissy

      Tara…that is awesome, you will be so glad you did. Guard that $1000 emergency fund like it is life or death though…having been down the road you are starting on, you will need it at some point for something. Keep the faith…you are heading toward something really, really good.

      • Barry

        Good advice!

      • http://Heathfamily7.wordpress.com Tara H

        Thanks, Chrissy! It was sweet of you to leave an encouraging word! :)

  • Kristin

    Great thoughts, Barry! Thanks for writing this. I really appreciate your common sense approach.

    • Barry

      Thanks – I feared readers would try to “burn me at the stake” for this post! :)

  • Katie

    Thanks Barry for all the priceless information you provide. We are currently on a long road to becoming debt free. We’ve been inspired by your success with it. Although it will likely take several years, I am confident overall we are on a MUCH better path thanks in large part to your advice.

    • Barry

      That makes me smile. Thanks for sharing that.

  • Stacey

    My husband and I have always been very open about our “financial stupidity” with our sons, and thank GOD I have a father-in-law who is setting a better example for his grandsons than he did for his son. For some reason, any lessons in finance he might have taught his son and daughter were missed, and my brother-in-law and I were not raised well in the finance department either. And it shows. The four of us, however well intentioned we might be, have not done very well in setting a sound and Biblical example for our combined five boys.

    My father-in-law, finally realizing this, started an investment group with the boys several years ago. They choose stocks, etc, have regular meetings of “the Board”, and they all take turns being the officers. I can honestly say that my youngest Manling (age 11), the newest and youngest inductee into the family stockholder’s cooperation, knows far more already about what makes Wall Street and the banking system work than I ever have or will. All of the Manlings have far better financial sense than I ever will. Thank God for that!

    Honestly I just don’t “see” numbers…and I’m in charge of our checkbook…what does that tell you? I know where we need to get to–but I don’t get a whole lot of cooperation from my hubby who is not used to being told no. Thankfully I’ve managed to use a lot of these instances to red flag to the boys WHY money is always tight. And they are all required to read Dave Ramsey’s book and do a consumer math course before graduation!

    Funny you said about the 18-year-old who got his first credit card application–the Eldest Manling got his a couple of weeks ago. I asked him what he wanted me to do with it. He handed it over and said, “shred it.” Which I did. He is already “in debt” to the VoTech school of his choice and is working on scholarships and contemplating a career path that would pay off his schooling if hired with a specific company. Either way, working to pay it off or earned money through awards–he isn’t looking to have that hanging around his neck when he graduates!

    • Barry

      It sounds like you’re really on track to have some financial whizzes in your family. I LOVE the ideas! The training you’re giving your family is truly priceless.

  • A. H.

    Ha ha. Burn you at the stake. I think most of your audience probably agrees that your idea is one way to go. I always enjoy your posts. You and Stacy are such a nice balance. It’s like two blogs in one! My husband and I have several paid off credit cards. We occasionally use them for a small purchase then pay them off. We are reluctant to close them because we are thinking of buying another house, and we think it would be “easier” if our credit score is as high then as it is now. I know that if we cancel all our cards, our score will take a hit! What’s your advice?

    • Barry

      Amy, this is an excellent question. In most cases, your credit score does take a small, temporary hit if you close an open account in good standing. Having said that, it is usually not a very big deal. If you have the discipline to simply keep them and keep your usage in careful check for the sole purpose of easier financing, I’m not opposed to the idea. However, BE CAREFUL! Keeping credit cards (and using them) for this purpose is very risky, in my likely-too-conservative opinion.

  • Nora

    Interesting post!

    I’m not trying to sound snarky;however, what is your background in finance? Do you work for a financial firm, have you taken the 7, 66, 3, 9, 10 or insurance exams? I ask because my husband works in finance and isn’t allowed to have an online presence or give any financial advice. As funny as it sounds, the firm he works for regular checks our credit reports, bank statements, and monitors his e-mails for signs of financial distress. I’m not even allowed to hold investments with another bank. We have to have a credit score for his job but that doesn’t mean that we use credit irresponsibly. I just use our credit card for things like our cell phone/Internet bill so that we can keep a credit score. I wish we didn’t have to have a credit score but it’s a necessity for my husbands field.

    • Barry

      Very interesting question and thanks for clarifying. I have an Associates Degree in Accounting, a Bachelors in Business and Accounting and an MBA. I’ve run multiple small businesses and have provided financial counsel for about 10 years now. I worked six years for (at the time) the world’s largest financial institution, starting out as a credit card collector, then collections trainer, then instructional designer and project manager. Because I was very interested in the dangers, etc. of personal finance done wrong and saw it every day at work, I dug deep into personal learning and some formal learning about it. I have purposefully not sat for any of the series licensing exams because they all lead toward selling a product or service. I have instead chosen to remain free of those ties (which is a positive and a negative) but it allows me to speak my mind and partner with CPAs, attorneys or other professionals as needed when very big situations arise. I am not a fan of big brother, so this approach has served me well…and being able to speak my mind, teach courses and even write a book on personal finance without the fear of negative repercussions from my employer or licensing board is very (VERY) important to me, and I believe others find it refreshing as well.

      …Although I do have to admit I sure would like to take the Dave Ramsey financial counselor certification…I’ve just been too cheap to do it up to this point.

      • Nora

        Thanks for the explanation. I really wasn’t trying to be snarky- just interested in knowing a little bit more about where you are coming from. I was very intrigued when you talked about the ability to get a job without a credit score. Nobody we know in finance could keep their jobs without a credit score. I’m glad that you are able to take home the bacon without registering with the state or becoming licenced. I always like “seeing” how other people do things.

        BTW, my hubby has all of his exams and doesn’t work in sales-at all. Out of college he was an assistant bank manager and hated the sales. He too- saw too many people fall into the debt trap…

        • Barry

          No worries. You make a good point about working in the finance world. The last two companies I worked for used your credit score to verify you didn’t have issues of concern (bankruptcy, etc) an this is common with employers today. This approach wouldn’t be an issue for those who avoided credit because most employers are only looking for signs of trouble, and a lack of history doesn’t indicate that.

  • Sabrina

    I agree Barry. We were able to pay off lots of debt this year and my best friend encouraged me not to cancel the cards. It’s bad for my credit score. I told her I didn’t care about my credit score. My husband and I even cut up the cards together. :)

    • Barry

      :)

  • Barbra

    I’m greatful that you are not afraid to say something. Because of your willingness to share, I’m learning more about finances and a better way to do them than I’ve ever had. Working on the baby steps to become debt free and know better how to make money work for us and not against us. Thanks so much.

    • Barry

      Although I try to remain kind and relatively peaceable in my “sermons” on debt, I never mince words. Thanks for the encouragement.

  • Shannon

    Great points! All would do well to avoid the “trap” of credit cards; so much heartache would be avoided! I remember your wife saying in one of her posts that she used the credit cards that came in the mail to clean soap scum out of the shower/tub…now there’s a plan!!! This year is for us too a year of positive changes under God’s leadership!

    • Barry

      Credit cards are definitely one of the best ways to get rid of soap scum – card scum to clean soap scum. ;0)

  • Sarah

    My husband and I took the Dave Ramsey course just recently We have been married for 20 years. How I wish we knew now what we knew then. Our children’s high school AND college graduation presents will be taking the Dave Ramsey course so hopefully they won’t make the same mistakes we did.

    • Barry

      Best course money can buy.

  • Chesca

    I wish this were true in canada about buying a house we are 2nd time homebuyers and been in our home 5 years would love to move to a home with acreage around where we are it would actually cost same to less for what we already have. But we too have been through hard knocks for the most part our fault,and are better for it. God has shown us time and time again he is the provider we don’t have any desire to take on credit (and in many cases they don’t want us either :) but the freedom of buying used and saving the difference puts such a smile on my face, and on that of my family i only wish we went to the school of hard knocks (or had someone give us wise counsel on finances) sooner! We plan to save little by little for our own land and then go from there, if we never get it so be it. We won’t borrow for a house again (even though we are in a mortgage for this home currently) God bless and keep shining God’s light in the face of dark counsel of this brain washed world, it is truly making a difference and is such an encouragement and testimony that with God and His perfect words of direction all things are possible!

    • Barry

      :)

  • Rebecca

    Hi Barry,
    I have a credit-related question, but I don’t know if it belongs in the comments section, so I apologize in advance. My husband and I recently bought a “new” car for approx. $14,000, cash. The best deal for the car we wanted was at a local dealership. I was upset about some of the forms that they insisted we sign. One was a “credit” application, but we didn’t fill in anything but our names, address, and SSN’s. The dealer said they need to run credit reports on anyone who purchases a car with cash (they said the law was enacted after 9/11). Another form regarded privacy practices at the dealership and who they would sell our info to. I refused to sign it until they wrote in that they would not share our info with our vendors – don’t know if they will follow it or if them writing that will help. The last form was some kind of addendum to the credit report form. It said that they had the right to contact us at work, etc. if we didn’t meet the terms of our loan. I didn’t want to sign this form either since we didn’t take a loan and I didn’t think it applied. They claimed that we had to sign it just in case the check bounced. Are all these form necessary? What are my rights in this case? I too am worried about personal info and big brother so I was just wondering if you could shed light on this kind of situation.

    Thanks!

  • Julie B.

    I certainly think this is better advice than “borrow and spend now, pay later,” but it seems like you’re throwing the baby out with the bath water. Yes, it would be nice if banks, insurance companies, and prospective employers and landlords would look beyond a credit score, but oftentimes they don’t. Jobs and living situations aren’t always that easy to come by, especially in these times.

    • Barry

      Hey Julie, thanks for bringing this up. My point isn’t that having a good credit score is evil and last time I checked, Stacy and I both had very good credit scores. The point is that I am not concerned with anyone taking actions to improve his or her credit score because it doesn’t define who we are as individuals. Instead I want you to pay your bills on time, avoid ALL unnecessary debt and live within your means. That takes the focus away from your credit score, which is what so many in society focus on today. If behaving well financially results in a good FICO score, great – but if it doesn’t, I’m not concerned with that in the slightest.

  • http://listenlearnactandreflect.blogspot.com Phoebe

    Thanks for this post. We are struggling right now to get our credit score up because we want to refinance our home for a better rate; although we definitely need to improve our credit score to meet that goal, your post put it into perspective. My parents had no credit (they never used credit cards) when they bought their house, and they were still able to get a mortgage although they had to put a significant down payment.

    • Barry

      Perspective is a great thing. I’m glad I could help.

  • Emily

    I was one of those kids who got a credit card at 18 to “start building my credit.” Looking back on it, it makes me so frustrated that my parents did that (and for my three sisters as well). I was raised in a household where my father made horrible financial decisions that they are still feeling the consequences of today. Thankfully, my husband and I figured it out before we got too far down the destructive credit path, and we are working hard to pay off the credit that we do owe. We are staying put in our very small home that doesn’t cost us much until we can pay off our debt and get a bigger home that we can easily afford. I’m excited to get to the point in our lives where we aren’t a slave to those bills coming in every month.
    We both have great credit scores, which I suppose to help us out when we apply for a new mortgage, but the next house we are going to buy is going to be our “forever home” (Lord willing), so if our credit score goes down or disappears, so be it.
    And no, my kids will NOT EVER receive credit cards upon high school graduation.

    • Barry

      Despite those who argue that building your credit is a good thing, I talk to people all the time who share a story like yours. Thank you for being willing to make things better for your kiddos!

  • http://bugs.ingenius.com/default.asp?IC-Aastra.8.152.0 bugs.ingenius.com

    Hi there! This article could not be written any better!
    Looking through this post reminds me of my previous roommate!

    He constantly kept preaching about this. I will send this information to him.

    Pretty sure he’ll have a very good read. Many thanks
    for sharing!