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Around two years before I retired, I found myself giving a piece of advice to one of my most financially responsible younger employees that felt, quite frankly, absurd: “You need to go out and get a credit card that you don’t want, to charge things to, just to prove you can pay for them.”
She was a great employee, diligent, organized, and disciplined with her money. She lived entirely within her means, used a debit card for everything, and had never carried a cent of debt in her life. But as she started preparing for her first mortgage application, she hit a digital brick wall.
In the eyes of the credit system, she didn’t exist.
There’s a strange irony in the housing market. Young professionals are told that “responsible” people avoid debt. Yet, the credit scoring system, the gatekeeper of the home owning dream, is essentially a “debt-management score,” not a “financial responsibility score.”
For years, she has paid her rent on time, every single month. In any logical world, that $2,000 monthly commitment would be proof of her ability to handle a mortgage. But in the system, rent is “invisible” by default. Unless a tenant proactively signs up for a reporting service, those years of consistency never reach the credit bureaus. You can pay $100,000 in rent over five years and have a credit score of zero, but miss one $25 payment on a store credit card, and the system remembers you forever.
To get a mortgage, I had to encourage her to “play the game.” We discussed the “Credit Mix” and the scoring system for revolving credit lines. To the banks, a person with three credit cards and a car loan is a “known quantity.” A person with a healthy savings account and zero debt is an “enigma.”
While credit agencies have recently begun allowing lenders to scan bank statements to verify rent history, it remains a secondary “check.” It’s a manual workaround in a system designed to reward those who load up with debt.
We have a system where the most fiscally conservative individuals are often the most penalized. If she walks into a bank with a folder full of on-time rent receipts and a large savings balance, she would be considered “risky” compared to someone who balances five different lines of credit.
All this came back into my mind when my daughter and future son-in-law recently started talking about buying a house together. For some reason it annoyed me to suggest they start using credit and maybe get a loan for their next car rather than using cash…it’s definitely a strange old financial world out there.. Keep feeding the debt algorithm gods
These credit agencies clearly need to become more transparent. In my case, no mortgage or other debt and pay off all cards on due dates. However, when my son’s tuitions are due every fall and winter, l put them on the credit card to get “points”. The cc bill gets paid off (thank you 529’s). The next week l keep getting notices my normal credit score (800+) goes into mid 700’s even though our bills get paid on-time like clockwork like they have since the mid 90’s. This is really annoying and frustrating as it caught me in the rear end once getting a car loan and ended up paying a higher rate. Silly bunch of squirrels at these agencies.
Once we had, “our great awakening and correction”, regarding debt in our early married days, we’ve had 30+ years of exceptional to truly perfect monthly credit scores (depending on the agency and how they apply their own scoring rules). Indeed, once we paid off the mortgage, we took a major hit on all the scores and it’s slowly recovering. Not sure we’ll ever see “perfect” again. Such a silly game. I find it laughable when one agency tells you that you don’t have enough activity on your cards (we typically use 3-4 of about 10 available within a month, depending on any special offers) while in the same month, another states you have too many cards with a balance. Note that we have never carried a balance forward on any card for those three-plus decades. We did WAY more than our fair share of supporting the economy this year but apparently, the agencies don’t like it when balances are paid off once any of them exceeds a certain threshold we set, even if not due yet.
Anyone else find it interesting that an online purchase (and some retail charges) show up almost immediately on your account (pending) but a refund may take one to two weeks to be applied to your card balance?
Best to all.
The great awakening, I like that turn of phrase. You’ve given me an idea for an article about our “great awakening” during the GFC…I better get typing!
It was really nice that you were concerned about your employee and helped her out.
However, it was my experience that she probably didn’t need to have credit score or credit card first to find a mortgage. Just the opposite, a mortgage first and then a card. The fact that she was free of debt would have actually helped her find a mortgage first.
That was the way it worked when I was younger. I had no debt, and paid cash for everything. When I went shopping for a home loan I discovered the house would be collateral for the loan, (secured debt) unlike a credit card which is unsecured. What was most important to the bank was that I had a secure and steady job, little or low debt, and that the loan payment would not be more than a certain percentage of my income.
After finding a loan and making a few payments, I decided I needed a credit card. I went back to the same bank and had no problem getting a card.
The card started off with a low credit limit, but after paying my bill off every month for a while it started to rise.
Good credit is one of those things that I consider to be essential. It takes a bit of effort to establish a credit presence, but is easy to maintain. It also opens some useful opportunities.
For example, when we moved into our current home we had no furniture. We went to a local “warehouse” furniture store with a shopping list. We selected items with the help of a salesperson and we were given several opportunities for payment. One was a credit card with 3-years to pay the balance and no interest or penalties as long as we made the monthly minimum. We took the offer.
Credit cards are wonderful tools, but can easily be abused. G and I both have cards in our own names. When we purchased the house, some utilities were put in my name, and some in hers. That too is for credit purposes. The house is titled jointly.
The thing about credit scoring it that it is somewhat convoluted. Here’s a few factors from my Equifax statement:
1. Credit limits can be deceiving. Credit Usage is what matters. An excellent rating for this is achieved by keeping credit used to less than 20%. In other words, if the available credit is $10,000, then less than $2,000 is used. A good rating is 21-40%. It is suggested that credit usage, including a HELOC be maintained less than 30%.
2. Payment history is very important. To achieve an excellent rating, it should be 100% on-time payments. Good is 99%. Poor is 97% or below. Payment history includes auto and student loans.
3. Average age of credit is a factor. It is the average time all of the accounts have been opened. Excellent is 9+ years. Good is 6-8 years.
4. Total Accounts open are a factor. However Average Age of credit is more important when calculating a credit score. In other words, it is suggested don’t open a lot of credit that is unneeded. Total Accounts include open and closed accounts. 22+ is excellent and 13-21 is considered good.
Using the scoring factors, it would seem establishing credit as early as practical and maintaining it in good standing for years is the best way to get a high credit score.
A credit score is based solely on debt. It’s a “I love debt” scorecard. What I prefer to a credit score is hard cold cash.💰 💵
I doubt that is true. My score dropped with no debt at all and no CC balance at month end.
I get it. Honest. But the primary reason to have a “good” credit score is if you’re planning to borrow money. I have no plans to borrow money ever again so, I don’t concern myself about the score even when I open an email and they offer to show me what mine is; I just ignore it. They have no idea how much you’re worth or what kind of financial resources you have. So what do they really know. It’s a game they play to get you to borrow money and pay interest. After all it was a financial institutions that thought up this crazy scheme. Just my opinion.
“Credit” is something we don’t need until we do. If we buy a car, home loan or an auto lease are influenced, among other things. For younger people who lack the ability to predict the future, establishing good credit is a shrewd move.
Although not a major consideration, apparently your credit score has an effect on pricing for insurance and phone contracts, although I’m not entirely sure why or how.
I’m told there is a correlation between credit score and claims. The higher the score, the less likelihood of a claim.
As best I can tell, the “credit score” circus isn’t a significant factor for home loans here in Australia.
The focus appears to be on a good track record of saving a down payment, which would then translate into being able to regularly and comfortably make the loan repayments.
The term “credit score” thankfully barely seems to rate a mention for us Aussies.
To my mind, credit scores have risen in importance as local bank managers lost the ability to make lending decisions themselves. In the UK, credit scores have only become essential for obtaining credit in the past 15-20 years. Before that, what really mattered was having a good relationship with the team at your local bank branch. I much preferred the old way.
I don’t buy into the credit score scam that our financial institutions use. You CAN purchase a house without credit (we did) as long as you have a down payment and have the ability to repay the loan. We need to stop buying into these lies and perpetuating them on our children. I don’t care what our society tells us debt is dumb and I for one want to avoid it any all costs.
Good article. I did exactly that when I was 21. Even got a small loan to get better credit. Then of course credit cards. In the late 1960’s we had to wait about a year to get a Sears credit card. Being an engineer and learning Engineering economics, we always paid off the credit card. My score is well in to the 800’s at age 80, when frankly it does not matter at all. I am wary of any Credit Bureau, they messed up millions of us, when they got hacked years ago. Be careful out in the jungle.
I play the credit card points “game” individually and through my sole proprietorship. I have over a dozen open credit cards – with no balance, and never any interest paid, of course. And, bizarrely, my credit score in well over 800 and has never been better. Absurd.
Your score shouldn’t suffer due to the number of cards, so long as you don’t use all of them at the same time. I make at least one small purchase on each of my cards, in order to keep the issuer from closing any of them, which would reduce available credit, and have an adverse effect on the percentage of credit used, thus lowering my score. The purchases are recurring such as for internet or streaming services. I set up auto pay on the due date to pay them off. My score suffered a bit as a result. Now I have those bills paid as soon as they occur so that the cards appear unused when my score is calculated.
I also pay off my main credit cards every time the balances exceed $1,000, lowering my utilization percentage. This keeps my score around 808, which is good enough to secure better ratings from property and casualty insurance companies.
It’s irksome that our scores are adversely affected by not having consumer loans; but nothing I can do about that.
Dave Ramsey, who despises credit cards, suggests going to a local community bank or credit union and request ‘manual underwriting’ in order to obtain a mortgage when you have no credit. I never used this myself, so I don’t know how realistic that is. Regarding adding your children as an authorized user, this only works if they collect the social security number of the child so they can report the account usage to the credit reporting agencies.
I get it, I do. Still, it seems to my (usually) logical mind, that a history of paying off credit card balances each month is exactly the same as paying a loan on time each month.
An additional technique to help your children improve their credit rating (FICO score) is to add them as an “authorized user” on one of your long term credit cards WITHOUT giving them access to the card.
When you add someone as an authorized user, the entire history of that specific credit card account, including the age of the account and the payment history, is typically reported to the authorized user’s credit bureau file.
I second Jeff’s comment. That’s an interesting bit of knowledge, thanks for sharing.
This is interesting. I suspect one of my kids has a low credit rating, due to both spending habits and an ongoing less-than-friendly divorce. I might consider doing taking that step after the divorce is finalized, but not before.
I had two credit cards for decades then one, an airline card with perks, raised the fee by $400 a year. I cancelled and got a new no fee card. Instantly my score dropped by nearly 60 points and for no other reason. It’s been about 9 months now and my score while growing is still 40+ point from where is was which was the 800s. No rhyme or reason from my perspective.
Completely outrageous. These credit bureaus folks have too much power, but “industries” like insurers can use that “data” to bump your rates up as suddenly a more risky client. One begins to suspect a bit of business inbreeding that smells of scam. I’ve had communications from insurers about not getting their best rate because my score had declined, to 830 or 825. It’s just a bureaucratic justification to charge what they want.
When I paid off my mortgage, my credit score unexpectedly dropped significantly. It’s since recovered to its previous level, but the initial drop seemed strange.
If that mortgage was your only loan of that type, then it’s likely that eliminating it dropped your score at least for a while.
Scores take into account the different types of loans you use — installment (mortgages, auto, student, personal) and revolving (credit cards, retail accounts, HELOCs) — not just how many different credit cards you use. So when you pay off one type, that contribution to your score is gone.
That makes sense, great explanation.
During the pandemic I started using CCs for most transactions and have continued using them as it gives me a record of my transactions. I always pay them off every month and never carry a balance on any CC. However, if I have a slightly higher CC bill at the EOM, my credit score will drop. It seems ultra sensitive to financial activity.
When I was just getting started in the 60s, getting a CC was hard. My first card was a Gulf Oil CC soon followed by a JC Penny card. Thereafter, bank CCs followed. I abhor debt and have always paid these cards off at the EOM. I actually think it is good for it to be a little challenging when starting out in life. People need to learn how to be responsible users of credit. I have seen people who racked up lots of debt before they realized they had to pay it off along with the usurious interest.
You thought it was hard as a man? It was even harder, if not impossible, for single women. The Equal Credit Opportunity Act wasn’t passed until October 1974.
I’ve watched my credit score bounce around for years and you would think Fair Isaac would have figured me out by now (I’m 80). Every year in December I put a $20,000 down payment on our beach house rental on one of my credit cards (3% back!). Within weeks my credit score will drop about 20 points. Then I pay it off in full when due and the score goes back up. Same thing happens when I pay the remaining half in the summer. This cycle has been going on for decades. I’ve never missed a payment or been late on anything, but my score keeps bouncing around within about a 40 point range depending on purchases.
It’s maddening! I see similar fluctuations in my own credit card use all the time. You’d think “Fair Isaac” would know with decades of data that I pay all balances off every month. But the credit score bounces around between 835 or so and 820 or so. Dumb Isaac is more like it. Moreover, who gave these so-called credit bureaus free reign to scoop up all our data constantly, monetizing our private business, trying to sell over-priced protection schemes, etc.
That $20k likely puts your credit utilization (usage divided by credit limit) higher than usual. If it’s too high (especially if over 30%), your score gets dinged. Assuming you have the funds available, you might want to pay it off immediately after the down payment appears in your transactions, instead of waiting until the due date.
Credit scores are usually calculated around the closing date (not the due date), so paying it off a couple days before the closing date will likely prevent the score drop.
Mark,
For years after my son graduated from high school we urged him to get a credit card just to use buying groceries. He wouldn’t play the credit game so once he got married his wife, who was 100K in debt for Physician Assistant school, had to co-sign for a loan to buy his first used vehicle when he was in his late twenties.
Along those lines I have written here that I am waiting until I’m 70 to replace our deck with a three season porch. One of the main reasons I’m waiting, besides trying to complete a total conversion of my wife’s traditional IRA to a Roth, is that I am considered not to have any income other than a small pension. This despite owning a $600+K house outright, and having more than an adequate retirement in accounts.
That’s a good example of the need to have debt to get debt, such a paradox.
That is great advice. Nice summary. You have to play the their game responsibly. Get a card, put recurring charges on it and pay in full. Also do not close the account as length of history matters to this insane scoring system the major 3 control.