We all know a good credit score is desirable, and a bad credit score is something to be avoided, but what we may not be aware of is that there are some very undesirable behaviors that can actually improve your credit score.
Taking on a lot of debt that you can (just about) pay off may boost your credit score but that doesn’t mean it’s the best choice for you. What’s more, a high credit score may not be a sign of financial health at all. Your credit score is not just about how good you are with money. It’s about how good you are with debt.
Somehow, a very high credit score has become a desirable thing to have in America. A status symbol. Something to brag about. A sign that you’re good at money management. Something, and here comes the problem, to actively work towards.
More than one person has told me recently that the big extra chunk of debt they just took on is “a good way to build credit”. It’s true that well-managed debt can help you improve your credit score, but it’s important to remember that more debt puts you in a more precarious situation overall, and chasing a high credit score isn’t something that should ever be at the heart of your financial decisions.
If that’s something you’re doing, you may want to ask yourself these questions.
Are there better ways to improve your credit score?
You don’t have to carry a lot of debt in order to have a good credit score. Small amounts of debt, repaid on time and in full, have an impact too. In fact you’ll build your credit score over time if you regularly put small purchases on your credit card, and pay the balance in full every month, meaning technically you’re never in debt at all, and you benefit from the interest-free period on your card each month. This is one of a few really good ways to use credit cards.
Other ‘essential’ loans you may have, such as student loans or an auto loan, also contribute to your credit score, so making those repayments reliably will improve your credit score over time, without needing to take out extra loans purely to build credit.
Even paying your rent and monthly bills on time can help build credit. In the past this didn’t raise your credit score, although missed payments could certainly lower it. Now, however, you can request that these payments are taken into account. Major credit agency, Experian, offer Boost America, a way to opt-in and allow them to monitor payments to your utility, cable and cell phone providers. So simply paying your bills on time can improve your credit score.
Are you mistaken about what a high credit score really means?
Many people take it for granted that a high credit score means they have good money management skills, when in fact it’s more complicated than that. You can be managing money badly and still have a high score. You could be juggling multiple debts that you can’t easily afford to pay off long-term, but as long as you always pay on time and make the minimum payment, your score could still be healthy.
You may like to think your high credit score is a reflection of how good you are at managing money, but as Laura Belbs points out in this article, a good credit score can just indicate that you’re very good at being in debt. It doesn’t mean you’re good at earning, saving or investing money, or making good financial decisions on a day-to-day basis.
Those who purposely chase a high credit score by taking on more debts are often assuming that will pay off when they want to take on a really big debt, like a mortgage or a business loan. Obviously lenders will look at your credit score when it comes to something like a mortgage, but they’ll also look at other things such as how much you have to put down as a deposit. Constantly taking on debt to boost your credit score, rather than actually saving money and investing money, really isn’t the sensible financial planning you may think it is.
Are you lying to yourself about why you’re taking on debt?
This is my biggest problem with this argument. I understand you want a new car, or a boat, or a shopping spree, but are you really taking on that debt just “to build credit”. Let’s be honest. You want something, and you don’t have the money to buy it. Credit companies make it easy for you to own things you can’t afford, and you know that building credit is a responsible thing to do. So you tell yourself that’s what you’re doing.
It’s time to get honest. Some debt is inevitable for the majority of people, and well-managed debt is a way to build credit to that when the next inevitable debt comes along, you’ll be an appealing prospect to lenders. But if you’re constantly wallowing in consumer debt, regularly applying for more credit, making minimum payments, and still congratulating yourself on a healthy credit score, you need to get real.
If you find yourself in this situation, it’s time to stop applying for credit, consolidate the debts you have and start paying down them down as aggressively as you can. Let’s face it. That won’t hurt your credit score at all, and it will make you feel a whole lot happier about your finances.