Sunday, October 4, 2009

Demystifying Credit Scores: Pt 4 So What?

This is the 4th in a series of 5 mini posts on Demystifying Credit Scores.

Please be sure and read through the other posts, too.


In this final post of the series, I want to address the major question, "So What?"

When it comes to credit scores should we really care? 

Well, yes and no.  I use my (divorced) parents as a great example:

For nearly 20 years, my dad didn't have a bank account or a credit card or a car loan.  He bought a home with owner financing (because he had bad credit after the divorce).  He had no credit file at all.  But dear old dad usually had lots and lots of cash; and that's how he paid for everything.   He needed a new truck?  He bought in a stack of bills.  When there was an emergency, he pulled cash from his mattress (or whereever).

My mother, on the other hand, lived paycheck to paycheck.  The money in her bank account barely covered the bills expected to come in over the next 2 weeks.    But, she had great credit.  So, when she ran into challenges and her expenses were increased unexpectedly, she relied on credit to get her through - and it's always worked for her.

You see, the answer to the question "So What?" is "It Depends."  Will you need your credit anytime soon?  Are you planning ot buy a new car?  Rent an apartment?  Buy a house?  If so, then yes, it matters what your credit rating is.

Many will tell you if you have a couple of credit cards, a good car and a place to live, then if you do have to allow something detrimental (like a foreclosure or short sale) to happen to your credit report, it's not that big of a deal.  But, remember once you've defaulted on something, it's like lying to your parents, you have to regain trust.  You do that by rebuilding your credit.

The COST of a lower credit rating:

The actual cost varies, as does the actual point change.  But, according to an article published on November 29th on, the following are examples of the actual dollars you could lose by having a lower credit rating:

If you had a 780 credit score, and paid 30 days late just once, on a 5 year $20K car loan, your interest rate could increase 3%, costing you $26 more a month.  If a debt settlement was reported (this is where a creditor agrees to take less than is owed to them in order to close the account and recoup some of what is owed to them), a $200,000 30 year mortgage rate would increase so that the loan cost you $109 more a month.

If your credit score was 680 before your 30 day late payment, the increase in your cost would be $41 per month; and a $200K 30 year mortgage would cost you $95 more per month.  After a debt settlement, you could no longer qualify for a credit card.

You see, these credit scores (specifically, the FICO score) is powerful.  I urge you to care about  your credit, but for you to balance the needs for credit with the needs for cash.  You can only live on credit OR cash for so long.  At some point, both run out...when you run out of one, you want to make sure you have the other.  It's best to have a mix.

If you've recently been in a situation where you let your credit rating fall, tune into my next post with tips on improving your credit score.
Clicky Web Analytics