Can you calculate the ROI on your credit score?

Question

I've heard it said from people who work in the industry that your credit rating isn't a measure of your ability to pay, but rather a measure of how profitable a customer you are. I've also heard people saying that you have to carry a balance, have a rotating pool of debt, or make a payment a little late on rare occasion "to keep up your score". If that's true, essentially that means your credit rating is an investment, something you have to spend money to maintain--and should be afforded the same consideration you give to any other investment; i.e. what's the ROI? Most of the other reasons given for maintaining a high credit score would just be fear tactics at best or scams at worst.

Is that true?

Additional info: I don't want this to come off as "anti-credit" and confuse my question. In my belief, credit is very useful. Properly handled, both sides benefit, just as two parties do in any good economic transaction.

I'm interested in the interpretation of the credit score as something that costs money to raise. Is that true? And if so, can we analyze its return on investment? If that ROI is bad, are people getting scammed when they intentionally carry balances on multiple cards (or whatever) in order to raise their credit ratings?

Hopefully that clears up what I'm asking.

Answer 1

Well, it is a negative point of view, but nobody in the history of money has ever loaned money because they like you. I suppose you could paint it as an honest point of view.

All money lending is for profit. If you have a high score, you are very likely to repay your loan because you are lower risk. We always hear lower risk... but the risk is that they won't make money off of you.

I think that just like we buy previously owned vehicles cars instead of used cars, and we banks call them service fees instead of junk fees, our credit score discusses our credit worthiness instead of profitability

But none of that means you can't benefit from it. It isn't a fear tactic, it is a way to judge each other. You probably pay interest and fees to keep it high, but that is price of lending.

I think the questioner has a negative view of credit (which I suppose is fine and is their right, I will defend their right to an opinion) but the way we do and judge credit is neither evil or benevolent.

I could certainly agree that more transparency would be good, but only for honest folks. If the credit bureaus made it public how they judged us, there would be a new industry for people who want to game the system.

Update

Since it always will cost to use credit, and using credit is the only way to prove your a low credit risk, it will therefore always cost money to raise your credit score.

However the return on investment is exemplified in this question: a person with no credit was able to get a loan, but at serious out of pocket cost. Later, after establishing credit at a price of real money, he was able to secure a nearly identical loan for considerably less cost (in terms of interest paid) because he had proven himself worthy. When I say proven, I mean paid interest.

There is nothing wrong with questioning the system, change only occurs when people question the status quo. And for sure our current system is not perfect, but like many employed systems while it is terrible but there is nothing better.

Answer 2

MrChrister's answer is just plain wrong.

Your history of carrying debt or paying interest has nothing to do with your credit score. The biggest factors are payment history, debt to available credit ratio and length of credit history.

If you have active credit accounts for 5 years, have 10-15k in limits on credit cards and put gas and groceries on a credit card that is paid in full each month, you'll have a top notch credit rating. There is no way to tell from a credit report whether you carry a balance for pay in full.

Anyone who gets into debt to improve a credit score is ignorant of the process. If you have bad credit, here's how you improve it:

1. Pay your bills on time. Always.
2. If you have no debt, get a personal loan for $250 from a credit union. Pay it on time for a year.
3. Apply for a standard Mastercard/Visa from a local bank/credit union
4. Pay your bills on time.
5. Rinse, lather repeat