What Credit Scores mean to you

I was listening to a personal finance show on a local radio station the other day and a woman had called and told the host that she had her credit card bill paid and was current with all of her debt payments, but she had not eaten in two days! What has happen to the world? Are people really more concerned about keeping Visa and MasterCard happy rather than keeping food in their stomach? As best-selling author and financial-counselor, Dave Ramsey often says, “Americans are worshiping at the altar of the credit-score.”

For the few people who are unaware as to what a credit-score is, there are three companies in the United States, Equifax, TransUnion and Experian that receive information from your banks and creditors about your financial information. From this information, the companies have an intricate formula which they use to calculate what is known as your credit score. Whenever you apply for a loan, apartment, or even a job, there is a good chance that they will look up your credit report to determine whether or not you are “worthy.”

There is a fundamental flaw with the credit-score system. Although these companies do not reveal the formula they use to calculate credit scores, it is generally agreed that they are based on your history of repayment, the balance of your existing debt, and your ability to borrow more money. Interestingly, your income and the amount of money you have in the bank are not part of the calculation what-so-ever. So a multi-millionaire who has not needed to borrow money in several years could pay cash for an apartment building, but could not qualify to rent an apartment there!

What has happened that has caused people to become so obsessed and fixated in their credit scores these days? People have fallen victim to the myth that you need a good credit score to get through life financially. Here’s the reality: you can get through life without a credit score. There are some times when having a credit score would be easier than if you did not have one, but you can live without one. Yes, you can save up and pay for things with cash, you do not need to finance anything at all.

There are even minor percentage people who save up and pay cash for houses. Most of us don’t fall into that category though, and will probably need to borrow money for a house, and yes, you can get a home-loan without a credit-score. You will merely need to find a company that does mortgage loans the old way, with what is called “manual underwriting.” In this they actually look at the person and see whether or not they have the financial ability to repay the loan, rather than just looking at one’s FICO score.

When a potential employer or a rental complex looks at your credit score to determine whether or not your quality material, there’s really not much you can do. Fortunately, there are plenty of employers and rental complexes with common sense that realize there is more to life than a credit score. It would probably be a good idea to tell them that if they chose to look at your credit score, they won’t find one and the reason why.

You can live without a credit score. There are instances where one might come in handy, but you can get by either way. Not having a great credit score is not the end of the world, and keeping your credit score high should not be number one on your list of priorities.