"Is it true that credit scores really don't matter much? I have heard that obsessing over your credit score is a pointless exercise and the importance of scores is overblown. Does 20 points difference matter much today?"
- Question from reader T.R.
T.R., thanks for the question. It all depends. For some people, the short answer is they don't matter much at all while for others they can make a huge difference. Let's take the case where it doesn't matter first. If you've already bought a home, expect to pay cash for any future automobiles, and already have your credit cards lined up and pay them off each month, then credit scores don't mean very much. While they may be used to price certain insurance products in some states, the overall effect for someone in this position is negligible. It stands to reason that if you don't need future credit, credit scores aren't that important. One out of five households don't have a checking account much less a loan. If you're accustomed to dealing in cash, you shouldn't care less what your credit scores are.
The only thing you should really borrow for is a house. And regardless of your credit score, there are a number of ways to borrow to buy a house, regardless of your credit score. The obvious way to get around a bad credit score is to buy a seller financed home. Another way, is to have a relative or friend cosign the loan. Even a bankruptcy might be no obstacle when it comes to buying real estate. Two to three years after declaring bankruptcy, with a large enough down payment, you may be eligible for an FHA loan that has moderate interest rates. And paying your mortgage on time will give your credit a big boost.
You can get a gas card with almost any credit score. Secured credit cards and debit cards also help alleviate the burdens of walking around with a poor credit score. And once you demonstrate a little responsibility, your credit scores will steadily rise.
Having said that, keep in mind that your credit score does not only factor in when you're borrowing, landlords might not rent you an apartment and it can even effect your employment. Certain government jobs will be off limits, especially those related to national security. Employers have the right to check your credit score with your prior permission and if you're applying for work as an accountant or in the finance or retail industry, your credit score can and will have a bearing on your job prospects. And if you're self-employed or want to start a small business, you'll probably have a difficult time securing financing. But even after a bankruptcy, you might be able to get an SBA guaranteed loan secured by tangible assets like equipment. The rate might be higher, but it's not necessarily a show stopper.
As a general rule, securing a student loan from the government will not be affected by your credit score. Those loans are based on need more than credit worthiness. Student loans from private lenders are another matter. So, again, even after a bankruptcy, you might still be elligible to go back to school to improve your economic situation.
If you're borrowing to by a house or a car, your credit score will be vital and they will weigh in heavily on the kind of rate you pay on your credit cards. With a score of 760, you may get a 4.75% 30 year mortgage, while something in the mid 600s might not let you qualify at all. So when you are starting out, credit is much more important. Once you've acquired your home and assuming you plan on staying in it a long time, your credit score won't matter nearly as much. If your credit is sub par, it might be worth fixing it before you venture to go out and try to secure a major purchase like a house or car. It all comes down to paying your bills and doing it in a timely fashion. Buy anything with subprime credit can cost a fortune in interest.
Obsessing about your credit score is often a waste of time. The people that seem to do it the most are those with 800 plus scores. There is no practical difference between a 820 and an 800 score, so obsessing about it is just folly. Again, if you are buying a house and your score is 740, then it might be wise to work on getting it to 760. Although certain credit unions don't give much weight to credit scores and any score over a decent number combined with solid income and job history will qualify for the best rates.
Now the odd thing about credit scores is that you need to have opened a few credit lines to get good scores. Because that's the only way they can grade you. If you were rich and paid for everything in cash, you'd have a terrible credit score since you'd have no history of paying a credit facility in a timely fashion!
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