You are overwhelmed by your debt. You feel like you are robbing Peter to pay Paul. You do everything you can to scrape up enough money to make your minimum credit card payments on time. The last thing you need now is to miss a payment, and start lowering your credit score! Read on to learn the truth about your credit score.
Having a bad credit score is a common fear among those struggling with debt. But your credit score may not be as important as you think. Let’s start with the basics.
Check out our latest podcast and listen to Jillian Taylor-Mancusi talk about credit scores. She covers a wide array of topics related to this important measurement of our financial worthiness.
What exactly is a credit score?
Your credit score is used and provided by Equifax and TransUnion, the two credit bureaus in Canada. It is a number between 300 and 900. Higher scores are viewed more favourably. Your credit score measures your financial risk based on how you’ve used credit in the past.
What does your credit score mean?
When your score is 800, a lender will think to themselves, “If I lend money to this person, 800 out of 900 people will pay this money back.” In comparison to only 400 out of 900 people paying the money back, with a score like 800, the odds are in your favour!
When is your credit score important?
Like it or not, your credit score dictates a lot nowadays. It is a deciding factor in whether or not you qualify for a student loan, a car loan, or a mortgage. If you are at a life stage where you are working towards owning your own home, car, or furthering your education, a good credit score can help you get approved for that mortgage, car loan, or student loan. A lender will see that they have a high chance of their money being paid back.
But when is your credit score not as important?
In many instances! These are the things that no one tells you. I’ll explain with a real-life story.
I’ll never forget the gentleman I met with who spoke about how hard he worked to build up his credit score. He was so proud of his score and how despite his unmanageably high debt load, he never missed a minimum payment. Yes, his rent and utilities kept falling behind. Every month he felt like he was robbing Peter to pay Paul, but at least his credit score was still okay, he would say.
I asked him, “Can I just ask why you’re trying so hard to keep your credit score up?”
“Yeah,” he replied, “I uh.. well I don’t want it to go down because… I…um…”
“… Are you planning on using that credit score for something?” I asked. “Like a mortgage or a car loan one day?”
“Well no,” he said. “I’m a fifty-something single guy, and I’m happy renting. I already have a car and it’s paid off. I…don’t know… what I’m going to use my credit score for.”
We sat in silence for a few moments as he thought. “I’m sorry,” he gasped. “I’ve just never been asked that question before. It’s just what you’re supposed to do.”
Then he had an a-ha moment. He realized that his good credit score wasn’t actually worth anything to him. He still had an overwhelming amount of debt he couldn’t pay down, despite working two jobs and living on a tight budget. He now understood that good credit is only used to borrow more credit, and he didn’t want any more debt!
He decided to make a big change. Instead of working two stressful jobs well into his seventies, just to make the minimum payments on his debts, he decided that a debt solution which might impact his credit score was okay with him.
He chose to move forward with a Consumer Proposal to repay a portion of his debts. At LCTaylor, we worked with him to develop a proposal to his creditors, which was a formal, legally binding process that offered to pay his creditors a percentage of what was owed to them. His creditors accepted the proposal, and he was debt-free in less than 5 years.
In my role as a Licenced Insolvency Trustee, I have spoken with many people who don’t intend on applying for a mortgage or a car loan in the next few years. They are happy to rent and either own a car already or don’t need one. Lesson of the day: A good credit score is used to get more credit. If you don’t want to borrow any more money, you may not need to worry about keeping a good credit score after all.
So if you are working hard to build, rebuild, or maintain your credit score, I am simply inviting you to reflect and ask yourself, “Why?”.
“Why do I want a high credit score?”
Are you looking to apply for a mortgage, car loan, or student loan in the near future? If so, do you have the money available for a down payment on a mortgage? Or will the bank approve you for a car or student loan based on how much debt you currently have? It is vital to consider if a high credit score can truly benefit you at this stage of your life. You may be surprised to learn that a high credit score isn’t all it’s cracked up to be!
Jillian Taylor-Mancusi, LIT
