Some people protect their credit scores with their life – setting up their bills on “auto pay,” aggressively paying down debt, regularly checking their credit scores with credit agencies such as TransUnion, Experian or Equifax. Others don’t seem to care as much, they pay bills, but forget a few a long the way, run a high balance on their credit cards, make the minimum payment, and TransUnion, who are they?
This article takes a pragmatic, no judgment, view of your credit score and discusses why it may actually be a bad thing to have an ultra high credit score!
Whoa . . .
Let me explain. Your credit score is a combination of several different factors:
1) your payment history;
2) the length of time that you have been a holder of a credit card or credit line such as a mortgage or home equity loan;
3) the amount of debt you have outstanding in relation to your total available credit.
This makes sense intuitively; if you don’t pay your bills then lenders don’t want to give you money. Likewise if you quickly run up a lot of credit, then some lenders may be afraid that you are getting ready to have a mid-life crisis, spending money on things like sports cars, an entirely new wardrobe, etc., only to then not have the money to pay it off.
It’s point number three above that becomes problematic. There is a saying: banks only want to lend you money when you don’t need it. Unfortunately this is true. If for example you have a lot of credit, but never carry a balance, all thing being equal your credit score should be higher than if you had a lot of debt. The problem is that in our society citizens need debt.
Now that I have put it out there, let me explain. When was the last time you went on vacation? Did you carry several thousand dollars in cash with you or did you carry a credit card? For those of you who own a home, did you pay cash for it? For those that went to college, did you pay cash, or did you take out a student loan? Those three examples illustrate why you need debt in your life. Each is a valid reason why responsible debt consumption is important. Without debt, most people could not function normally in society.
However the moment you add additional debt to your life your “credit risk” goes up and your credit score often goes down.
So if maintaining a pristine credit score means not being able to: purchase a home, fund college or have a safe comfortable vacation, personally I would opt for just a good credit score instead.
To check your credit score for free go to TransUnion.