This guest post from Matt is part of the “reader stories” feature at Get Rich Slowly. Some stories contain general advice; others are examples of how a GRS reader achieved financial success — or failure. These stories feature folks from all levels of financial maturity and with all sorts of incomes. This is a rare reader story that appeared elsewhere first. I saw it on Matt's blog last week and asked if I could reprint it because it addresses an issue people often wonder about.
A couple years ago as I was getting a credit report from Experian (I was about to buy a new car and wondered where I stood credit-wise), I signed up for one of their monthly tracking features. I justified this because I'd had a credit card number stolen and wanted to watch my credit records for a while, even though I knew the $15/month was a bit of a waste. Over the past year or so, I've watched my credit score start lower than I remember it being and go lower, and I've come to the realization that it's largely a joke.
The Same Old Story
My credit history is pretty ordinary: I started out in 1993 with one of those credit cards that come with a free t-shirt and frisbee in college, mostly because I was amazed anyone would give me credit. The introductory $500 limit quickly went to $2000 when I put some ski trips on the card, and I always carried credit at about 35-40% of the card's limit.
After college, I continued to use the card and watched my limit go to $5000 and then $10,000 (as I carried more and more on it), and a few years after college the card's limit was at $20,000 even though I vowed to no longer put items on it. At the same time, finishing my Bachelor's degree and getting a Masters racked up about $25,000 in student loans (in 2011, four years of college only costing $25,000 seems quaint!). I also owned a couple used cars with small car loans I paid off in time.
After I moved to Oregon in 2003, I finally got serious about my ~$30,000 in debt. My previous years of carrying thousands in credit and paying things off in time (but rarely getting ahead) ballooned my credit score into the low 800s. I never worked to improve this score — it was just a nice surprise after a decade of paying bills on time. My high credit score was great when it was time to get my first home loan, buy my first new car, and when I sold a home and bought a second one a couple years later.
Once I settled into a long-term home, I started paying off my credit cards and school loans aggressively. By 2006, I had no balance on my credit cards, and my wife and I finally paid off our school loans. Having had credit card numbers stolen in the past, I started closing my unused credit card accounts knowing it might affect my credit, but I figured it was a better overall approach to shift towards buying things with my bank's ATM/VISA card instead. I knew without credit cards I would never carry a balance and the money would directly out of my checking account so I planned purchases for things I could afford, and ignored purchasing frivolous things.
I also followed the Get Rich Slowly philosophy and focused heavily on building my retirement savings and over the years of maxing out my retirement with the help of an investment planner, I have a pretty good nest egg going.
Punished For Good Behavior
You can imagine what all this fiscal responsibility did to my credit score the past few years: It dropped below 800 soon after I paid off all my cards and started closing accounts.
For a few years, I had no open credit cards and no open balances. I paid off two more car loans and was paying ahead on my house loan, and each year I'd watch my credit score fall in the 700s. A couple of months ago, my credit score was barely above 700, and the main negative flag on my account was having no open credit card accounts. So, before I took a recent trip abroad, I decided to finally sign up for one of those personal airline cards my frequent-flier program has been pitching me and use the card on my vacation.
Today I learned that my credit score dropped into the 600s and my risk just went from low to medium. The culprit? The credit card account I opened to try and appease the FICO gods!
My new credit report says I have “too low of a limit” (it started at $5000) and I had “too high of a balance” on it as I used it on vacation (I paid off the card as soon as I returned, two weeks before the first bill even showed up). I got the card to improve my score and rack up some frequent flyer miles and pay it off in full, carrying no balance, and yet, they docked me once again.
Financially, I'm in the best shape of my life right now.
- My house will be paid off in about five years at the rate I'm going.
- I have a great retirement portfolio that I contribute aggressively towards and it continues to grow.
- My business is doing well even as we've expanded with a new employee and several contractors.
I had the highest credit score at a time in my life when I was leveraged to the hilt and I lived paycheck to paycheck. Now that I have my own business, a healthy retirement, and can pay for everything I need/want, I have a low score and I'm dubbed a higher risk even though my ability to pay is very high. I used to think a credit score was all about your ability to pay, but it's clear now it's more about how profitable you will be to banks.
J.D.'s note: I've had a similar experience. As I've turned my financial life around, my credit score has fallen. I don't care, though (and neither, I think, does Matt). Why not? Because I don't intend to carry any major debt in the foreseeable future; any debt I take out will be repaid immediately.