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Is having good credit overrated?
What is the value of good credit? If you're like the majority of Americans who rely on having good credit scores to help smooth the way when you buy a car, get a mortgage or apply for other types of loans, a high credit score is vitally important.
A conversation with someone at a dinner party over the weekend and recent comments from a friend makes me wonder whether the number of people who don't value good credit is growing.
The person at the dinner party proudly revealed that he doesn't have any credit cards (he uses debit cards if he has to book an airline flight) and pays cash for everything, including cars.
He says the last time he checked his credit score was several years ago and it was 540 back then. Credit scores range from 300 to a maximum of 850, so he was on the lower end of the range. These days, you need a FICO score of about 750 or more to get the best mortgage rates. He has no idea what his score is now. But he says it doesn't matter to him. He is a computer programming entrepreneur and, I'm assuming, does very well.
I told him I thought he was definitely in the minority in the country because the rest of us (me included) want to be able to borrow if we need it. Since I'm not independently wealthy with my own unlimited stash of cash, I have to rely on banks to finance big-ticket items. Those banks use credit ratings to weed out the good versus bad credit risks among us. I don't make the rules, but I'm forced to play by them because I'm not wealthy.
The discourse reminded me of a recent article about so-called "strategic defaulters." These are people who are walking away from mortgages even though they have the ability to pay their loans. (Many are upside down with their loans, meaning they owe more on the home loans than the properties are worth.)
As the article points out, Experian and other credit reporting agencies are developing models to help banks determine which borrowers are likely to deliberately default. Doing so means these property owners will damage their credit scores, but the threat of having bad credit has not deterred them.
Check the credit repair forums and with any credit counseling agency and you'll find thousands of people trying to find ways to boost their credit scores. Yet some people are snubbing their noses at the whole credit reporting system. Why?
How bad is bad credit?
A friend who spent several years working for a bankruptcy law firm and talking to people before, during and after their bankruptcy filings, explains it this way:
"The importance of good credit is tied to how severe the consequence is of bad credit, and, with proper planning, the effect of bad credit can be mitigated in five years, which means good credit is overrated just like a college education and home ownership. That's not to say there is no value, it's just a value that is exaggerated."
He adds: "The value of good credit is the savings derived from lower interest rates one can derive on loans for a fixed period of time. The fixed period of time component is critical because time heals bad credit scores, and at a rate faster than most people realize."
"A major reason good credit is so overrated is that with proper planning the effect of bankruptcy on a credit rating can be to a large extent mitigated within five years, even though it does stay on your [credit report] for 10 years. The banks promote, and most people believe, that a bankruptcy is much worse for your good credit than what most Americans face, heavy debt leverage, and often that may not be true."
I value my friend's opinions. He has clearly spent time analyzing the pros and cons and costs and benefits of bad credit and came up with these conclusions. For me, I'm still paying my bills on time to keep my good credit score and pay my financial obligations.
I wanted to write this blog to find out how many other people there are out there who feel that having good credit isn't that important. I also want to hear from those who've been rejected for loans because they had bad credit.
See related: Q&A with Adam Baker of Man Vs. Debt, Consumer credit card debt drops slightly in April, Fed says credit cards easier to get, but does anyone want one?, Angry about the credit scoring system? Here's what to do
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