Why Credit Scores Should Be Ignored

I heard a news report from a mainstream news outlet putting forth the claim that protecting your credit score is an important part of good money management. This is a lie promulgated by the financial services industry and repeated by most everyone.

The three credit bureaus are private organizations that keep track of how well people pay their bills. They also summarize this information into a single numerical value, so that lenders can quickly work out the risk of lending to a consumer.

People who want to "establish a good credit score" do something like this:

• Open a few accounts to increase their unused credit line but not so much that they are penalized for requesting credit too often.
  
• Borrow some money and pay it back on time, while not borrowing so much that they are penalized for lack of available credit.
• Take great care with anyone who has the ability to put a negative market on their credit reports.
• Monitor their credit reports frequently for erroneous information.
• Pay the credit bureaus extra (beyond the cost of a credit report) to compute their score for them so they can get feedback on to what extent their financial lives match what the bureaus want to see.
  

What do they get for jumping through these hoops? They get the ability borrow money at a lower interest rate and to borrow money for things that lenders think are risky.

If you want to borrow money for a house and have a good down payment and enough income to make the payments, you do not need good credit. The underwriting guidelines are not that strict. A person without a long credit record or a high credit score can get the same interest rates available to someone with a high credit score. The person with the high credit score, however, will be able to buy a more expensive home with no down payment, borrow to buy a car, borrow money unsecured, and so on. In short, having a high credit score allows you to do things that are costly and risky for the consumer and profitable for lenders.

This situation really bothers me when I hear someone suggest a financial move for the purposes of "building credit", especially if the financial move profits a bank at the expense of a consumer. It also bothers me to hear people considering settling a dispute with someone because they're scared that the other party will put a negative mark on their credit bureau. It goes like this: I got this letter saying I owe money. I don't think I do, but instead of refusing until I see proof that I owe the money, maybe I should just pay it to protect my credit report. We have courts to resolve disputes like this. The credit bureaus' opinion on a dispute should be irrelevant.

The bureaus make a clear distinction between their customers and consumers. Customers are banks and anyone else who pays for a credit report on someone. Consumers are the people who want to borrow money from banks. The bureaus get their money from their customers, so that's who they're accountable to.

It's wise for people to avoid borrowing money and to ignore the opinions of banks and credit bureaus.