My hubby and I recently completed Dave Ramsey’s course Financial Peace University. Many personal finance bloggers agree with many of Dave’s money principles, such as getting out of debt, saving an emergency fund, and investing as soon as possible.  The one area where many PF bloggers seem to disagree with Dave is on the issue of credit.

Does your credit score matter?

Many PF bloggers say yes.  Some say that credit cards can even be a good thing as long as they are used wisely.  Dave Ramsey is staunchly is opposed to credit cards and says credit cards are not needed if you instead pay cash for everything.

What is a credit score?

Credit scores are used to assess your ability to pay back a debt.  When you apply for a mortgage, a car loan, or a credit card, creditors look at your credit score to determine what interest rate they will offer you.

If your credit score is bad, you will likely be charged a high interest rate (because it’s risky to lend  to you), whereas a high credit score will snag you a lower interest rate (because there’s less risk to the lender).

According to Dave, the FICO score is an “I love debt” score because it’s based on your relationship with debt.  Credit scores range from 300 (bad) to 850 (perfect).  The FICO score breakdown looks like this:

35% payment history
30% debt level
15% length of history
10% new credit
10% type of credit

One thing that you will notice is that income is not included on this list.  Whether you are earning $100,000 per year or $15,000 per year is irrelevant.  You could inherit $15 million tomorrow, and your credit score wouldn’t change.

Dave Ramsey has no credit score because he has no debt and has not had any for quite a long time.  As he points out, he has enough money to write a check and buy an entire apartment complex, but he can’t rent an apartment because he doesn’t have any credit.  This shows what a crazy system we have.

It may be crazy, but should we avoid it completely and pay cash for everything instead?  Absolutely, if you can.  Dave Ramsey pays cash for everything, but he also has the means to do so.  How many people have enough cash on hand to pay cash for everything, even a house?

A great credit score means that you can take out a mortgage with a low interest rate or purchase a car at a reasonable interest rate.  Obviously, it’s preferable to pay cash for these things, but if you are still working toward building wealth and don’t have the cash yet, then your credit score does matter.

With a lower interest rate on your car loan or mortgage, you’ll have lower minimum payments and you can pay off these debts much more quickly.

Your credit score matters a lot if you can’t afford to pay cash for everything yet.

So how do you improve your credit score?  Do you really NEED credit?  Not necessarily.  You can build credit by paying other bills (such as rent, car payments and student loans) on time consistently.

It’s also important to avoid checking your credit score too often because this can damage your credit score.  Checking your account once per year should suffice.

If you decide to get a credit card, make sure to find one with no fees and pay off the balance in full every month so you don’t waste money on interest.

Do you have any credit cards?  Do you believe credit is necessary? Do you really NEED credit?

Other stuff you might like:

My Personal Finance “Aha” Moment
How We’re Preparing Financially for a Pug Puppy
Why I’m Grateful for My Student Loan Debt
The Appeal of Minimalism
9 Ways to Get Free Yoga Classes

Personal Finance Resources:

The Total Money Makeover by Dave Ramsey
YOLO: The Roadmap to Financial Wellness and a Purposeful Life by Jason Vitug
Smart Women Finish Rich by David Bach
It’s Only Money and It Does Grow on Trees by Cara MacMillan

Blogging Resources:

How to Blog for Profit Without Selling Your Soul by Ruth Soukup
365 Blog Topic Ideas for the Lifestyle Blogger Who Has Nothing to Write About by Dana Fox
ProBlogger: Secrets to Blogging Your Way to a Six Figure Income