Are Credit Scores Still Relevant?

There is no doubt that recent history has turned many people off to debt and credit. For some that involves holding off on a property or car purchase until you have the entire amount to pay in cash and to others it could mean closing & cutting up your credit cards forever and swearing by a complete cash-only lifestyle. Some simply choose to drop off the grid for fear of “big brother”. Whatever the rhyme or reason, this leaves a very big question that begs answering: is good credit still important?

 

The answer to that question isn’t very simple.

 

It’s not simply an issue of credit scores for the sake of obtaining new credit lines alone. Of course, the desire to obtain financing for an automobile or a home (whether for residence or investment) still exists, but with all that has happened in the credit markets over the past couple of years, lenders are making less money available and the money they are making available are coming at higher requirements. There are no more stated-income, no more 125% loan-to-value, and no more other risky loans being underwritten today. Lenders are going back to the old standards: 20% down payments, proof of sufficient income, and most importantly credit scores which show a history of successful ability to manage debt obligations.

 

Additionally, the insurance industry has gotten involved. Now, in order to get car insurance, healthcare coverage, or a variety of other insurance products, the companies that underwrite these policies are using your credit score as a component in their calculation of how much they are going to charge you. While it may not be the main component of your payment determination, it will nonetheless play a part.

 

Then you have to consider employers using credit scores as well. Potential employers, especially in cash-based jobs, retailers with high-ticket items, and jobs handling sensitive information are using credit scores to judge whether candidates are safe or risky future employees. A bad score may signal a security risk, and therefore an unemployable candidate for such job opportunities.

 

If you are a small business owner, and you want to open a credit card account tor lease equipment, you will have to have your credit run particularly if the business is new and doesn’t have a credit history of its own. For small business credit card or lines of credit. you will also have to provide a personal guarantee for any debt incurred by the business. Regardless of what your goals are, having a personal credit history, and a good credit score in the eyes of the lender, are imperative.

 

Whether we like it or not, these are realities and have to be considered when weighing the need for maintaining good credit, or even a having a credit history at all. I’m not out to explain or justify credit scores. Instead, I’m just laying the foundation for you to voice your views. So I leave it up to you to debate:

 

Do you even care about your credit score? Even if you lead a cash-only lifestyle, are you the least bit concerned?

 

 

 

  • http://marriedwithdebt.com/ John @ MarriedWithDebt

    It’s a shame to see the Debt Industrialized Complex tightening their Fair Isaac noose by horning in on hiring. Another question to add: If we are headed towards a “cashless” society, will credit be the only option (other than barter?)

    • http://www.dollarversity.com Eric J. Nisall – DollarVersity

      I can see the reasoning behind the employer use.  I mean if someone is in trouble financially and they have easy access to cash or something they can turn around and sell quickly it would throw up a red flag for me.  Maybe if they were only allowed to access the score so that the details remained private it would be a better situation?

      I really prefer the idea of being cashless.  Handling paper money, having to go to the bank to replenish the stack, not having any security, etc all annoy me about using cash.  

  • http://moneymamba.com/ JT

    I should care about my credit score, but I haven’t – mostly because I haven’t been required to care.  That sounds a lot worse than it should.

    What I mean to say is that my credit score is unnecessarily lower than it should be given that I keep a credit card (with a BT) virtually maxed out.  I could move the funds from savings to pay it off, but I kind of like having the excess cash on hand.  It’s become a security blanket of sorts, even though I know that’s a completely backwards way to look at it. Maybe I’ll let it go soon enough and reclaim my extra credit score points.

    • http://www.dollarversity.com Eric J. Nisall – DollarVersity

      If you don’t have a need for a really high credit score, there probably isn’t much reason to worry.

      I don’t think it’s necessarily backwards, and see no viable reason to sacrifice flexibility for a few points, especially if that BT is carrying a 0% rate, in which case it isn’t costing you anything anyway.

    • Sunshine25

      I hope you are not paying interest on the balance. 

  • Sunshine25

    I am concerned about my credit score because it affects whether I can I apply for more credit cards for the sign-up bonus. If your score is too low, you will not get approved. That prevents me from making money off the banks. :)

    • http://www.dollarversity.com Eric J. Nisall – DollarVersity

      That’s true, but at the same time, at some point won’t all of those lines adversely affect your score?  Say, if you apply for too many within a certain window, or have too many trade lines in total.

      • Sunshine25

        Hard inquiries, number of cards, nor average age of cards do not affect your credit score adversely (25% of your score). The biggest factors are on-time payment and debt to credit ratio (65% of your score).

        http://www.myfico.com/CreditEducation/WhatsInYourScore.aspx

        As long you pay on time and pay off your balance, the other factors are not a strong weight. The hard inquiries stay on your credit report for two years. As time passes, the 2-5 point drop in your credit score per inquiry will recover.

        • http://www.dollarversity.com Eric J. Nisall – DollarVersity

          Actually, they do.  What you just pointed out was that the weight was skewed more heavily to the payment /usage factors.  Have you never heard of someone being denied an application due to having too many lines open?  For too many recent inquiries?  I have.

          It’s true that the other factors may have a stronger weight, but you can’t blatantly dismiss the 25% portion entirely like you did–especially when there is nothing that to support that wording. 

          • Sunshine25

            I’ve been denied credit for making too many applications in a short amount of time. :) We are getting off your initial point though which is about credit scores. This is not a discussion about whether you are approved or denied credit lines. If you want to discuss factors for being denied credit, write another blog post. :)

  • Anonymous

    I greatly care about my credit score – mostly for research purposes. I’m trying to see what it takes to achieve The Perfect Score – 850. (Even though having above 720 will most likely qualify you for the best rate). I’m doing it really just to see if it’s possible. I’ve taken some classes taught my people who worked for the bureaus and they could never give me a straight answer. Everything “depends”…

    • http://www.dollarversity.com Eric J. Nisall – DollarVersity

      I think that there are no real answers when it comes to credit scores.  Just a lot of assumptions, but no absolutes.  Interesting experiment, though.  When I bought my condo I was at 805 according to the developer rep, but it really didn’t help much since to get all of the perks (1 year HOA dues paid, and get the broker his kickback for referring me, which we then split) I had to go with their preferred lender who gave a relatively high rate.

  • http://twitter.com/johnulzheimer John Ulzheimer

    Before you suggest doing away with credit scores let me take you down memory lane…

    1.  Remember when it took 3 months to find out if you were approved for a mortgage?

    2.  Remember when credit reports were manually processed by humans instead of machines?  This sounds great but humans processing of credit reports is slow, inconsistent, expensive and, frankly, too subjective.  Think of a megabank and how many credit decisions they make daily…tens of thousands.  Can’t do that effectively with just manual review.

    3.  Do you remember the days when “instant credit” didn’t exist?

    4.  Do you remember when your race, gender, profession were held against you by lenders?  

    You can thank credit scoring for helping to do away with all of that.  It ain’t perfect but the grass isn’t greener on the other side.

    • http://www.dollarversity.com Eric J. Nisall – DollarVersity

      Thanks for the input John!

      By no means am I insinuating that credit scores be eliminated.  In fact, I’m a huge proponent of the wise use of credit and debt to one’s own advantage.  And, I personally think credit scores are a great tool that, while some tweaking may be necessary, are quite valuable to society as a whole.

      This was just an exercise to get people who may not normally come by the site talking and to get others thinking.

  • Anonymous

    I care very much about my credit score.  My employment, real estate endeavours, insurance and credit limits all depend on credit.  Without A+ credit I would not be able to command so much money in the job market or build my real estate empire.  At this point credit is assisting my goals tremendously.  Albeit, I use credit wisely and if my credit sudden fell off a cliff I could supplement with cash but it will slow my acquisition of assets tremendously.

    • http://www.dollarversity.com Eric J. Nisall – DollarVersity

      Thanks for the input Mr. Trump! lol  That pretty much echoes my thinking on credit–a useful tool to supplement an overall strong financial toolbox.  Of course, if everyone used it wisely we probably wouldn’t be talking about it very much these days, huh?

      • Anonymous

        LOL I wish I had the Donald’s connections and head start with his generational wealth.  I hope to provide for my kids like that.

  • http://www.moneyspruce.com/ Jeffrey Trull

    I think a good score is still important for a lot of things, but I generally don’t follow mine or care too much. I have a very good score even without trying (all I do is pay bills on time). I’m not planning to take out a loan soon, but I’m sure it helps to have a good credit score for that as well as for the job considerations.

    • http://www.dollarversity.com Eric J. Nisall – DollarVersity

      I don’t really think about mine too much either, but I still try to follow routines as if it was a major concern.  That way, should I need a good score for anything, I wouldn’t have to scramble to get it right.  I hate having to do things in a rush or at the last minute.

  • http://twitter.com/prairieecothrif Miss T

    I find credit scores like page rank. They are still used  a fair bit. Even when refinancing a mortgage that you have previously been approved for, your credit rate is looked up. To me it is best to focus on keeping it in check. 

    • http://www.dollarversity.com Eric J. Nisall – DollarVersity

      Oh, absolutely.  And no one is going not recheck all of your qualifications when it comes to lending money.  Especially not if they learned any kind of lesson over the past few years