The Credit Score

The other day I had an interesting conversation with a friend about the credit score and its importance. I believe the credit does have its uses but is often overused and its value overestimated. Te short story is: Your credit score tells a finance company/bank if you know how to get loans, and if you pay them back. If it is high, you are really good at getting loans.

To some this may seem like the exact purpose of credit scores, but there is so much more to your credit than just a score. For example, if customer A has a 800 credit score, makes 3000/month, and pays 2500/month a business would be remiss to give this client a loan. On the flipside, customer B lets say has a score of 580, but have perfect credit in the last three years, makes 3000/month, and only pays 700/month.

This scenario is actually more common than you think. Which client is a better loan? Granted client B is not going to get a good interest rate, nor a loan without solid collateral, but client B may not be such a bad loan as one might think. Before the credit crisis, particularly in mortgages, loans were being given purely on the basis of the credit score, thus causing landlords to owe more than they made each month. As long as they kept renters in their homes everything was good, but when renters started getting evicted, and they couldn't fill the homes, they got foreclosed on.

Maintaining your credit is not a bad thing, and a good credit score is a very good thing, but the moral of the story is: Don't get overly concerned about you credit score, simply pay your bills, every months, on time while being sure to keep your credit ratio (Amount you pay/Amount you make) to around 25% and with a mortgage aim for no more than 35%. Credit scores work, but it is not necessary to constantly think about it. Personally may goal is to have a perfect score of zero (AKA completely debt free)!