As a financial coach, people often ask me about their credit score. That is to say, they want to know how to get a good one. But why? Why do we depend so much on those three numbers? It begs the question: do I need a credit score? Well, I’m about to commit financial blasphemy. In other words, I’m about to tell you that you don’t need one.
What is a Credit Score?
If you watch TV at all, there’s no doubt you’ve seen the commercials. “Build your credit! Repair your credit! Get free access to your score!” I even saw one sad commercial that featured an expecting mother. She stared longingly at a stroller for her baby. However, she didn’t have the credit score to get a good loan. Credit boosting to the rescue! Now, this poor mother can go further into debt and despair by borrowing money she can’t repay! But what is a credit score?
To put it simply, a credit score measures how well you interact with debt and repayment. That’s it! It has absolutely nothing to do with how well you manage your money. In other words, you could have only $50 to your name and still have a high score.
What Determines My Credit Score?
Well, I can tell you what DOES NOT determine your score. It’s not your net worth, your bank account balance, your salary, or your budget. Nope! On the contrary, a credit score only measures your interaction with debt. Here’s how they determine your score:
- Payment History: 35%
- Amounts Owed: 30%
- Length of Credit History: 15%
- Credit Mix: 10%
- New Credit: 10%
As you can see, credit scores do not determine how wealthy you are. Instead, they only look at how well you handle debt.
What are the Score Ranges?
So, what are the credit score ranges? How do I know if it’s good or bad? First, credit scores can range from poor to excellent. Here’s a breakdown of the FICO ranges:
- Excellent: 800-850
- Very Good: 740-799
- Good: 670-739
- Fair: 580-669
- Poor: 300-579
Supposedly, the score measures the likelihood that you will default on a loan. For example, they believe someone with a score of 800 or more is more likely to make on-time payments than someone with a score of 600. Therefore, lenders love people with high credit scores!
Is it Better to have a Low Score or No Score?
I want to be clear. Earlier in this post, I stated that you do not need a credit score. However, I am not advocating for people to have LOW credit scores. Instead, I’m advocating for NO credit score. So, what’s the difference?
First, a LOW credit score means there is likely some money trouble in your past. For example, maybe you missed a few payments on your car note. Or, you had a credit card go into collections. Consequently, your score will drop faster than Congress’ approval rating.
In other words, having bad credit will indeed impact your finances negatively. It will make it harder to rent an apartment, get a mortgage, or even obtain certain jobs.
So, Do I Need a Credit Score?
That depends. Are you still going to use credit cards or take out loans? Well, yes, I would say you need a credit score. However, I advocate for a debt-free life! If your goal is to be debt-free and to never borrow money again, you don’t need a credit score. After all, has debt really been good to you? Somehow, I don’t think so.
But I want to bring you back to reality. Let’s say you have millions of dollars, make $300,000 a year, and own 10 debt-free rental properties. Do you know what that does to your credit score? NOTHING! Having wealth has no impact whatsoever on your score. Even if you had bad credit and suddenly stumbled upon a million dollars, it would do nothing to improve your score.
As stated previously, your credit score only affects you if you plan to stay in debt. I for one, don’t advocate for it. Don’t let those three numbers rule over you. More importantly, don’t let debt rule over you.
What About Getting a Mortgage?
But wait, what about buying a house? I can tell you that you don’t need a credit score for those things, either. WHAT?! Mind blown. That’s right, you don’t need a credit history for a mortgage!
How is this possible? Let me introduce you to this thing called manual underwriting. Manual underwriting is nothing new. Mortgage lenders have done it for years! However, in today’s computerized environment, many lenders now depend on algorithms and computer programs to make decisions for them. Instead, find a lender with an actual brain. All they do is verify your income, your savings, and make sure you’re a responsible human being. That’s it!
Making a Plan to Live Without Debt.
So, do you need a credit score? No, you don’t. So, what can you do instead of trying to build your credit? First, start budgeting and give all your money an assignment. Second, make a plan to pay off your debt, except for your house (unless you have the money to get that puppy paid off!). Finally, once you’re debt-free, you can start planning for your dream retirement, building wealth, and giving more!
Once you get rid of all your debt, why would you go back? Isn’t life bliss without payments? Once you no longer have debt, you don’t need a score. In fact, you never needed it in the first place.
Therefore, I challenge you to kick debt to the curb and never look back! Go and pursue financial freedom for God’s glory!