He that has lost his credit is dead to the world – [English and German Proverb]
Do you know you credit score?
Do you know what a credit score even is and how it can come to dominate your life?
According to Wikipedia a credit score is –
an evaluation of the credit worthiness of a debtor predicting the debtor’s ability to pay back the debt; it thus forecasts implicitly the likelihood of the debtor’s default.
In Canada your credit score is a three digit number that is calculated using a mathematical formula. You gain points for behaviour that demonstrates you can use credit responsibly, like paying your bills on time and you lose points for showing that you have difficulty managing money.
The number ranges from 300 – 900 points.
Businesses use your credit score to determine their risk in doing business with you; especially in the lending of money. It is up to each individual business to determine the minimum credit score they will accept as a risk moving forward and businesses have the right to refuse service to customers they deem too risky.
And therein lies the rub. In order to increase your credit score you must demonstrate credit worthiness. In order to demonstrate credit worthiness you must use credit and in order to use credit you must demonstrate credit worthiness.
In our modern economy the old English and German proverb quoted above is true on so many levels. You can’t do business without credit and without credit you can’t do business. Or can you?
When I was on the verge of bankruptcy I used to rail against this seemingly perverse and corrupt system by stating emphatically that the only people who need credit are people who want to go into debt. I used that circular reasoning as an excuse every time I was forced to pay a bill late or default on a loan, which I did more often than I care to admit. My logic, being once bitten and twice shy by the whole thing, was that since I had absolutely no desire to go back into debt, I had no need of a credit score and could justify screwing my creditors.
To this day I do not know my own credit score, nor do I care to. But I know it exists and I know that even though I have no desire to go into debt, it is still there and it still dictates much of what I am able to do in life.
Living debt free, which is the first step in my 6 Steps to Financial Freedom, is the first key to building a good credit score. But it can also hurt you in the long run. If you have no debts the credit rating agencies have nothing to measure and their ability to determine your credit worthiness is limited. In that case paying your bills on time becomes even more important and keeping an open line of credit can help show that you can resist the temptation of going into debt for debt’s sake. But at the end of the day your credit score is only one number and if the company or individual you seek to retain is unwilling to do business with you due to a low credit score, when the only reason for it is the fact that you are debt free, there are other businesses out there that will gladly take your money. Especially if you can prove to them that it is indeed your money they are taking.