Your Credit Score Doesn’t Matter As Long As It’s Not Bad
I have a good reputation – now my mark is close to 800. Great, right? Except, of course, for that awesome loan, which was actually worthless even when I recently bought a house. Don’t get me wrong, bad credit has a big impact on your finances . It’s weird that a great reputation doesn’t really matter.
The very idea of credit ratings is inherently flawed. We tell people that there is a single number by which to judge their financial well-being. This is a daunting prospect. In fact, there are many credit ratings , not just one. Banks use their own scoring system, for example, to approve or reject your applications . FICO is probably the king of credit ratings and even they offer several different models and your lender must decide which model they use.
NerdWallet notes that the average FICO score is 695 , so most people have good creditworthiness, but 22% of people also have grades below 600. I’m not suggesting that credit doesn’t matter at all. It’s damn important when it’s bad. We’ve listed all the ways bad credit can make your life difficult , but here’s a quick rundown:
- Higher bills for your cable, phone, or internet connection
- Higher insurance premiums
- Higher interest rates on a loan
- More difficult to apply for an apartment
A common assumption is that bad credit simply means you can’t get a good rate on your mortgage or car loan, and the solution is to simply not buy a house or car, but rent and use public transportation. Okay, let’s say that’s fair. But bill providers can still charge you shitty loan fees, and when you’re trying to rent an apartment or even in some cases get a job, your bad credit haunts you everywhere like a foul smell.
If you have excellent credit, it seems like the opposite is true: you get a discount on your bills, you automatically get your dream apartment, and so on. However, this doesn’t work.
Several benefits of an excellent credit history
Okay, maybe I’m a little cynical. Excellent credit has several benefits. For example, I can easily get approval for huge lines of credit. On the other hand, I never use these lines of credit because I pay off my debt in full every month, so I have a good credit history from the beginning. If I were to make the most of my lines of credit, my credit rating would drop, and before you know it, I would have to deal with all the shortcomings of a bad credit history. So I’m definitely not jumping when my credit card company congratulates me on increasing my credit limit.
But we can say that a high credit limit – it’s good. If you have a high limit and don’t use it, your credit will improve ! This is true, but this logic is a bit absurd. I get a higher limit to improve my credit … for what? An even higher limit that I won’t use? And if I do use it, my account drops, rendering the whole perk meaningless. It’s like having a phone that only rings by itself and stops working if you actually use it.
If you have a good credit history, you are probably also more likely to get approval to use low interest credit cards. Again, it doesn’t matter if you’re out of debt.
My reward credit cards are pretty good and maybe one of the benefits of a great credit history , but as MoneyUnder30 points out , you have a good chance of being approved for most credit cards if your score is at least 700. You don’t. need a great rating. You just need a high enough score.
Excellent credit doesn’t matter, even if you think you owe it
For a while, I was very happy to get a great loan because I knew it would finally pay off when I applied for the mortgage. Only this did not happen.
First, the lender told us that they would have to go along with my fiance’s bill as we bought the house together and his name will also be on the loan.
“However, his grade is about 100 points lower than mine. Don’t you count mine at all? ” I have asked.
“No, not really,” our lender said.
We tried to get around this with my name only on credit. Of course, we got approved for a lower amount, since we only had one income in the app, but it would be nice if the rate was significantly reduced. However, this did not happen. Our rate, combined with a mediocre credit history: 4.8%. Self-service rate with excellent credit history: 4.2%. In the end, we decided to take advantage of the FHA loan, which had a much lower rate (3.3%), which was the same whether we applied together or separately. Yes, you have to pay the premium with an FHA loan, but we processed the numbers and it was still cheaper considering the interest rate that even my excellent loan could get.
In his own post on credit rating issues , personal finance writer (and part-time landlord) Sam Dogen says a clean credit report is just one of several factors he takes into account when approving a tenant. They also have their work book, recommendations and the ability to cover rent for several months in case of loss of work. Landlords weed out candidates with bad credit, but that doesn’t mean excellent creditworthiness will greatly affect your chances. It’s hard to quantify it because it’s entirely up to the homeowner, but chances are that an 800 score won’t help you beat a candidate who makes double your earnings, even if his score is only 740.
Dogen also noted that when he went to rent a Honda Fit, the dealer didn’t care what the result was.
The Honda Fit is priced at $ 19,025 before taxes, at such a low price point that many people with mediocre credit ratings buy it. It’s the same with the Honda Civic. Most people with an average household income of $ 52,000 per year should be able to earn $ 235 per month for a car.
When my fiance rented his C-Max, we found the same thing. In a bidding with the dealership, they said his 700 credit rating could work against him with funding. We called them and said we would write my name instead and use my 800 estimate. They relented and admitted that the rate was likely to be the same.
Bottom line: excellent creditworthiness has not served any purpose in my life so far.
Excellent as good as perfect
Most of us have learned that going overboard pays off. This doesn’t seem to apply in the world of credit: you don’t need to be good, you just need to be good enough. Otherwise, you are wasting your time. Here’s how Forbes author Adam Levine put it :
The idea of ”playing out” your already excellent credit rating in order to raise it won’t do you any real significant benefit – the difference between the interest rates or loan terms offered to people with 800 and those offered to people with the elusive 850. So games don’t help anything other than your ego.
Dogen agrees , saying that after talking to various mortgage officials for years, he learned that if your score is over 740, “it doesn’t matter how much higher your credit rating is. You will always be offered the best borrowing conditions. “
As long as your credit is not terrible, you will receive the same level of privilege as good as excellent.
Of course, you need good credit, not because it opens the door to some magical financial world, but because bad credit can be a problem. Great credit can give you a lower mortgage rate, but bad credit will definitely bring you a terrible rate. Great credit can help ensure that your lease application isn’t thrown away, but bad credit ensures it definitely gets thrown away.
In other words, when it comes to credit, it’s pointless to strive for excellence. You just need to strive for “not bad”.
Art by: Angelica Alzona