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Why I don't care about a credit (debt) score

August 12th, 2014 at 06:02 am

All it tells you is whether you are good at borrowing money and paying it back. That's it. Here is how it is determined.

-35% of your score is based on your debt history.
-30% is based on your debt level.
-15% is based on the length of time you've been in debt.
-10% is based on new debt.
-10% is based on type of debt.

It does not factor in your income. It does not factor in your debt-to-income ratio. No savings accounts either. The only way to have a good credit score is to go into debt and stay in debt.

That is not how I want to live my life. I choose to not have any credit cards. Nope, not even one! I have an emergency fund.

New car? Yep, saving up cash for that purchase. Buy used! I would rather buy a beater than pay a car loan.

Do I have any debt? I do! My last debt is my mortgage. It hangs over my head.


16 Responses to “Why I don't care about a credit (debt) score”

  1. Another Reader Says:

    Debt is a tool. When used wisely, it can help you purchase assets that produce income, freeing you from the need to work. When used to buy "stuff" or when too much risk is taken, that's foolish. Dave Ramsey lost everything not because he used debt, but because he was overconfident to the point of arrogance and miscalculated his risk. You can use debt and not do "stupid with zeros on it."

  2. Bob B. Says:

    I'd agree with you completely, but unfortunately insurance companies use credit score, in part to determine rates.

  3. SecretarySaving Says:

    I don't believe that debt is a tool used for good. I believe that debt is dumb. It has caused a lot of hardships. If you want to purchase assets that produce income then you should save up and pay for them. If you don't have the money to do that, then you simply can not afford it. Debt brings on enough risk to offset any advantage that could be gained through leverage of debt.

    Dave Ramsey went broke because of debt. If he didn't have debt him being arrogant and overconfident wouldn't matter. He is a twice made self millionaire. Made mistakes and is helping others.

    You are free to your option. I can respect that. I don't have to agree.


  4. SecretarySaving Says:

    Bob - my score and DD1's score has been frozen since January. I just swapped insurances. I was able to get quotes from State Farm, Farmers, Nationwide and finally went with an independent insurance agent. Hope this helps!




  5. doingitallwrong Says:

    For many people, debt is dumb. The fact of the matter is, however, that wisely utilizing debt will get you farther ahead than never having debt will. If you have a good credit score, you get better rates on insurance and mortgages, among other things. After all, you never know when catastrophe could strike and you'll be wiped out -- if you've shown that in the past you can properly manage debt, you're a better risk to insurers and lenders than someone who has never faced debt before and so would have no clue how to go about managing it.

    Leveraging debt doesn't necessarily mean you can't afford the purchase. You want a new car? Sure, save up $35K before you buy it -- but then take out a six-year, 0% loan on it and put the $35K into an investment account making conservatively 5% per year. (If you've got a good credit score, you can get those kinds of loans.) If something bad happens, you've got the money to pay off the car loan right then and there, but if not you'll come out roughly $12,000 ahead.

    You certainly don't have to agree, and if you want to live 100% debt free more power to you, but of course your opinion doesn't work for everyone, and many people are able to responsibly use debt (and the resulting good credit scores) to considerable financial advantage.

  6. SecretarySaving Says:

    doingitallwrong- Did you really say that "wisely utilizing debt will get you farther ahead than never having debt will"? If you had your car paid for then it would free up money that you would be using to pay a loan and that could go towards your investment. If have ever read The Millionaire Next Door, research shows the majority of millionaires get out of debt and build wealth.

    This is my personal journey. Great feedback with different perspectives. All is welcome!



  7. CB in the City Says:

    I think it is REVOLVING debt which is the problem. Using credit cards to pay for everyday goods and then paying off in full each month is smart. You pay no interest, build up your history, and sometimes can get some awesome bonuses. Truly, if you have no credit history at all, it will come back to bite you. No matter how trustworthy you are, you have to have a paper trail to prove it.

  8. Another Reader Says:

    I judge a set of beliefs by the results the set of beliefs produces. In 2009, I refinanced my house at a lower interest rate and pulled out cash. I took that cash plus cash I had on hand and over the next two years, I bought several foreclosures and short sales with that cash to use as rentals. At the end of 2012, I refinanced my house at the then principal balance to an historically low rate of just over 3 percent. The net income from the rental houses is about twice the mortgage payment on my house. The rentals have appreciated between 75 and 100 percent since I bought them. I could sell those properties, pay off my mortgage and have a lot of cash left over. Instead, I have rentals that are paying off my mortgage, providing a decent income on top of that, and sheltering me from taxes. Over time, the rents and the values will increase. It would be hard for me to conclude from this example that use of debt is "dumb."

    I agree that most folks do not understand debt or how to use it wisely to grow their assets. The folks in the Millionaire Next Door were business owners and the like, many of whom used debt to build their businesses and personal assets. They also lived in the same houses for decades, drove older, conservative cars or vehicles that were related to their businesses, stayed married to the same person for life, invested money in the stock market and/or in real estate, invested in educating their children, and generally lived lives that were not wealth consuming.

    My point is if you are conservative with risk and knowledgeable about what you are doing, debt is a useful tool. If you use debt unwisely, then you should not be using it at all.

  9. SecretarySaving Says:

    AnotherReader - I would probably want my mortgage paid for before purchasing and having to maintain more property. I haven't experienced that though. If you want to save some money its hard doing that when you are paying on debt.


  10. Another Reader Says:

    If you are making money with the assets you bought with the debt, it's very easy to save money. Having substantial cash reserves is a good idea when you own rentals, so saving the net income insulates you from any problems with the rentals. Having multiple sources of income also reduces your risk.

    You are an intelligent, thoughtful person, and your attitude about debt has helped you get to a better place in your life. Being a little less dogmatic about debt in the future might also be helpful to you.

  11. doingitallwrong Says:

    I really did say that, and I stand by it. If you had your car paid for yes, you could use that car payment amount to invest, but you're starting off with a much lower investment and so your compounding is going to be lower. For example, if you start out with $36,000 and invest it at 5% for six years, you'll end up with $48,000. (Changed the starting amount a bit just to get even numbers.) If, instead, you use that $36,000 to pay cash for a car, and invest the car payment amount per month ($500 for a six-year, $36,000 loan at 0% interest), you'd only end up with $42,000. Surely paying on a loan for six years at 0% interest is worth a $6,000 gain in investments?

    I have read The Millionaire Next Door, albeit years ago, but my recollection is similar to that of Another Reader's -- the millionaires used debt wisely to increase their income and/or assets.

  12. SecretarySaving Says:

    No, I wouldn't want to carry a car note around for 6 years to get $6K. I'd rather not have a car payment at all and have invested that car payment in an investment to get the $6K. Because during those six long years ...I would be owing on a car that has depreciated more than $6K!

    My strong opinion against debt is going to be the driving force to just push me further into financial peace.

    You know the feeling you get when you pay something off and no longer have to deal with that? It could be a family loan, car payment, house, student loan or credit card. You no longer get the annoying bill in the mail from that company. The sigh of relief when you get to use that money somewhere else in your budget.

    Have you ever lost a job or been through a divorce and thought geez if I didn't have this $1200 mortgage, $600 car payment, $150 credit card bill, $300 student loan.

    It is definitely something to think about. How would that feel?

  13. doingitallwrong Says:

    The point is that when you're using debt wisely, you can pay off whatever debt it is immediately if you need to. Debt is not always about buying things you can't afford, which is how you seem to be defining it -- it's about using your available capital in the most financially positive way that doesn't risk your entire financial future.

    The car will depreciate whether you pay for it up front or over time. So at the end of six years, you can have a car worth $18,000 and $18,000 in the bank, or you can have a car worth $18,000 and $12,000 in the bank. Which would you rather have?

  14. doingitallwrong Says:

    Obviously, that should be a car worth $18,000 and $48,000 in the bank, or a car worth $18,000 and $42,000 in the bank. Wink

  15. Another Reader Says:

    Wise use of debt allows you to reach financial independence rapidly. Lay offs don't matter and you can retire early. You can live off your assets, not your labor. Become the millionaire next door.

  16. Sive Says:

    Debt is a part of your credit history and this one really matters. Even potential employers may check your credit score and base their decision on it. Also you need a score to rent an apartment and to get mortgage at a lower rate. These are basics written and re-written on multiple resources like https://www.valuepenguin.com, https://www.nerdwallet.com, https://effectify.com/ etc. It's nice to be independent and self-sufficient but there are so many different situations in life you cannot plan. It's better to have an opportunity to adapt to new conditions and a good credit score makes it a much easier task.

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