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Your credit score is not important, and it also is. Let me explain. There are two camps in the personal finance arena that shout the loudest. In the one camp, we have the “Debt is dumb” folks led by Dave Ramsey. In the other camp, we have those obsessed with amping their credit score to the sky with scientific precision. Honestly, neither of these approaches to your credit score is healthy for you financially or emotionally.
Your Credit Score is Not Important
According to Dave Ramsey and his followers, debt is the worst and your credit score isn’t important at all. In fact, Dave regularly brags about not having a credit score because he hasn’t borrowed a penny in decades. I have to be honest, I used to be part of this camp. I taught Dave’s Financial Peace University as a volunteer for my church for ten years. As my financial sophistication and wealth grew, I decided this mindset no longer fit me. I now disagree with this approach for a few reasons.
1.) Not all debt is created equal. I like to say it this way, “Debt can be used as a slingshot or a shovel.” Demonizing debt can cause people to feel guilt and shame over what is essentially a business transaction. Debt is a decision to pay something off over time. It’s a business deal between you and the bank. Using debt to buy a large asset, like real estate or ownership in a business, can actually improve your financial situation in the long run. Lumping all debt together and saying it’s dumb is, well, just plain dumb!
2.) You shouldn’t cut up your credit cards. Dave Ramsey can regularly be seen with a huge pair of scissors, chopping up people’s credit cards. Can some people overspend on credit? Absolutely! Can some people use credit cards responsibly and pay them in full monthly? Of course! You’re an adult and only you can decide if you can responsibly handle a credit card.
Credit cards provide a higher level of protection than debit cards because most have a zero-liability for fraud. If someone fraudulently uses your debit card, the money is gone from your account until the matter is settled. The bank is going to try harder to recover their money (credit card) than your money (debit card)!
3.) Your credit score affects things beyond your ability to borrow money. Your credit report and credit score can affect your insurance rates, your ability to rent an apartment, and your employability in certain jobs. Think of your credit score as a vital part of your “financial reputation.” In most states, it’s perfectly legal for insurance companies to charge you a higher rate for car insurance if you have a low credit score. A direct correlation has been found between high insurance claims and low credit scores.
If you’re seeking employment in a position that deals with any type of financial data or transactions, your credit will likely be examined. As a former HR manager, I can tell you that employees with a checkered financial past were frequently high-maintenance for management (asking for pay advances, using the company credit card for personal matters, garnishments, etc.)
Your Credit Score is of the Utmost Importance
Many folks are downright obsessed with their credit scores. If you google “improve my credit score,” you’ll get 245 million results! Unless you’re in the process of qualifying for a mortgage or recovering from bankruptcy, you really shouldn’t be hyper-focused on it. Of course, sometimes this is easier said than done, since you might be able to see your score every time you log in to see your bank account, credit card, or personal finance app.
Some time ago, I invited a credit expert to teach my clients a Credit 101 webinar. How credit scores are calculated is something we should understand. This credit expert knew all the tricks for achieving a stellar score. By the time the webinar ended, all of our heads were spinning. She achieved an amazing credit score by having over a dozen credit credits with an elaborate spreadsheet calculating how much money to charge on each every month and multiple payments of varying amounts timed just right. Honestly, this approach is as unhealthy as the “ignore your score” camp, and here’s why.
1.) Your credit score only measures your “success” with debt. Your credit score takes into account the following: payment history, amounts owed, length of credit history, new credit, and mix of credit. If you “play nice” with your debt, make payments on time, have enough debt (but not too much!), you’re rewarded with a good score. The purpose of your credit score is to let banks know if you’re a good little borrower!
2.) Your credit score is NOT the best measure of your financial success. Ultimately, your net worth is the key money metric you want to focus on. Your net worth is what you own (assets) minus what you owe (debts). Two people could have identical credit scores, but very different net worth numbers. Your credit score doesn’t take into consideration your income, bank account balances, investments, home equity, or business ownership. You could win the lottery tomorrow, increasing your bank balance by $20 million dollar, and your credit score would not go up by one puny point! If my clients are going to be obsessed with improving only one financial number, I’d prefer it be net worth.
3.) Your credit score is only one small piece of your financial health. You wouldn’t define your physical health solely by your blood pressure numbers! In the same way, when we approach our financial health, we need to look at ALL the numbers that matter: net worth, income, cash flow, savings, investments, and yes, your credit score. The bottom line is that we should be aware of our credit scores without being obsessed with them!
Related: Why Money Is So Emotional