We live in an age where we're obsessing way too much about our credit scores. Sites like Credit Karma (where they update your score once a week), Credit Sesame, and Quizzle allow us to have free access to some type of variation of our scores. Now, even credit card companies are offering free credit monitoring tools as a complementary add-on.
As I regularly scour the web on a bunch of personal finance blogs, I come across way too many "how to improve your credit" types of articles. Having good credit allows you to ultimately take on more debt at a lower cost. Let me repeat that. Good credit will allow you to carry more debt. When we think about what credit is used for, it's to borrow money at a lower cost: an auto loan, mortgage, personal loans, or student loans. Not to say that our credit isn't important, but shouldn't we put a greater emphasis on getting out of debt and saving for retirement?
Having Less than Perfect Credit Actually Helped Me...
About five years ago, I embarked on your typical Silicon Valley startup journey. This meant I had no stable income, lived on my savings, and had to watch every penny I spent. Needless to say, things started to spiral out of control. I slowly began to fall behind on some payments and I saw my 700+ FICO fall faster than I could imagine.
I ended up settling/negotiating some of my accounts and getting on payment plans with my creditors. I thought my life was ruined. My impeccable credit that I worked so hard for went down the drain. I thought I would never be able to get a credit card or get a mortgage in the future. My credit score went down as low as 550. Even after I paid off some of my balances, I didn't see much upward movement. I couldn't even get a new credit card to rebuild my credit score.
But then I Realized Life Wasn't Too Bad
Despite having a pretty awful credit score, I soon realized that I could care less about having perfect credit. The purpose of having a good credit score is to have access to money at a cheaper rate. I wasn't in this situation. I wasn't planning on buying a car or a home so it wasn't a concern to me. Instead, I focused on getting my head above water which meant saving enough cash for a rainy day and setting aside money for retirement.
During this phase, I was mostly using my debit card and cash for purchases. This made it easier to create a monthly budget and figure out what I could and couldn't spend.
Good Financial Habits Will Help You in the Long Run
It wasn't long until I finally decided that I wanted to make a concerted effort into rebuilding my credit score. I saved enough cash for my emergency fund, and I was able to create a good habit of watching how I spend money.
The first thing I did was to figure out which credit cards to apply for. You'll need to be mindful of this since most creditors will do a hard inquiry which can impact your credit score. I decided that I would first start with a secured credit card to minimize the number of credit card applications. The process was pretty simple: you establish a credit line by depositing funds into an escrow account held by the creditor for securitization.
And Here's Why Your Financial Health > Than Your Credit Score
When you have good financial habits, your credit score will improve. Let me repeat that. Good financial habits will guarantee a good credit score.
As we all know, more than half of our credit score is made up entirely by two factors: payment history and overall credit utilization. When you're managing your money the proper way, you'll immediately notice that you're making all your payments on time. You'll set up email reminders, check your account balance frequently, and always plan ahead to make sure you can pay off your balances in full. When you're doing these three things, you'll almost never utilize more than 30% of your credit score.
It's not to say that your credit score isn't important. The truth is that way too many people care too much about their credit instead of improving their financial health. Once you're able to establish a good footing on your finance, a good credit score will follow.