My credit score: A love/hate relationship

Screen shot 2009-12-09 at Dec 9, 2009, 10.37.26 PMWhat’s that saying? Oh that’s right, “Damned if you do and damned if you don’t.” I’ve never really had a reason to use this phrase before, but when it comes to my FICO score, it is the first thing that comes to mind. The only way to have a high FICO score is to continually be borrowing money. This causes a problem when your blogs name is Punch Debt In The Face. How can I possibly strive to have a high FICO score, but swear off virtually all debt? Unfortunately, I’m not sure I can answer that question, but I’m gonna give it my best shot.

For those that don’t know, your FICO score is basically a measure of how likely you are to repay your debts. A high FICO score, means you will probably make most payments on time, with few (if any) hiccups. A low FICO score, indicates a high probability you will make late or no payments rather frequently.

There are five main categories that make up each individuals FICO score…

* Payment History (timliness of repayment)
* Amounts Owed (available credit compared to credit used)
* Length of Credit (length of time you’ve had the account)
* New Credit (how frequently are you opening new accounts)
* Type of Credit (student loans, car loans, credit cards, etc)

Now that you know the components of your FICO score, lets talk about why it’s important. I assume most of my 20 something readers are like myself andย  hope to one day purchase a home. I would also assume most of us plan to take out a loan to purchase said home (if you are planning on paying 100% cash, you need not continue reading).

Did you know your FICO score plays a huge factor in your ability to purchase the home of your dreams. Let’s run through a little hypothetical situation…

Johnny has a terrible credit score and walks in to his local bank to apply for a $200,000 mortgage on his dream home. Ninja also walks in to the same bank to apply for a $200,000 mortgage, but Ninja has a very high credit score. There is a good chance the bank is going to reject Johnny’s application, therefore crushing his dreams of being a homeowner. But let’s say they don’t. Let’s pretend they decide to qualify Johnny for that loan. The bank gives Ninja a low interest rate of 4.75% because he is not a risky person to loan money to. With Johnny however, the bank has taken on some risk by giving him a loan, so they decide to charge him an interest rate of 6%. Ninja’s total interest paid over 30 years is going to be $175K, meanwhile Johnny’s going to have paid over $230K in interest. That’s a $55K difference for taking out the same loan from the same bank. High credit scores generally result in better financing options.

Here’s the problem. The only way to have a high credit score is to be continually borrow money. You’ll notice all five components of the credit score require you to have credit available to you (aka you have to be in debt). What if you are like me and have sworn off incurring future debt, except for a mortgage, and are aggressively working to get rid of all current debt? Fortunately there is at least one way to continually be “borrowing” money, without actually being in debt.

I use my credit card for every purchase I make. By the end of each month, my balance is usually around $1,500. I then pay off this balance in full, so I incur no interest charges. My CC company will then report this information to the credit agencies. Since I made my payment on time, my credit score is going to continue to increase. It’s a simple, yet effective way, to raise your credit score, without having to pay for it.

This is the only free way to raise your credit score I know of. Does anyone else know of other ways to raise your credit score without going in to debt? Let me know ’cause I’d be very curious to hear them! At the end of the day I really wish credit scores didn’t exist, but the reality is they do, and they are frustratingly important.

14 thoughts on “My credit score: A love/hate relationship

  1. An associate of mine likened it to slavery once. I wish I could find his exact words.

    Ah, here it is:

    Jake Stichler wrote:
    > *No longer* the case? Paying off your balance every month has made you
    > a crappy customer for YEARS.

    Exactly right. A high FICO score results not merely from being a good
    credit risk, but above all from being a good credit *consumer*. A FICO
    score is a "good slave" index. The higher it is, the more you have
    demonstrated yourself a willing and productive slave.

    You say that they're "frustratingly important," but really, if you work to the point where you can live outside the system (and preferably outside the country), you'll find just how meaningless it really is.

    • I can live outside the system, with the exception of a mortgage. I don't plan to do the 100% down thing, so my credit score is going to be heavily looked at when I apply for that loan. If I had no plans to purchase a home, then I would not worry at all about my credit score, as I have no other plans to borrow money….ever.

  2. The short answer is NO! You gotta use credit to have credit – and it's a Catch-22 – the more responsible you are, the less opportunities you might have to get credit. So I was a really GREAT customer of the lending industry for a long time – paying interest out the *&%(% and not being responsible…don't go there, 20-somethings! If I could hijack the TARDIS solely to tell my 20 year old self how miserable that BOA credit line would make me 16 years later, I would. So from a 'rehab' your credit score perspective, my credit union financial advisor suggested I take out a signature loan (personal/unsecured loan) and deposit the money into their restricted savings account (which only allows two withdrawals per month) and set it to auto-pay every pay period. The money's not mine and I'm paying a very modest amount of interest per month to rebuild my credit. Obviously, this was brought about by my having a great relationship with my credit union (while my credit score is in the tank, they were willing to manually underwrite me for this signature loan at a ridiculous low rate), but it is not an option available to everyone.

  3. I actually just got my credit score/report last week. That post is sitting in my drafts folder waiting to be published. I think you may have motivated me, so check for it soon.

    I've learned from my credit report that you can raise your credit score by:

    -Opening cards with high limits (that's not going into debt per se, but you will need to use it)
    -Eliminating cards you don't use (if the card companies don't have a payment history to report, it actually hurts you, so you should just cancel)
    -Keeping your spending under 10% of your limit (so again, still have to spend, but this creates a nice trickle down effect. If you spend less than your limit AND keep repaying on time, ask for a higher limit, which will increase your total credit available).

  4. I recently did a post on credit scores – mine is steller, but Jordan's is not – which sucks b/c when we go to buy a home we'll need both our incomes to qualify – but his score will hold us back. The only thing we've been able to do is get him a secure credit card that he *trys* to pay off each month (he's not quite the PF freak that I am) – in a year, he's upped he's score by about 20 points, but it's still in the 600s. It takes forever. The worst part is – he's never abused credit – he's just never had a credit card before now.

    What he needs is an RRSP loan or some silly thing – but right now, he's score's to low to quailify.

    I second your sentiment: Your damed if you do and damned if you don't.

    • So when you go to qualify for a loan, they take both spouses credit scores and add them together? Interesting?!!! Got to get the wife's score up then!

      • If you are trying to qualify for a loan based on your and your wife's income, then yes both persons will be factored in to the equation. If you just want to qualify for a loan based of your income, then only your credit history will be examined. I'm gonna try my hardest to qualify for a loan on just my income because I don't want my future wife to work when she has kids (if she doesn't want to). Sometimes people purchase homes based off their dual income, and a few years down the road find themselves struggling as one loses/quits their job.

  5. I check my score every year and while I used to care a lot about it, not I don't care a whole lot.

    Maybe when I start saving for a down payment the I'll start checking the score more regularly. I'm more concerned now with just getting the debt under control. If that helps the score, so be it, but I'm not going to go out of my way to keep my score at a certain point or do things just to make it higher.

    Since I don't need a good FICO score now or anytime in the next 5-7 years, I'm not worrying about what it is just making sure that I do the things I need to do now.

    Perhaps I'm a passive-aggressive credit user?

  6. You got it. Those who insist that using a card while you have the cash at the ready to pay the bill in full is somehow still borrowing have to face the fact that they are risking having a low credit score or no score at all. Dave Ramsey's advice in this matter is more dangerous than helpful. A potential employer who pulls a credit report on you might think twice as someone with no open accounts is out of the norm.

  7. You can pay your credit card in full? Oh, maybe that's why I don't use mine.

    You could always move to a remote location to pay full for your house. Say the Marshall Islands? ๐Ÿ˜‰

  8. My credit is totally shot from years of late late payments on my enormous student loans, which shouldn’t be a problem, really – I don’t plan on ever financing a car, or even buying a house (I’m so sold on renting for life). EXCEPT that employers often check your credit before they’ll hire you (WHAAT??), and of course, landlords check it before they’ll rent to you. So it’s not even just a credit score anymore, it’s a responsible-human-being score. Makes me crazy, especially since FICO is a private company – it’s not like your credit score is official in any real official way, it’s just a bunch of jerks keeping up on your financial whereabouts.

    So, I’ll be spending the next few years with a big scarlet F (for fail, duh) over my head, until I can get a better job and a cheaper place (catch-22s all around, eh?) and get myself out of this hole. Yuck.

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