The Personal Finance Hour, Episode 13: Credit Scores with Liz Weston
Published on - June 22nd, 2009 (by J.D. Roth) 
Join us this afternoon for the 13th episode of The Personal Finance Hour. Today, Jim and I will be joined by a special guest, money writer Liz Pulliam Weston. Weston, “the most-read personal finance columnist on the Internet”, writes regularly for MSN Money, and is the author of Your Credit Score: Your Money and What’s at Stake.
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OK, this is going to sound crazy…but do any of us really NEED a good credit score if we have no plans to use credit? I lived my whole life as a slave to my credit score, guarding it fiercely, freaking out if there was ever a possibility it might get dinged…and then this year those 38 years blew up in my face. My husband’s business of 12 years collapsed when a big client stopped paying its bills, and we were stuck with a crushing amount of personally guaranteed business debts (we had no consumer debt other than our mortgage). We blew through our emergency savings servicing our mortgage and meeting our tuition obligations for our kids’ school, and can’t sell the house because the market’s down so far. We’ve declared personal bankruptcy and have decided to give up on the house rather than start draining our retirement savings as well.
When our credit card companies got word of this, they closed our accounts. So what? We pay them off every month anyway so now we just use our debit card. We needed to rent a house to live in, so when we put in an application we included a personal letter explaining our situation and they rented to us. We sold our financed car and finished up the lease on our other one, and bought used cars we could afford for cash instead. They’re not fancy but they run. Our kids will go to public school and I’m 100% confident they’ll turn out just fine.
So other than getting a new mortgage some day, I’m not really sure what I need a good credit score for. And now that we’ve learned the true cost of paying a mortgage on a home that costs vastly more than a comparable rental, and experienced first-hand the breathtaking rapidity with which you can lose all of the equity you’ve paid into a home and then some, well, I’m not so sure I am convinced that owning a home is such a great investment, either.
In reality, perhaps our great credit score was partially our undoing. My husband and his business partner (with my and the partner’s wife’s co-signatures) were able to get a LOT of business credit. In retrospect they could have run their business leaner and maybe not gotten us all into such trouble. We bought our house with a nice fat down payment and got a 30-year fixed mortgage, and on paper we could afford the payments…but only as long as everything chugged along. If we’d cut back a bit and not bought such a big liability, maybe we would have been able to hold on through the downturn. But the banks said our credit was good enough to have anything we wanted, so we did. (Let me be clear, I am not blaming the banks for my situation)
Anyway, just some food for thought, from a recovering FICO addict. I’m sure I’ll be taken to task by someone here.
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A good credit will give you lower rates on insurance and maybe a job you apply for as more and more employers check credit reports and scores of potential employees. It may not seem fair but that’s the way the world works these days.
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@Jeanne:
You are correct in questioning why you need credit. you don’t. IF you plan on actually “paying” for items/services in the future rather than “renting” them, then credit is of no importance.
And as you have found, you can rent an apartment, or a house, or a plane ticket, or a car without a credit card. You do not need credit to get insurance. You do not even need credit to get a mortgage.
You do not “need” a credit score to do anything really, other than borrow mor money. You will do just fine.
However, don’t get discouraged about home ownership. It is still the best way for most people. Your situation is your situation, and you did what you had to…I would have as well. You will own again.
But you will also be clear about what matters and what doesn’t. And a good credit score doesn’t mean jack ****.
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@ Barb1954 – true, true…but in my situation, the interest I was flushing down the drain every month on my house (and the savings on the expensive homeowner’s insurance…and the expensive car insurance for the nice cars) will more than cover the increased cost on renter’s insurance and minimum car insurance for our beaters. Don’t get me wrong – we will re-build our credit, but more passively – by virtue of the fact that we are just the kind of people who pay our bills on time – than by worrying about it.
@Troy – thanks for the encouragement. It’s a brave new world out there for us and it looks like it’s all going to be OK, despite what the financial industry tries to tell us we need.
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So if a person never borrows money or has been debt free for the last 10yrs, they have no FICO score? Right?
It makes no sense why some companies look at people that have zero liabilities/ no risks (no debt) and charge them more for auto insurance than a person that lives in debt. You would think they would rewards people that don’t have a FICO score. After all, no FICO score means no debt.
When are these companies that rely on FICO gonna get that a NO score is not the same as a LOW score?!?
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@ LIKO
I used to work for a credit bureau building credit scores. Banks, lenders, insurance companies, and most other institutions that price risk via a credit score realize there is a difference between No scores and low scores.
But the fact remains, in aggregate, people with no score prove themselves riskier than those with high scores time and time again. The key is “In Aggregate”, you may be different but amongst the millions without scores like you, you have to find other ways to stand out as a good risk.
Secondly, it is entirely possible to live without debt and maintain a high credit score. You don’t need a mortgage to break 800. You need time, judicious use of cards, low utilization, and dependable on time payment history.
@Barb1954
You are absolutely right. Imagine a hiring managers dilemna faced with two equally qualified candidates. Now throw in the position is high level with access to a budget, company card, client secrets, large finances, etc. I guarantee as a hiring manager I’d choose the person with the good score over the bad one. While bankruptcies do happen to people who play by the rules, once again in aggregate they clearly reflect riskier behavior.
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Well…my husband has worked in the staffing industry for 15 years and he says the credit check thing is essentially a myth, except in fields like accounting, where the potential employee has access to company finances. The use of criminal background checks in an employment screening is very common and increasing, but not credit checks.
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My credit score is around 760 or something like that. But it’s going to eventually fall off. I haven’t used debt in awhile. I think I’ll skip on the whole FICO thing and stay debt free. If I have a high score, that’s great! If not, it’s not worth going out of my way to keep up with it. I prefer to use “cash” to buy stuff, and that includes a house too. If feels good when your highest monthly bill is your electric bill for $60!
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@LIKO – Good for you. People look at me funny when I say I want to save up a 20% down payment for a house. I’m not averse to paying cash either. I will if I can. In the meanwhile, I’ll continue to pay my bills on time so that I can qualify for the lowest interest rate mortgage possible.
@J.D. I hate I missed the show tonight. I’m glad it’s available on iTunes. Liz Pulliam Weston is one of my favorite financial experts.
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The show was GREAT and I thank you for keeping it up so we can catch what we missed. I only regret I wasn’t able to call in. I started with no credit score 3 1/2 years ago. In 16 months I had it up to over 700. Then turned around and bought a new car … at 14.75% interest, (WAY upside on that!). Just over 2 years later, I finally have it back up over 700 and am trying to buy a house with nothing down. (THANK God for the VA loan!) The car note I thought would help build my credit is now the biggest impediment to me getting a home loan!!
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The show was GREAT and I thank you for keeping it up so we can catch what we missed. I only regret I wasn’t able to call in. I started with no credit score 3 1/2 years ago. In 16 months I had it up to over 700. Then turned around and bought a new car … at 14.75% interest, (WAY upside on that!). Just over 2 years later, I finally have it back up over 700 and am trying to buy a house with nothing down. (THANK God for the VA loan!) The car note I thought would help build my credit is now the biggest impediment to me getting a home loan!!
P.S. – Sorry, forgot to tell you great post!
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JD,
Loving catching these shows on Tuesday morning over coffee at work! When do I get to be on talking about the economy?
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I am hoping to buy a house within the next 2 years. I am trying to eliminate my debt and improve my credit score (let’s just say that I am less than “gazelle intense” about it). Has anybody used any services like myfico.com to watch their credit scores and micromanage their score? Suggestions or advice?
Some day I’d really like to be a cash-only guy for everything, but I can’t see that happening for a house any time soon.
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