In my opinion, “credit score mania” is possibly the most overrated area of personal finance.
That’s not to say credit as a topic is unimportant, it absolutely is important.
But beyond the basics of building solid a credit history, my goodness it’s overhyped.
It’s undeniable that having good credit can provide access to education, transportation, a mortgage, and even business/investment opportunities.
And yes, having bad credit can make it challenging and costly to access assets you wouldn’t be able to afford otherwise.
But can we please stop obsessing over credit scores like they matter in the day to day, or even month to month journey of achieving financial well-being, freedom, and independence? Because for the vast majority of people, they really don’t.
Your credit score doesn’t define who you are, nor should it be your sole focus while becoming financially fit.
Learn AND implement the basics of how to build it, maintain it, leverage it, and then hit the cruise control on it.
It doesn’t need to be idolized, fawned over, flaunted, or overcomplicated. Trust me, it’s not that deep, and you’ll see what I mean.
Over the next four posts, I will be breaking down the topic of credit and going into detail how you can simplify building strong credit.
It will be the same thought processes, approaches, and behaviors I used to build and maintain the 800+ score I’ve had for over a decade.
And NO, that is not me flaunting it (lol). If anything, you’ll see just how boring and simple of a process it was to get it.
To Start, Credit Is Simply About Trust
Before you get bogged down with the technicalities and nuances of credit, you first must realize that credit is simply about trust.
In its most simplistic form, credit is a type of arrangement between a borrower and a lender.
The arrangement is this: the borrower receives a good, service, or money and promises to repay the lender at a later date.
Inherently, that means there needs to be a foundation of trust in order for the lender to extend credit to the borrower.
If there’s no trust, then there’s no credit extended.
Learn what it takes to master being trusted by a lender, and you’ll be rewarded. If that sounded very “Mr Miyagi-ish”, good.
Interest: The Privilege of Borrowing
Interest is a finance charge for the privilege of borrowing.
Or, as Garman & Forgue put it, interest represents the “rent” one pays while using someone else’s money.
When it comes to most common types of loans (e.g. credit cards, auto loans, mortgages) the “rent” is expressed as an annual percentage rate (APR).
The APR is an annual rate you get charged to have access to what was borrowed through credit.
It’s one thing to be trusted that you will repay what is extended to you, but that trust is not free.
Why We Have Credit Scores
So, ok, credit is trust and interest is the privilege of borrowing. Then why do we have credit scores, you ask? I’m glad you asked!
Once upon a time in the 1950s-60s, local credit bureaus would collect information on borrowers from local businesses to learn who was paying their bills.
This information, in addition to any extra “commentary” a businessowner wanted to provide, became a “payment history” of sorts.
Imagine for example, Verizon keeping a file on you like “yea, he/she sometimes pays on time, and they usually have an attitude to go with it”.
This info went into your “payment history” that bankers could use to determine whether or not to give you a loan.
As you can imagine, this system was definitely not the most accurate way of assessing creditworthiness. Especially since they could pretty much look at you or your “demeanor” and decide not to do business with you.
The system needed improving and by the 1970s, The Fair Credit Reporting Act created a system to regulate how information was collected, reported, and obtained.
This new system and associated scoring model made the process more standardized, which benefited borrowers.
It made life a lot easier for lenders, too.
The scoring model gifted lenders with a quick snapshot tool to help them decide who to trust, and how much to trust them.
Credit is about trust, remember? Ultimately, you credit score is an indication of how much a lender can trust you with their money.
Your score answers this question: “How well do you manage debt?”
That’s it. Nothing more, nothing less.
Your Credit Score Is Not An Indicator Of Wealth
So, with trust being an important element in any relationship, why do you need to stop overthinking it? Because at the end of the day, your credit score is just a way to measure how risky of a borrower you are.
Your credit score tells a lender whether or not they have a good shot of getting their money back from you.
Their money is your debt. Yes, it could be debt to provide you access to an opportunity, but it’s still debt.
And if a credit score is just a measurement of how risky you are to repay debt, why would you want to put this number on a pedestal?
The score doesn’t speak to your complete money picture; it’s just a piece of it.
It sheds zero light on how much you save, invest, or whether or not you have a healthy relationship with money.
Credit scores have no influence on your net worth, and they don’t measure wealth in any way, shape, or form.
A person could have an amazing credit score and still be in bad financial shape by every meaningful measurement. Just like someone with only a decent score just may have more money saved and invested than you’d think.
Consider this: A person living paycheck to paycheck, $4 in the bank, and not making any ground on their financial goals could have a 780 score if they can manage their debt well enough.
Credit scores do not measure actual financial success and only represents a limited piece of the puzzle for most people.
How To Build A Solid Foundation of Credit History
As I mentioned earlier, I’ve had excellent credit most of my adult life.
But I didn’t build that by obsessing over it. I built it by simply practicing the basics; no real special attention beyond that.
Have I benefited from it? Of course! Extremely low rates on my mortgage, never being denied a line of credit, and receiving high limits, to name a few benefits.
But, let’s also keep it in perspective. My credit score isn’t paying my bills, keeping me out of debt, building my emergency fund, investing in my 401(k), or directly inching me towards any of my personal goals.
If I want to build a life of financial comfort, happiness, and options, that’s going to come from focusing on what will really move the needle.
So, my challenge to you is this: Instead of attaching your financial identity to a credit score, focus on the healthy thoughts, feelings, and behaviors needed to create a solid foundation.
When you put emphasis on building the foundation, you’ll naturally find yourself in a position of healthy credit (debt) management and your score will reflect that.
How to build a solid foundation for a good credit history:
- Establish and maintain a checking account and a savings account
- Have utilities billed in your name
- Maintain a good payment pattern on bills
- Understand your own credit card habits and temptations
- Recognize that credit cards are not “free money”
- Avoid charging what you can’t pay off in full each month
- Get clear on the difference between needs and wants
- Learn how compound interest impacts what you buy on credit
- Stay current on, and pay off outstanding loans quickly
- Check credit reports regularly and dispute errors
This is focused on building a strong foundation. We will get more into the ins and outs of establishing a strong credit score in future posts.
We’re just getting warmed up here.
I plan to go in on this subject much more in the next few posts, but for now, just take a deep breather.
Or, maybe it’s I that needs the breather. I tend to get a bit passionate about these topics.
Either way, just remember: your credit score is not your identity, and it doesn’t tell the entire picture.
Focus on getting in a good head space, building a solid credit foundation, and practicing overall healthy financial behaviors.
If you do that, you can bet that the “score” will fall into place.