One of the hottest topics in personal finance is the credit score. You cannot go anywhere without someone telling you how important your credit score is. Some people will go so far to say it is one of the most important areas of your life. So how important is your credit score?
Your credit score can range from 300-850. The average credit score as of May 2012 is a 692 (according to myfico.com). Most lenders have a minimum credit score requirement of 650 or higher. Below is where American’s rank with their score.
There are five major components when calculating your FICO (credit score)
- 35% – Debt payment history (shows if you are paying as agreed or not)
- 30% – Debt levels (too much debt can harm your score, not enough debt and your score can start to disappear)
- 15% – Length of time in debt (typically, the longer you are in debt the more that helps your score)
- 10% – Type of debt (based on if your debt is a mortgage loan, consumer loan, revolving line of credit, etc.)
- 10% – New debt (how many recent credit inquiries you have had)
When you look at how your FICO score is calculated, what is the one word that is in all five components? DEBT!!
Another personal finance expert, Dave Ramsey, accurately nickname’s the credit score an, “I love debt score.” Why? Because the only components to the credit score revolve around debt. What the credit score does not take into consideration are things like net worth, income, money in the bank, etc.
Let’s say you inherited $5 million dollars. Your wealth just substantially increased; however, your credit score did not change one point. And if you use that new found wealth to pay off your debt, eventually you will not have a credit score.
The question at the end of the day is do you really want to be debt free or would you rather stay in debt to have a high credit score. If you look at the chart at the beginning of the blog 73% of American’s have credit scores ranging from 650-850 (a typical range to qualify for a loan). It is interesting comparing that with the Wall Street Journal citing 70% of American’s living paycheck to paycheck.
According to the book The Millionaire Mind, people that ultimately win with money never went into debt or realized that debt does not work to prosper and then stopped using debt.
A good credit score is not an indication of winning with money. It only proves that you can make your payments on time and that you are going to stay in debt.
If you would like to break the chains of being in debt and become DEBT FREE, sign up for a FREE 30 minute consultation.