Credit Scores – Important or Not?
Posted by Christi | Filed under Christi
Sometimes your credit score is important, and sometimes it’s not. How do you know if you should keep watch of your credit score or toss it out the window? Let’s discuss this today by starting with the basics.
What exactly is a credit score? Your credit score is given to you by Equifax or TransUnion. It is a number between 300 and 900. Higher scores are viewed more favourably. Your credit score is a ratio and measures how risky it is to lend you money, based on your past financial behaviour.
What does your credit score mean? If your score is 800, a lender will think to themselves, “If I lend money to this person, 800 out of 900 people are likely to pay this money back.” In comparison, if your score is only 400, it means that only 400 out of 900 people are likely to pay back what they borrow. With a higher score, the odds are in your favour!
When is your credit score important? Like it or not, your credit score has a lot of influence nowadays. It can influence whether or not you get a job, a car loan, or a mortgage. If you are at a life stage where you are working towards owning your own home, car, or furthering your education, a good credit score is a very important aspect.
But when is your credit score not as important? I’ll explain with a real-life story.
I’ll never forget the man I spoke with while visiting our office in Edmonton. He was talking about how hard he worked to build up his credit score. He was so proud of his score and how despite his high debt load, he never missed a minimum payment. Yeah, his rent and utilities had fallen behind every now and then. Every month he felt like he was robbing Peter to pay Paul, but at least, AT LEAST, his credit score was still okay.
I asked him, “Can I just ask why you’re trying so hard to keep your credit score up?
“Yeah,” he replied, “I uh.. well I don’t want it to go down because… I…um…”
“… Are you planning on using that credit score for something?” I asked. “Like a mortgage or a car loan one day?”
“Well no,” he said. “I’m a fifty-something single guy, and I’m happy renting. I already have a car and it’s paid off. I… don’t know… what I’m going to use my credit score for.”
He began to fight back tears. “I’m sorry,” he gasped. “I’ve just never been asked that question before. I thought it’s just what you’re supposed to do.”
We sat in silence for a few moments as he wiped away tears. Then, he reached over the desk and wrapped his arms around me. He gave me the biggest, hardest, warmest hug that spoke “thank you.”
He had an a-ha moment. At the rate he was going, he was going to stay in debt for the rest of his life just to maintain an average credit score. It was only when he realized that the credit score wasn’t worth anything to him that he decided to begin focusing on what was best for him and his life. Already working two jobs, and living on a very modest budget, he ultimately decided that a debt solution which might impact his credit score was okay with him.
In my role as a Credit Counsellor, I have spoken to so many people who don’t intend on applying for a mortgage or a car loan any time soon. They are happy to rent and either own a car already or don’t need one. Lesson of the day: credit scores aren’t always the be all end all.
Like my unforgettable client, I had a similar a-ha moment this week. I pulled my credit report, like I do every year, and discovered that my credit score is now deemed “excellent” for the first time in my life. My initial reaction was happiness! Financially, I had been doing all of the right things so I was happy my score had followed suit. However, my second reaction was something I didn’t expect.
I actually realized that it didn’t matter that my credit score was high. I realized it wasn’t going to do anything for me in the near future. For years I tried to improve my credit score. I finally did it and… now didn’t really care. I don’t know exactly what I was expecting. A congratulatory letter? A phone call from my financial institution letting me know I can refinance my mortgage for a few percentage points lower? Nothing happened!
You see, credit scores are important when you borrow money. But I didn’t want to borrow more money! I don’t want another car loan and I already have a low rate mortgage. So I worked really hard, earned my excellent credit score, and now I don’t need it. An interesting turn of events, I’d say.
So if you are working hard to build, rebuild, or maintain your credit score, I am simply inviting you to reflect and ask yourself why. Why am I working so hard to get a high credit score? Will it benefit me? What will I use it for? You may have a very legitimate reason, or you may learn that it’s time to take that three-digit number off of the golden pedestal, and focus on managing your money well. Your credit score will follow suit.
I may not put that score to good use right now, but I am happy it will be there to help me if or when something unexpected happens. Thanks to many of your comments, I’ve learned that while I’m a planner, I just can’t plan for everything. What do you think – should everyone work towards a high credit score? Or are there times when a credit score isn’t all it’s cracked up to be? Share your thoughts below!
- Christi (@ChristiPosner)
Christi Posner is a Credit Counsellor for the Credit Counselling Society, a non-profit, charitable organization. Born and raised in Winnipeg, Christi is a newlywed, a new homeowner, and with the exception of car loans and a mortgage, she is newly debt-free. Her goal is not merely to survive, but to financially thrive; and to do so with some passion, empathy, humour, and a smile.
August 4, 2012 at 6:29 am
I would like to point out that a credit score still matters when you’re looking for somewhere to rent if you’ll end up renting from a management company (not just from a person renting a portion of a home).
People absolutely check your credit score before granting apartments. If you don’t intend to move though, I guess it’s not so important, as long as you’re in.
The credit score isn’t the only deciding factor of course, but you don’t want to limit your options if you have zero credit.
August 10, 2012 at 9:44 pm
Yes, you bet it does. Co-signers will also help if your credit score isn’t as strong as you’d like. In this man’s case, you got it – he wasn’t intending on moving.
August 4, 2012 at 5:11 pm
Very informative post Christi! You know what…I don’t even know my own credit score. I’ve never had an issue when I’ve needed a car loan, etc. so I’ve just assumed it’s pretty good. But now I’m curious!
August 10, 2012 at 9:45 pm
It costs $25 to be curious and find out online. You don’t have to pull it. If you know your credit history, that’s a very good indicator of your score.
August 6, 2012 at 6:23 pm
While I don’t know my credit score, I think maintaining a favorable credit history is important because you may not always have time to improve it by the time you realize you need it for something.
August 10, 2012 at 9:46 pm
VERY good point Jay! I totally agree. You never know when you might need a good credit score. Who knows what the future could bring – an emergency whether it was for housing, health, etc. Not something to be taken for granted.