credit score

Questionable financial advice: on credit scores

I swear that this is not going to primarily be a personal finance blog.  I just happened upon something else in that arena that I wanted to share comment on so I can hopefully correct bad information.

Of course it’s Mr. Ramsey again:

Dear Dave,

I’m 20 years old, and I’m trying to get out of debt. However, I’m concerned about what might happen when I’m older and don’t have a credit score. My girlfriend says I won’t be able to get a job or rent an apartment without a good one. Is this true?

Ian

Dear Ian,

No, it’s not true. I’m sure your girlfriend is a sweet person, but she has no clue what she’s talking about in this situation.

In either case you can simply explain that reason you don’t have a credit score is because you have no debt. Since you don’t have any debt, you have something known as money. That makes you very stable, and it makes you a fantastic candidate as an employee or tenant.

Listen to me, Ian. I’m a landlord, and if I had my choice between a tenant with no debt and no credit score and someone with a high credit score but lots of debt, I’d take the one who has no debt in a heartbeat. Why? Because that’s the one who is most likely to pay.

Besides, you already have a good credit history if you’ve paid your bills on time. Show them proof of that, if necessary. But taking on a pile of debt to have a high credit score or increase your current score is just plain stupid!

—Dave

See also his blog post here, in which he advises that a credit score isn’t important if you’re out of debt.

Here’s why that’s bad advice:

First of all, I mentioned here that all debt is less than optimal.  I’m working on getting out of debt myself.  But more and more, certain types of businesses check your credit score either as a precondition to doing business with you or as a way to help set your rates.  For example, insurance companies (auto insurance is still mandatory, no?), property management companies (from whom you can rent a place to live), even employers are checking credit as a way to evaluate both how trustworthy you are and how susceptible you might be to bribery from less-than-savory characters.  Back in the day, one of the conditions for maintaining my TS-SCI clearance was a certain level of financial responsibility, commonly expressed in a credit score.   Most places don’t know any other way to evaluate, and are not open to any other way to evaluate a person’s financial responsibility other than a credit score.

That means there’s no “explaining” that you have no debt or alternatives such as showing proof that you pay your bills.  If a company’s policy requires a certain credit score to do business with you, then that’s what they’re going to need and there’s not much they can do about it.  Although Dave might prefer a tenant with no credit score, unless you can rent from Dave, you will probably need a credit score.

Also, simply because you are out of debt doesn’t mean that you have the money lying around to, say, buy a house or replace your clunker of a car.  Guess what you need for those things – financing!  Guess what you need to secure financing – a good credit score!

Finally, creating and maintaining a good credit score doesn’t have to mean taking on “a pile of debt.”  Since I have a decent credit score and excellent cash flow management skills, I may share what has worked for me and what I have seen in another post.

Bottom line – pay attention to your credit score!  It is increasingly the key to being able to move through life financially.

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