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Do you need a Credit Score?

Before Nathan and I purchased our home, we had no credit score, as we had no debt. We went to a car dealer to purchase a new car in cash. For some reason he still felt the need to run our credit and informed us of the bad news that we had a 0 credit score. Nathan and I were, of course, ecstatic about this. However, the dealer let us know that if we financed the car we would be able to begin to “fix our credit”. It would be at a high interest rate, but it would help us in the long run. He could not understand why we were happy with a 0 credit score and didn’t want to take out a car loan.

As a Financial Coach I get asked often about how to raise or fix a credit score. So I thought I would discuss exactly what a Credit Score is and what it means to your financial wellbeing.

A FICO score is the number the creditor uses to figure out if someone is worthy of taking out debt. FICO scores have only been around since 1989 and it doesn’t show how good you are with money, how wealthy you are or how you manage your finances. What a credit score does show is that you are good at making payments to your creditors over and over again. Your score is determined by 5 things: payment history (35%), amounts owed (30%), length of credit history (15%), credit mix (10%) and new credit (10%). Your score is between 300-850, with anything about 740 as very good/excellent and anything lower than 670 as fair/poor and good being in between.

But everyone needs a credit score, right? NO! If you’re applying for credit cards, yes. If you’re applying for a loan, yes. But you don’t need a credit score. When you become debt-free you don’t need a credit score, because you are paying cash for everything and not taking on any more debt.

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