Gather round on the carpet because today I have a story for you. Our story starts with a happy family living comfortably. With several thousand of dollars in extra income each month, their bills were paid, their wants were bought and their savings account overflowed. Their credit scores were above average and life was good for our small family. Then, one month, financial tragedy struck. The income that they had gotten so used to having simply wasn’t there anymore. Suddenly, they had gone from $10,000 per month to $1,200.
Our little family was in trouble and yes, when I say “our family,” I mean my own. 2014 was a terrible year financially for my family and by the end of that year we had gone through all of our savings and dealt with our power being shut off twice. We had missed our car payment three months in a row and almost had it repossessed (thankfully I was able to prevent that from happening) and I suddenly owed my family over $5,000 for bailing us out. Life was no longer good and as a result of the trouble? Both mine and my husbands credit scores fell to well under 500. Late car and utility payments will do that to your credit score.
2015 was a much better year for us financially, but the truth is that it is May of 2016 and we are still trying to repair the damage done to our credit scores and addressing the reason that our budget failed back then. In the time since, I’ve started adding $225/mo extra income to my budget every month, we stopped buying certain items and started making them ourselves, and we completely switched cell phone companies to save over $1,000 per year. It is working, but there is still a ways to go for us to completely clean up that damage. I will freely admit that because of the damage done to ours that there are certain things we’re not having an easy time of doing right now. Does it mean that we’re not going to even try to raise it? No, because we are and while it is slow going, it’s going.
I know. So many times we are told by bloggers, family, friends or whoever that we should only be worried about getting rid of all of our debt to become debt free. The vast majority never mention worrying about your credit score.
“You don’t need a high credit score if you’re debt free.”
Have you heard that (or something like it) before? I’m sure you have. Here’s where I take issue. You do need a good credit score in today’s world.
Without a good credit score you can not:
- Rent a home if you don’t currently own your own
- Open a new utility account such as power without a significant deposit
- You will pay less for car insurance if you have a good credit score since most insurers view a lower score as a sign that you’re more likely to file a claim.
- You are more likely to be approved for a cell phone without a huge deposit.
- You are more likely to land that dream job than the applicant who has a lower score.
Why You Actually Do Need a High Credit Score
Are you seeing a pattern here? You do need credit in your life and you do need a good score. Your credit worthiness is viewed pretty much the same as your character. If your score is low? That landlord might view that as a sign that you won’t pay your rent even if your rental history is good. If your score is low? You’ll very likely have to pay that new power company a deposit of hundreds to get your power turned on. If your credit score is low? That job interview might be worthless because the guy sitting next to you has the same skills and a higher score which the interviewer might take as as sign that he is more trustworthy and responsible than you are.
Thirty years ago, you might have been able to get away with not having any credit at all, but these days, not only having credit, but having a good credit score is an absolute necessity. So does that mean that I think you should not try and be debt free?
No. What I think is that you should be as debt free as possible while building your credit score. I think that you should use credit wisely keeping your debt to a minimum and then I think that once you’ve purchased a home, you should absolutely become totally debt free. Until then though? You will need your credit score to build high and stay high.
Credit isn’t something that you should look at as a free ticket to getting what you want. In order to build the good score that you’ll need, you will want to use it responsibly. If you get a credit card, only use it for what you know that you can pay off and then pay it off each month. If you take a car loan, make sure you’re getting a good interest rate and then make your payment each month. Keep your driving record clean and ticket (or accident) free. Don’t move every year.
If your credit score is already low, there are things you can do to raise it. It will take work and it will take time. Your credit score may have been destroyed overnight but you absolutely won’t repair it overnight. You’ll need to do two things to start: First, find out what your credit score actually is right now. Credit Sesame is a great option for doing that. It is totally free to use and will allow you to get your credit score free updated once a month or so.
Next you’ll need to pull your actual credit report so that you can start paying back bad debt before you build good credit. You can do that for free at Annual Credit Report once a year for each credit bureau. If your family budget doesn’t currently allow for extra money that might be used to pay off debt, there are plenty of different side jobs that you can do to pay off your bad debt. They aren’t hard to do and will provide you with enough of a buffer to start paying back those that you owe.
Finally, once you’re well on your way to rebuilding your credit score, start tracking your net worth (the total sum of your assets minus debts). This will allow you to see your total assets and debts in one shot. I am using is Personal Capital. It might sound strange to some, but watching our net worth grow as we rebuild our credit helps to keep us motivated to keep going.
Like I said, please don’t mistake what I’m telling you. I’m not in any way telling you to go out and take on piles of debt that you will never be able to pay back. Yes, you need to have a good credit score but you need to do so responsibly. Knowing that your credit score is actually important, will you build your score or do you still think that you don’t need credit at all?
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