Credit Score. Good or Evil?
Feb 17, 2019
Recently I asked for your suggestions for upcoming blog topics and I got a massive response. Safe to say the blog should be around for another year at least given the list I now have! Today I’ll answer just one of the many ideas sent in that interested me.
Bronwyn asked:
How important are credit ratings? I have checked mine on Credit Simple and it seems to be dropping (I don't have a credit card or automatic payments and have always paid my bills on time). It bugs me that I am no longer in the top percentages for my age, sex, street etc. Who uses credit ratings and what difference does it make?
A credit rating or a credit score is simply a rating of how well you manage DEBT. The cynic in me thinks that it should probably be called a “debt score”, but that could have negative connotations and as a society we want people to feel comfortable with taking on debt, so instead of calling it exactly what it is, DEBT, we call it CREDIT instead. Go figure! A credit score indicates to someone looking to lend you money, or extend you credit, your creditworthiness, or your ability to pay the money back as agreed.
A high credit score is not a badge of honour, it's not an indicator of your net worth or your ability to earn money, it instead indicates how often you have taken on debt (and paid interest) and how well you have paid it down.
At my workplace I do credit control work i.e. I chase up people who owe us money, aka “bad debtors”. Often, with just one or two phone calls people pay up, sometimes it stretches on for months and sometimes I meet the “never gonna pay you suckers!” customers. Which leaves us with only one option, putting them into debt collection to recoup our money. The debt collector takes over the debt and it's now their job to chase down the money for us. Its things like this that are recorded and will impact your credit score in a negative way because institutions are less likely to let you borrow their money if you didn’t pay the last company back.
On the other side, I had a credit card for many many years and each and every month I paid it in full and before the due date. This reflects well on my credit score and makes me look better in the eyes of any future lender.
Here in New Zealand, there are four companies, Centrix, Equifax, Illion and Credit Simple that collect data from consumers (you) and provide information to any lender who is looking to lend to the likes of Bronwyn, and each of these four might hold different information about you. They are collecting data on your phone bill, your power bill, your credit card, any car loan etc. So, every time I have accessed credit my behaviour has been noted and passed to any one of these credit reference agencies. If I’m late in paying my accounts, they notice and they also notice if I’m paying on time.
Who cares if I’m a day or two late in paying my phone each month? Lenders do. If I wanted to go and put a car on tick (I so don’t want to) then the car yard can look up my creditworthiness going back as far as five years. If I have regularly defaulted on paying my bills then that will raise alarm bells with them, I’m too risky to lend money to. If on the other hand I have debt but make payments on time, then they can see that I am likely to honour the contract I’m about to sign with them. In this case, past performance CAN predict future returns and the fact I’m likely to honour the debt.
And if I was applying for that holy grail of lending in New Zealand, a mortgage, if I’ve historically been a bit mediocre with debt I have had in the past they will take this into account and can either turn me down as they see me as risky or charge me a higher interest rate than someone with a better track record. And if they turned me down and I thought, “I’ll just try another bank”, well, the next bank can see that I was turned down by a competitor and that will raise alarm bells with them also.
My credit report will have quite a bit of influence on what sort of deal I will be offered, you can be sure of that. If I’m too GOOD at paying off debt then a lender such as a bank (that makes money via interest payments), won’t look on me as favourably as you might think! How are they going to make any money out of me if I never incur interest on my credit card?
You can destroy your credit rating pretty quickly, just by being late with your bill payments. But fixing this mess up will take a long period of time, possibly years. Years of never missing a payment so you can build up the trust of any future lender. So, if this is you, and you are thinking of borrowing money in the future, you might want to pay attention to your bills now.
So, you know what comes next right? I could not resist looking up my OWN credit score and given my abhorrence to debt, I thought it would be really poor. But, here you go:
Looks a bit like my school report where I recall seeing very few “excellent” and mostly “very goods”. I was surprised my score was so high, to be honest! I could also see the following on my report:
My old credit card (which I closed in October) was there showing repayment dates right back to Feb 2017.
Report showing a section of my credit card repayment information.
My phone bill and power bills (including my supplier name) showing all of my payments were there (not the amount, just the fact that I had paid on time).
Then they had this info graph, which is what Bronwyn was alluding to above:
THIS IS A STRAIGHT UP GIMMICK Bronwyn, just a graphic that someone has designed to make your credit score feel more personal, less like a number and to make you feel competitive with your neighbour, star sign (that’s ridiculous), age, postcode and gender. And it appears to have worked!
For my score above I’m ranked fourth on my street. Well, there are only nine houses on my street: 3 retirees, 1 holiday home, 1 rental property, 4 families
Who has been borrowing all the money to outrank me? I’m going to be sizing them up next time I see them out mowing their lawns. Maybe I could ask them? I don’t think it is the retiree, but they did just get a new lounge suite….I also see a boat up the driveway of the holiday home...
In order to improve on all of these ‘scientific’ rankings above, what could I possibly do? At this point, the Credit Simple website basically becomes a shopping portal encouraging me to get shopping VIA TAKING ON DEBT. They have used my credit score and demographic criteria to tailor offers to me (they probably haven’t, I suspect that everyone gets the same offers…) There is a section called My Offers, where I apparently have 37 offers currently waiting to tempt me. Including applying for a credit card and financing a car. I am shaking my head as I type this.
Now that I’m feeling empowered by my “very good” credit score and feeling competitive about beating my neighbours, I’m free and clear to go shopping! Holy heck, I’ll show my neighbours how its done and try and beat them off the top spot for my street!!!
So, I’m being encouraged to take up one or more of these offers WHY?
So that I can pay that debt down.
Pay all the interest associated with it AND IMPROVE MY CREDIT SCORE.
Why?
So, I can take on some more debt…
Pay all the interest associated with it AND IMPROVE MY CREDIT SCORE.
Why?
So, I can take on some more debt…
Do you get the picture?
So, WHAT exactly is the point of it all Bronwyn? Does it have any use AT ALL this credit score? My advice would be to go about your daily life paying cash for the things you buy. It is inevitable that you will need a phone and will sign up to a phone plan, that you will put your name on the power account etc. That's fine, pay the bill on time and in full when you receive it. Then, put your energy into earning a good and growing income, saving and investing for your future and if one day you need to take on a mortgage they will dredge up this info. That’s fine too. But don’t for a minute think its a great idea to take on debt to artificially inflate your credit score so that you can rank higher than the other 41-45-year-old Libra’s in your suburb because that is insanity.
If you are looking for a REALLY in-depth read of credit scores then follow this link for more detailed information: https://www.moneyhub.co.nz/credit-score-credit-check.html
I didn’t want to provide a link, but I know I’ve piqued your interest about your own credit score now, so if you want to check it out you can go here www.creditsimple.co.nz. It is free, but just make sure you go into your settings and tick the boxes so you DON”T receive all of their offers...
For me, I’m done with debt so I don’t need a credit score because I don’t need access to credit. And it's going to take a lot more than an infographic to make me change my mind, but it was a bit of fun learning about it. Thanks for the suggestion Bronwyn!
