Before diving into details about credit scores, it’s worth reviewing the basics:

Why do you want to achieve a good credit score?

So that when you need to borrow much more money than you have, you will be able to, at a decent interest rate. Note the “need” part – it’s critical. Never borrow money needlessly. That includes borrowing “to build up a good credit history.” That’s mostly unnecessary, in my opinion. If you feel you must, borrow a token amount of money for that reason, and not for any length of time, either.

What credit score do you need?

It depends on your prospective use. If you are not contemplating buying a house in the near future, the answer is probably, “You don’t need a great credit score – just an average one.” Obsessing about credit scores when you don’t need an outstanding one is probably not worth your effort.

The most important determinant in your ability to commandeer a large loan for a house or anything else is your employment. You have to have a good-paying job, and you have had to have been at that job or a similar job for a while, in general. You may have worked at low-paying jobs and done well, but you’ll still probably not qualify for a normal mortgage.

The second-most important determinant of your ability to get credit is any negative history with debt. No, I don’t mean late payments once every year or two. I mean bankruptcy, or any judgments against you, or lawsuits against you. Negative credit information of a major nature is by far the most important driver, and is not offset (score-wise) by a subsequent history of paying on time. But even after a major negative credit event, if you continue on and have a high-paying job with a recognized employer, you can still quickly recover access to credit. So, in a sense, having a good job is both of the two most important aspects of getting and keeping or recovering access to credit, absurd as that sounds.

That’s it! I do not approve of borrowing money needlessly, including the old shibboleth of letting your balance with a credit card company stay outstanding (paying at least the minimum amount, of course, each month) for years, just to “get a good credit history.” Even the credit score companies seem to know how counterproductive this is, because they lower your credit score if your ratio of debt-to-income or debt-to-assets is too high. So why bother with a token amount of debt just to please them, when you’re not sure it makes a significant difference? Better to expend the energy into your employment achievement – your credit score will then leap up!

Moving forward

Your credit score is just a tool, and by no means the most important tool, to getting what you want out of life. It may be totally unimportant for years and years, and then become important when you want to get a mortgage. However, it’s logical not to spend too much of your precious money trying for a really high score (“paying for it” by paying interest you don’t need to pay). For the specific drivers of credit score, if you have a credit card you can also easily register for free online credit score updates from any one of the three main credit score companies (TransUnion, Equifax, and Experian) which all share information anyway. They will show, in colorful easy-to-read graphics, how your score has changed and why it changed. Be aware that their obvious bias is to persuade you to care about “managing” relatively insignificant changes in your score.

In real life situations, acquiring credit is not always as cut and dried as using a public bank and a credit score. If you get a good enough job, you will qualify for private banking, possibly with a division of a bank which does business with your employer. Or you might join a company-affiliated credit union. In these cases the conventional ratio-based limits for loans tend to be easier. Even family and friends are potential sources of credit, and don’t think they don’t care about how good your employment is as a source of repayment, because they do!

Your access to the finer things in life in the future are often the result of actions you take today, but not necessarily just the by-rote activities which used to be the middle-class prescriptions on how to get ahead. Credit scores have a limited function and are therefore limited in how much they will affect your life. A good score is good to have (if you don’t overpay for it) – a perfect one is not necessary. I hope this simple primer helps you realize that obtaining and retaining access to credit is a much broader and more important topic than obtaining a decent credit score. Think about that; think about your chosen career path and successfully maximize it, and your credit score will follow along nicely. Drift from one dead-end, low-paying job to another, and your “well-managed” credit score still won’t help you acquire enough credit when you really need it.

Categories: Finance


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