Does Your Credit Score Matter?

Welcome to a crazy, crazy world of personal finance. Three companies are keepers of three digits – and those numbers hold the key to your financial success…or do they?

Your Credit Score
Way back when – and we’re talking 20 years ago, so thanks for making me feel old – I had intimate knowledge of the credit reporting process. I worked in PR for one of the Big Three credit reporting agencies, and part of my job included explaining the process to reporters. Back then, I would have answered the question “Does your credit score matter?” with an emphatic “YES.”

Now I’m not so sure.

The Background

A lot has changed over the years in personal finance, and the availability of credit is high on that list. We used to suggest that the credit reporting system was definitely a benefit to the populace: “We make it possible for you to walk into an auto dealer this morning, and walk out with a new car this afternoon, thanks to our reporting system and your credit history.”

You can insert your own story here: apps for this credit card or that, quick mortgage approvals for loans and refinancing, a system that now makes it possible to walk into an auto dealer knowing the exact car (down to the VIN number) and loan terms and walk out in minutes – without having to deal with an actual person – driving a shiny new vehicle.

Somewhere along the line, credit scores became more widely used by creditors, more understood by consumers, and more part of the consumer finance dialogue. Now, credit scores are everywhere – ad campaigns tout that they are used in “90 percent of financial decisions.”

So of course they matter, right?

The Black Box

Before we answer the question, though, we should talk about the score itself and how the three credit bureaus (Equifax, Experian, and TransUnion) arrive at their scores. They each license the algorithm from FICO (from a company called Fair Isaac), and FICO considers a number of factors when helping the bureaus arrive at the score. (If you’ve followed our sister site 10KaYear.com – a site that we’re phasing out because we’ve gone “all things Meta” over hereand here – you’ll know a little of this from the tales of our buddy Darnell.) (DISCLOSURE: 10KaYear.com has an affiliate relationship with myFICO.) Factors include:

Credit Score Factors

  • Do you pay your credit accounts on time?
  • How long have you been in the credit system?
  • How much of your available credit are you using?
  • Have you recently shopped for something requiring a credit report to be pulled by a bank or lending institution?
  • Have you opened accounts recently?
  • And, of the credit available to you, how much of it are you using?

(As you’ll notice from the graphic, Darnell, the friend who has shared his story with us, isn’t doing that well on the credit score scale. But he gets a passing grade.)

Darnell’s story…and how it helps answer the question

We should actually answer the question with another question:

Cash? Or credit?

If you pay cash, your credit score doesn’t matter. If you pay credit, of course it matters.

Our friend Darnell had been through a couple financial difficulties, so he was able to get his score back up from in the 500s (which is below-average and, actually, what the lenders would consider “Sub-prime”) to 605 (which is by no means sterling credit, but it’s still average).

At the time Darnell and I first started chatting, his biggest issue was getting an auto loan. He walked away from a couple opportunities because the interest rate being offered to him was pretty bad. Like “20% APR” bad. Way down in the 500s – in his case, the LOW 500s – kept Darnell from saying yes to a loan that would have been onerous. So he found other options…

  1. He looked at other ways to get around while, at the same time,
  2. He put himself on his own sort of Spending Diet and,
  3. He socked away money for a vehicle.

Interestingly enough, a few months later, his credit score stabilized – and he didn’t use all of his available credit (which actually wasn’t that much anyway). So he found himself into the 600s, making him eligible for better credit offers for that car that he ended up not needing a loan for.

Does Your Credit Score Matter?

Darnell would say “not as much as it used to,” and the credit industry would say “absolutely it does!” And, while we think Darnell has done a pretty cool thing by putting money away for a car – and by downgrading his list from “Cars I’d Want,” to “Cars That Do The Job,” – he’s going to be out of luck when it comes time for a bigger purchase. (A house, for instance – he’s still in subprime mortgage territory; though you will hear ads from mortgage brokers telling you they can go into the 500s, he’s probably going to have to wait out his current situation for quite a bit longer. Or be prepared to pay a lot more in interest than someone whose number is in the 700s.)

The problem?

The reliance on credit as a means to attain things you do not need.

The system is set up (or some may say the cards are stacked against you) in order to facilitate the usage of credit. Not debit cards, not checks – credit.

Experts like Suze Orman will suggest the responsible use of credit, and they’ll tell you that you need to start small with cards that help you build up your score. Experts like Dave Ramsey will tell you to cut up the cards – and they’ll go so far as to not even accept credit cards on their website.

But the reality is that credit scores are used in 90% of credit decisions because…it’s in the best interest of the credit system to move you from prospect into customer as quickly as possible.

Answer: Get to a point where it DOESN’T matter

Have a budget. Save, don’t spend. Write everything down.

Pay cash as often as possible. If not cash, use a debit card. Steer clear from credit cards. Throw away the offers – even if they come with 50,000 bonus miles that you’re not likely to use.

Get radical with your money – and you’ll be at a point where it doesn’t matter that you’re just a number.

Is This Card Worth It?

We’re sharing content here that recently appeared on one of our sister sites, 10KaYear.com.

Credit Card Worth It

In the mail awhile back, I received an “Invitation to Apply” for the American Express Platinum Card. If memory serves, I once had one of these cards – back during my startup days – and used it, but not enough to justify keeping it. So I eventually canceled the card (and, BTW, closed out quite a few other cards, since I’m focusing on credit card use only as a necessity). What caught my eye was the price tag on the annual membership fee, leaving me to ask: Should You Spend $450 on a Credit Card?

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Now, to the nitty-gritty. And, actually, a few reasons why something like this could be worth it!

It’s not a “credit card.”

That’s point one, and the very first selling point I remember from my very first American Express experience – getting a card in 1989. You have to be disciplined enough to pay the balance in full every single month.

If you don’t have that discipline, the penalties can be steep, up to $38 each month for a late payment. For some of us, that is a deal-breaker. But, if you are committed to paying it off every month…

100,000 Membership Rewards points!

I don’t cover the points space that often – and, if you’re a reader of this blog, you’re likely more focused on getting an edge when it comes to disciplined savings and investing, and the smart spending that comes with that focus on your finances. But, Amex tells us in the letter that points are valued at up to $1,000 in gift cards at select merchants.

Other perks

They list the other perks in the marketing materials:

  • $200 Airline Fee Credit
  • The Centurion Network – their airport lounges, in just a few cities
  • Access to Delta Sky Clubs
  • No foreign transaction fees
  • A fee credit for Global Entry and TSA Pre-check

So, if you travel quite a bit, this may very well be worthwhile.

But, Should you spend $450 on a credit card?

That is a hefty price tag – think of it as five Amazon Prime accounts. Four annual Netflix subscriptions. The equivalent of an average car payment.

I don’t know, gentle reader…if you travel A LOT and are disciplined, and $450 at one fell swoop is not insane…then MAYBE it’s worth it.

But, for me…I’ll pass.

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Prosper Personal Loan