One Money Design

How many times have I checked my credit score in the last 5 years?  The answer is zero.  Yep, that’s right.  Good or bad, it just isn’t that important to me.  Dave Ramsey often jokes about how he doesn’t have a credit score; he says his score is zero.  He doesn’t borrow money and doesn’t use credit cards, so there is nothing in which to base his score upon. 

I don’t plan to borrow money for a new car loan, open up a new credit card or take on any form of future debt.  I’ve always had good credit history.  I’ve paid bills on-time, I’ve used a credit card and paid it off each month and haven’t really ever taken on debt other than a mortgage and car notes (which we’re trying to pay off).  Why should the credit score matter?

I suppose my score might become more important to me if I had a past bankruptcy or problems with delinquent payments.  At that point, my low score would impact a new home mortgage which would come with a high interest rate.   My score, if low, might also become more important if I were looking for a new job.  Some employers consider credit scores to determine dependability of job candidates.

I can see the need for some sort of measurement for lenders.  They of course are trying to evaluate risk in extending loans.  While the credit score isn’t necessarily ideal it seems to be the measuring stick for many different things right now.

Personally, I hate to see someone who has taken steps to clean up past credit mistakes become impacted by the history on their report when trying to buy a home.  Sure, mistakes have been made and there are consequences, but it’s sad to see people plagued with ridiculously high interest rates.  Especially, when they’ve taken steps to stay out of debt, live on a spending plan and manage their finances wisely.

I recently read an article in Money magazine about things lenders look for when checking credit reports and how to make your credit report look better to lenders.  I’ve included my thoughts around each one of these areas.

Things lenders look for when checking credit reports

Inquiries and types of open accounts

Hard inquiries appear when you apply to open up a new credit card account.  Personally, I don’t think it’s wise to open up a lot of accounts even if you plan to keep the balances paid off.  Contrary to common opinion of trying to build up your score, I don’t like the idea of having a bunch of cards open , especially for someone who has had debt or payment problems in the past.

Lenders also want to see what types of accounts you’ve had open in the last 10 years and ideally want to see a good mix of credit types.  This is where the argument comes in to keep old credit cards open.   If you’ve opened accounts in the past and have paid them off, apparently,  it is credit score wise to keep them open. My thoughts are to cut up all the cards and keep one available for use. 

Using too too much credit

Money says that you should aim to use less than 20% of your available credit.  Again, if you’re paying off your cards each month and avoiding other debts this won’t be a problem.  I think it’s unwise to use you a card for the sole purpose of building credit.  Use the card when it’s convenient or put it away in case an emergency occurs without adequate savings. But don’t use a credit card to chase after a higher credit score!

Not paying bills on time

Make sure you pay your bills on time.  According to the article, bankruptcies and liens show up on a report for ten years.  My advice is to plan well and keep good track of when bills are due so that you can have enough money in your account and pay them on-time.  This one just comes with practicing wise money management.

Big blunders

The article states that bankruptcies, liens and delinquent accounts can show up on a credit report for seven to ten years.  One bit of good advice from the article is to add a personal statement to your report.  Money says you can add one statement which provides you the opportunity to provide more background about your blunder, and most importantly the steps you’re taking to avoid the same mistakes.

Final thoughts

• Be patient if you’re trying to rebuild or improve your score.  It’s not going to occur overnight. 
• If you’re trying to rebuild your score, the first step is getting your personal finances in order with a spending plan and performing good cash flow management.
• Don’t lose any sleep over not having a good credit score. The best thing to do is to focus on performing wise money management.  Common advice in building credit isn’t always advice that will help you manage money wisely.
• Don’t go out and open credit cards to build up your credit again if you’ve experienced issues in the past.  Again, my thoughts are to not have more than one card and show good financial responsibility in paying it off each month. 

Related Posts:

• Order Your Free Credit Report from AnnualCreditReport.com