My falling credit score (and why I'm OK with it)
It's slipped -- oh, boy, has it -- but it's not the end of the world.
A couple years ago as I was getting a credit report from Experian -- I was about to buy a new car and wondered where I stood creditwise -- I signed up for one of their monthly tracking features. I justified this because I'd had a credit card number stolen and wanted to watch my credit records for a while, even though I knew the $15 a month was a bit of a waste.
Over the past year or so, I've watched my credit score start lower than I remember it being and go lower, and I've come to the realization that it's largely a joke.
The same old story
My credit history is pretty ordinary: I started out in 1993 with one of those credit cards that come with a free T-shirt and frisbee in college, mostly because I was amazed anyone would give me credit.
The introductory $500 limit quickly went to $2,000 when I put some ski trips on the card, and I always carried credit at 35% to 40% of the card's limit.
After college, I continued to use the card and watched my limit go to $5,000 and then $10,000 (as I carried more and more on it) and a few years after college the card's limit was at $20,000 even though I vowed to no longer put items on it.
At the same time, finishing my bachelor's degree and getting a master's racked up about $25,000 in student loans. (In 2011, four years of college only costing $25,000 seems quaint!) I also owned a couple used cars with small car loans I paid off in time.
After I moved to Oregon in 2003, I finally got serious about my ~$30,000 in debt. During my previous years of carrying thousands in credit and paying things off over time (but rarely getting ahead) my credit score ballooned into the low 800s. I never worked to improve this score -- it was just a nice surprise after a decade of paying bills on time. My high credit score was great when it was time to get my first home loan, buy my first new car, and when I sold a home and bought a second one a couple years later.
Once I settled into a long-term home, I started paying off my credit cards and school loans aggressively. By 2006, I had no balance on my credit cards, and my wife and I finally paid off our school loans. Having had credit card numbers stolen in the past, I started closing my unused credit card accounts knowing it might negatively affect my credit, but I figured it was a better overall approach to shift toward buying things with my bank's ATM/Visa card instead. I knew that without credit cards I would never carry a balance and the money would come directly out of my checking account, so I planned purchases for things I could afford and ignored purchasing frivolous things.
I also followed the Get Rich Slowly philosophy and focused heavily on building my retirement savings. Over the years of maxing out my retirement with the help of an investment planner, I have a pretty good nest egg going. (Are you saving enough for retirement? Try MSN Money's calculator.)
Punished for good behavior
You can imagine what all this fiscal responsibility did to my credit score the past few years: It dropped below 800 soon after I paid off all my cards and started closing accounts.
For a few years, I had no open credit cards and no open balances. I paid off two more car loans and was paying ahead on my house loan, and each year I'd watch my credit score fall in the 700s. A couple of months ago, my credit score was barely above 700, and the main negative flag on my account was having no open credit card accounts.
So, before I took a recent trip abroad, I decided to finally sign up for one of those personal airline cards my frequent-flier program has been pitching me and use the card on my vacation.
My new credit report says I have "too low of a limit" (it started at $5,000) and I had "too high of a balance" on it as I used it on vacation (I paid off the card as soon as I returned, two weeks before the first bill even showed up). I got the card to improve my score and rack up some frequent-flier miles and pay it off in full, carrying no balance, and yet, they docked me once again.
Financially, I'm in the best shape of my life right now.
- My house will be paid off in about five years at the rate I'm going.
- I have a great retirement portfolio that I contribute aggressively toward and it continues to grow.
- My business is doing well even as we've expanded with a new employee and several contractors.
I had the highest credit score at a time in my life when I was leveraged to the hilt and I lived paycheck to paycheck. Now that I have my own business, a healthy retirement, and can pay for everything I need/want, I have a low score and I'm dubbed a higher risk even though my ability to pay is very high.
I used to think a credit score was all about your ability to pay, but it's clear now it's more about how profitable you will be to banks.
J.D.'s note: I've had a similar experience. As I've turned my financial life around, my credit score has fallen. I don't care, though (and neither, I think, does Matt). Why not? Because I don't intend to carry any major debt in the foreseeable future; any debt I take out will be repaid immediately.
More on Get Rich Slowly and MSN Money:
I, like Matt and JD, have paid off my debts. All of it (business, home, cars). I haven't tracked my credit score, because I just don't care what it is. I never went so far as to cancel my credit cards since I always paid those balances in full every month anyway. I still use the credit cards just like most people use ATM cards, so I get the airline points on one and cash back on two others. The banks must hate me. They don't get any interest or fees from me and then I scratch back some of the transaction fees they get from the vendors by using their points and cash back deals. And that's just the way I want it.
There is, however, a small price to pay. Insurers use credit scores as part of their rating formula, so I'm pretty sure that I pay a bit extra for insurance. It's the lesser of two evils in my book.
There's a lesson that we, as parents and teachers, have not been passing along to the newest generation of adults. It's one that our depression era parents passed on to us, but we tending to ignore. It is... that debt is a tool. We would not become enslaved by a hammer. We would use it when it is appropriate and set it aside when it is not needed.
Our society seems to have developed a "one tool" approach to every kind of purchase. Use debt. Buy now, pay later. But in most cases debt is the wrong tool. And, at some point in our lives, it is a tool that needs to be put away permanently.
How else can we truly be free?
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