My Credit Score – Is it Really Necessary? (Repost)

So recently I have seen some responses on a conversation over at Free Money Finance regarding the need for a high credit score. There are two major schools of thought regarding the importance of the credit score. One side, championed by such personal finance gurus like Dave Ramsey, says that there is no need to have a solid credit score, while others say that a healthy credit score is needed to get favorable rates on insurance and loans (especially like homes and cars, which are the two largest purchases most Americans make over their lifetime). They also advocate using the cards to get the cash-back rates and rewards points.

Where do I fall? Not surprisingly to regular readers, somewhere in the middle. I hold three credit card accounts but I haven't used them in over a year. My largest monthly expense—rent in New York City—is with a company that doesn't accept credit-card payments. Even my workplace has converted to using a cash card system in place of using credit cards. The remainder of my spending is pretty low—to the point where a 1% cash back reward would be pretty meaningless. So my score will probably be pretty flat from where it is now.

But don't you need it?

Not really. Over the years most lending companies have used the credit score to make up-or-down approval decisions as well as determining who gets what rate. But since the credit score is basically a measure of how well you manage debt, wouldn't it be unfair to use such a measure against someone who has managed their finances well enough not to need debt? Think about it—if you received scholarships to pay for college, paid for used cars, and paid your rent on time, shouldn't that count? FICO says no. In fact, your current income or the amount of money you have saved does NOT figure into your credit score!

However, there is another way.

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Manual Underwriting

Seek a company that performs manual underwriting—which looks at things you have more control over, including:

- employment history

- salary

- rent records

- financial statements i.e., your 401(k)/IRA history, budgeting techniques, etc.

In other words, a good company that uses manual underwriting includes indicators on how you manage wealth, not debt. To be sure, they still look at your credit score, but it holds a lot less weight than real-world indicators do. Before FICO, manual underwriting was the case-by-case, more personal indicator that loans were made.


What about Employers and Apartments?

Some employers and apartment rental agencies include the FICO score in their decision when they decide who gets into their business. If your score is low or non-existent, they could lose your business. (At least that's how I look at it). However, if the agency in questions asks for your score and its not as high as you think they'd want it to be, take some initiative—write a letter explaining how the FICO score may not be truly representative of your ability to not be a liability. Provide evidence—your latest W-2, previous rental history (if any), proof of employment, etc. If that's not enough, then take your business to someone who will value your whole record.

Hedging Doesn't Hurt

We at Wealth Weekly don't encourage our readers to get into debt to boost their credit score. However, if the solutions we've provided above don't fit you, then take on credit at your own risk. You should never, ever carry a balance. Also, be careful not to use that piece of plastic to buy things you know you wouldn't have bought in the first place. That way you could have a two-pronged strategy when shopping for a good rate on your particular loan. In our free-market system here in America, you can always go to another company if you don't feel your business is being respected.

So don't make it your Life's goal to get your credit score high—if it happens, great, but it's not necessary—there are other ways that may leave you in even better shape financially.