DON’T FALL IN LOVE WITH YOUR CREDIT SCORE

Common sense answers to questions on personal finance

by Joe Plemon 

Q:  My dad always preached about keeping a high credit score.  Could you explain what criteria are used to calculate credit scores so I can know what I need to do to keep mine high? 

A:        Five factors are used.  The two that are weighted heaviest are your payment history (35%) and outstanding debt (30%).  If you make prompt payments and keep your credit card balances down, you have control of 65% of your score.  The remaining factors are length of time you have had credit (15%), the numbers of inquiries on your report (10%) and the types of credit you have (10%).I don’t disagree that a good credit score is important, but I want to caution you about falling in love with it.  Why?  Because four of the five factors used to create the score require that you go into debt and stay in debt.               Your goal, on the other hand, should be to get out of debt and stay out of debt.  A few  years ago my wife and I decided that we were no longer going to live in the debt rat race.  We rid ourselves of car debt by selling an expensive car and purchasing (with cash) a less expensive car.  We knocked off all consumer debt and eventually paid off our house.  Is my credit score trashed?  Not really, but because we don’t borrow money and don’t own credit cards, our payment history is becoming outdated  and in time my score will start dropping.   And do you know what?  We don’t care!  The purpose of a credit score is to let lenders know if you are a good risk to borrow money, so, for us, it is irrelevant.  Would I trade being debt free for more debt so I could have a good credit score?  NEVER!  I hope you wouldn’t either.