What's the fuss about Credit Score / History?

Question

I have seen a number of questions about improving or checking your credit score / history. I think a Wiki would be a good idea to deal with these questions. My feeling is there that you shouldn't worry about credit score, but about staying out of debt. The score will take care of itself.

Correct me if I'm wrong, but there are three useful loans you can obtain:

• Student loan - Investing in your future (How much should be the maximum?)
• Mortgage - Most people don't have the money to buy a house and it's tax deductible.
• Business - Investing in your future. Risky business, and don't mortgage your house if you can avoid it.

All other possible debts should be avoided, especially credit card debt.

So, why do people fuss about credit score?

Edit

The credit score is a useful tool for companies, no doubt about it. This is a question about why people spend time and effort at getting a better score.

Answer 1

Simply staying out of debt is not a good way of getting a good credit score. My aged aunt has never had a credit card, loan or mortgage, has always paid cash or cheque for everything, never failed to pay her utility bills on time. Her credit score is lousy because she has never had any debts to pay off so there is no credit history data for her. To the credit checking agencies she barely exists. To get a good score (UK) then get a few debts and pay them off on time.

Answer 2

Since we seem to be discussing credit score and credit history interchangeably, if I can add credit report as the third part of the puzzle, I have another point.

Your credit score and credit report can be effective tools to notice identity theft or fraud in your name.

Keeping track of your report will allow you to not only protect your good name (which is apparently in dispute here) but also those businesses who ultimately end up paying for the stolen goods or services.

Answer 3

Your credit score, for better or worse, is increasingly about more than just getting loans. For example insurance companies can use it to some extent to determine your rates,.

Answer 4

I justed rented a new house, and they ran my credit to see if I am a reliable person.

Answer 5

If human beings were Homo Economicus, i.e. textbook rational and self-interested economic-minded beings, as opposed to simply human, then yes, simple advice like "just stay out of debt and your credit score will take care of itself" could work. Your simplification would be very persuasive to such a being.

However, people are not perfectly rational. We buy something we shouldn't have, we charge it on a credit card, we can't afford to pay it off at the end of the month. We lose our job. Our furnace breaks down, or our roof leaks, and we didn't anticipate the replacement cost. Some of this is our fault, some of it isn't – basically, shit happens .. and we get into debt... maybe even knowing all the while we shouldn't have.

Our credit history and score takes a hit. Only then do we find out there are consequences! Our interest rates go up, our insurance companies raise premiums, our prospective new employers or landlords run credit checks and either deny us the job or the apartment.

Telling a person who asks for help about their credit history/score that they shouldn't have taken on debt in the first place is like telling the farmer he should have kept the barn door shut so the horse wouldn't run out. While it is not "bad" advice, it's not the only kind of advice to offer when somebody finds themselves in such a situation.

Adding advice about corrective actions is more helpful. The person probably already know that they shouldn't have overspent in the first place and got into debt. Yes, remind them of the value of being sensible about debt in the first place – it's good reinforcement – but add some helpful advice to the mix. e.g. "So you're in debt. You shouldn't have lived beyond your means. But now that you are in this mess, here's what you can do to improve the situation."

Answer 6

This question is correct, in the sense that if you truly never wish to take any kind of debt, you do not need to care about your credit score. I will assume a rational person who doesn't generally need loans and managed finance well.

The flaw however is it may be infeasible for many people in the modern world to live without any kind of debt at all. Some common transactions technically involve debt, some obvious and some less obvious follow (note this may vary between countries and states):

• Getting a mortgage
  • This is a fairly obvious example of a time some people consider debt justified, to buy a primary home, which for many people is infeasible to do outright in cash
  • You can validly argue that one could instead rent until they have the money to buy a home in cash, however that brings my next point
• Rent an apartment
  • Many, if not most landlords will run a credit check before allowing one to rent an appointment, this is in part because you could potentially damage the apartment beyond the value of the deposit and they want to know you are good to pay if so
  • They may also use this to judge your general responsibility and reputation, to find customers who they feel are low risk of problems, or defaulting on their rent, as in essence given it takes time to evict someone, they may end up in a situation where you owe them for rent, credit is then important
• Rent a car
  • The reasons for this are basically the same as above, having a valuable asset that doesn't belong to you and risk of default, however many would not consider this to relate to credit at all
  • Some companies may refuse you all together without good credit, others will want a greatly enlarged deposit of funds
• Post pay utility bills
  • If you want to pay your utilities at the end of the month rather than being required to prepay, or use a meter which requires buying credit in advance you are also essentially taking credit
  • Depending on the utility company they may run a credit check for this
• Cell phone plan (also applies to landlines)
  • If you use a contract cell phone as opposed to a PAYG one, you will likely need a credit check, both to check if you are likely to pay your bill and if you could pay for the phone if it were damaged or lost
  • This is a relatively avoidable situation as many prepay phone plans exist
• Internet or TV service
  • Many ISPs and TV service providers want to check credit both to know if you will pay your bills and if they loan equipment to you if you are likely to be able to pay for it
• Credit cards
  • While avoidable these still offer perks, particularly in better cards which will require a high credit score
  • They offer greatly improved fraud protection over cash, check or debit card, with lower customer liabilities and lesser consequences to you
  • They often offer rewards and cash back, which while not worth it if you might fall into debt and negate this benefit with fees, do give you free money if you can pay in full and on time reliably
• Car (and other) insurance
  • While not a form of credit many insurance companies use your credit score to decide how reliable and financially stable you are
  • If you have poor credit they may refuse to insure you or offer punishingly high rates
  • This is illegal in some jurisdictions so may or may not be a problem

So in summary, yes, if you do nothing that involves any kind of debt, even subtle or indirect debt you do not need to care about your credit score at all, otherwise it may be important for activities you may wish to do (the list above is incomplete, there are many other such cases, and some of these only apply in some places).

Answer 7

Credit Unions have long advocated their services based on the fact that they consider your "character." Unfortunately, they are then at a loss to explain how they determine the value of your character, other than to say that you're buddies & play pool together so they'll give you a loan.

Your Credit History / Score is as accurate a representation of your character in business dealings as can be meaningfully quantified. It tracks your ability to effectively use and manage debt, and your propensity to pay it back responsibly or default on obligations. While it isn't perfect, it is certainly one of the best means currently available for determining someone's trustworthiness when it comes to financial matters.

Answer 8

Use credit and pay your bills on time. That's really about it.

If you do that, you don't need to think about credit score. It's really a big distraction that is dwelled on too much.

Answer 9

What you (and many of the answers) miss is that credit rating is about any situation where you will owe a company money, whether it is something you would normally regard as a loan or not.

For example, utility bills. I changed cell carriers last year--and they ran a credit check before opening an account. (There's no credit check for pre-paid service as that's pure cash and carry.)

Also, credit cards. They're more useful than debit cards even if you pay in full every month and thus pay no interest.

Also, expect a credit check before renting an apartment. In a competitive market it's unlikely you'll get a decent place without a decent credit rating. Cash won't even suffice in many places as there are limits on how much a landlord can demand when moving in--which means they can't ask for a high deposit to make up for a lack of credit.