Having a great credit score is important. A good credit score will help you secure loans such as a home mortgage or car loan for a lower interest rate. Having a good credit score will allow you to qualify for credit cards loaded with juicy cash-back bonuses and other perks. A good credit score also lowers your insurance premiums, and may even influence hiring decisions. However, despite all the attention given to credit scores, a good credit score is not the end-all, be-all of personal finance. Here are six reasons why.
An Excellent Credit Score May Mask a Growing Debt Problem
Maintaining an excellent credit score is relatively easy. As long as you make your minimum payments on time, don’t borrow right up to your credit limits, maintain a variety accounts, build a history of those accounts and don’t apply for too much debt all at once, your credit score will be stellar. Other than not maxing out your accounts, the amount of debt you can carry doesn’t have much bearing on your credit score. It is possible, and fairly common to have unbelievably high limits, especially across multiple accounts. Hiding beneath those high limits might be a debt load that is gradually becoming more and more unsustainable.
An Excellent Credit Score Is a Trap Without Self Control
A great credit score can go beyond masking a debt problem and actually facilitate falling into a debt trap. Having an excellent credit score can make you over-confident. It can convince you that you can handle debt just fine. Furthermore, as you build your credit score, lenders will become more generous with credit limits, allowing you to rack up even more debt while maintaining a low credit utilization ratio.
An Excellent Credit Score Won’t Solve a Poor Debt to Income Ratio
Fortunately, the lending industry does have one metric that sometimes prevents over-borrowing. This is the debt to income ratio. Especially if you are applying for secured debt such as a home loan or car loan, having a high debt to income ratio is a big red flag to lenders. If you are starting to consider financing a purchase such as a home, it is important to eliminate as much other debt as possible- both for the sake of the credit application and for the sake of your own financial health.
An Excellent Credit Score is Not a Get Out Of Jail Free Card
If you have a good credit score for long enough, you might start thinking that your credit score is iron-clad. You might even start thinking that your credit score will protect you from a missed payment or two- especially if you do start getting in over your head with debt. If you ever find yourself thinking like this, it’s a sure sign you are in over your head with debt.
An Excellent Credit Score is Not Free Money
At first, having a good credit score and access to the credit that follows will feel like free money. A credit card with a several-thousand dollar limit will let you spend indiscriminately for quite some time before any of it starts catching up to you. However, catch up to you it will. Always remember that having access to credit is not free money.
An Excellent Credit Score Does Not Replace Healthy Savings
Taking the free money point one step further, an excellent credit score does not exempt you from having to save. Yes, many people use access to credit to substitute having an emergency fund. While this works, it does not work as well as an actual emergency fund. Borrowing to finance an emergency adds an extra payment to your life at a time when that extra payment may be especially burdensome.
When it comes to retirement, an excellent credit score will be meaningless if you don’t have anything saved for retirement. Because a credit score does not give you money, it simply cannot replace your income. You still need to budget, and you still need to save. End of story.
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- While I do strive to only write accurate information and dispense valuable advice, I am not a licensed financial adviser. All information is based solely on my personal experience and personal research and should be treated as such. Find out more.