Your credit score is a crucial factor that impacts your financial opportunities. It’s a three-digit number that ranges from 300 to 850 and is used by lenders, landlords, and insurance companies to determine your creditworthiness. It’s the gatekeeper for access to capital and good interest rates.

Dave Ramsey, a personal finance expert, loves to talk about how you don’t need a credit or FICO score because it’s just a score that shows how good you are at getting debt. He says,

“A credit score is nothing but an “I love debt” score. It’s proof that you’ve borrowed money and paid it back, so that you can borrow more money and pay THAT back. And the cycle goes on forever. If you want a life without payments, stop chasing a life WITH payments.”

I followed Dave and his advice for years and didn’t try to build up my credit and it has limited my opportunities. I understand what he’s saying – debt is bad. Don’t make it easier for yourself to get into more debt. I agree with that.

Ramsey’s approach to personal finance focuses on avoiding debt, building an emergency fund, and investing in retirement accounts. He encourages people to live within their means, pay off their debts, and save for the future.

In Ramsey’s view, a credit score is not necessary to achieve financial success. Instead of relying on credit, he recommends building a solid financial foundation by saving money and paying cash for purchases.

However, it’s important to note that not having a credit score can limit your financial options. If you choose to follow Ramsey’s advice and live without a credit score, you may need to take alternative steps to achieve your financial goals, such as building up your savings, paying cash for major purchases, and working on building a positive rental history if you plan to rent a home.

 

why build your credit

Dave Ramsey recommends not having a credit score because he advocates for a debt-free lifestyle. He believes that having a credit score can encourage people to take on debt, which can lead to financial problems in the long run.

Here are some of the downsides of not having a credit score:

1. Difficulty in getting approved for loans and credit: Lenders use credit scores to assess a borrower’s creditworthiness, so not having a credit score can make it difficult to get approved for loans or credit cards.
2. Higher interest rates: Even if you do manage to get approved for credit without a credit score, you may be offered higher interest rates because the lender sees you as a higher risk.
3. Limited access to certain financial services: Some financial institutions may require a credit score to offer their services, such as a mortgage or a car loan.
4. Difficulty in renting a home: Landlords often check credit scores as part of the tenant screening process, so not having a credit score could make it harder to rent a home.
5. Difficulty in getting a job: Some employers may check credit scores as part of the hiring process, especially for jobs in finance or accounting.

It’s Important to Build Your Credit Score

Better Loan Terms

Your credit score is a crucial factor that lenders consider when deciding whether to approve you for a loan or not. If you have a high credit score, you are more likely to get approved for a loan, and you’ll likely receive better loan terms, such as lower interest rates and fees. On the other hand, if you have a low credit score, you may be denied a loan, or you’ll receive less favorable loan terms, such as higher interest rates and fees.

Easier Rental Process

Your credit score is also an essential factor when it comes to renting an apartment or a home. Landlords typically run a credit check on prospective tenants to determine if they are financially responsible. If you have a high credit score, you’ll be viewed as a low-risk tenant, and landlords may be more likely to approve your rental application. Additionally, having a good credit score can help you negotiate better rental terms, such as a lower security deposit or monthly rent.

Lower Insurance Premiums

Did you know that your credit score can also impact your insurance premiums? Insurance companies use credit scores to predict the likelihood of filing a claim, so if you have a high credit score, you may be eligible for lower insurance premiums. On the other hand, if you have a low credit score, you may be viewed as a higher risk, and you may have to pay higher insurance premiums.

Job Opportunities

Finally, some employers may check your credit score as part of the hiring process. While a credit check is not a requirement for most jobs, certain positions, such as those in finance or accounting, may require it. If you have a low credit score, it may be viewed as a red flag to potential employers, and it could impact your chances of getting the job.

Now that we’ve covered why it’s essential to build your credit score, let’s look at how to do it.

Overall, not having a credit score can limit your financial options and make it more difficult to achieve your goals. However, you can start building your credit score by opening a credit account and using it responsibly.

 

First, let’s talk about what makes up your score

FICO score is a type of credit score that has 5 components. 35% make up payment history, 30% make up how much you owe, 15% is the length of credit history, 10% is the credit mix and the other 10% makes up your new credit.

Payment History – Your payment history is the most crucial factor that determines your credit score. It accounts for 35% of your score and measures whether you’ve paid your bills on time. Late payments, collections, and bankruptcies can lower your credit score.

Credit Utilization – Credit utilization is the second most crucial factor that determines your credit score. It accounts for 30% of your score and measures how much credit you’re using relative to your credit limits. High credit card balances can negatively impact your credit score.

Length of Credit History – The length of your credit history accounts for 15% of your credit score. Lenders like to see a long credit history because it demonstrates that you have a track record of responsible credit use.

Types of Credit – The types of credit you have account for 10% of your credit score. Lenders like to see a mix of credit types, such as credit cards, auto loans, and mortgages.

New Credit – New credit accounts for 10% of your credit score. Lenders like to see that you’re not applying for credit frequently, as this could indicate financial instability.

How is a FICO score used?

FICO scores are used by banks, credit companies, apartments, ect… and they decide whether you are eligible for loans or not. They can see all of the bad parts of your credit score.

In most cases, having a credit score is important, especially if you plan to borrow money or use credit in the future. A credit score is a numerical rating that represents your creditworthiness and is used by lenders to determine the likelihood that you will repay your debts on time.

If you don’t have a credit score, you can start building one by opening a credit account, such as a credit card or a loan, and using it responsibly. Make sure to make your payments on time and keep your credit utilization low, which means not using more than 30% of your available credit.

Building your credit score takes time and effort, but there are several strategies you can use to improve your credit score:

1. Pay your bills on time: Payment history is one of the most important factors in determining your credit score. Make sure you pay all your bills on time, including credit cards, loans, and utilities.
2. Keep your credit utilization low: Credit utilization refers to the amount of available credit you’re using. Try to keep your credit utilization below 30% of your available credit to avoid negative impacts on your credit score.
3. Apply for credit sparingly: Too many credit applications can lower your credit score, so be selective about the credit applications you submit.
4. Monitor your credit report: Check your credit report regularly to make sure there are no errors or fraudulent accounts that can hurt your credit score. You’re entitled to one free credit report per year from each of the three major credit bureaus.
5. Consider a secured credit card: If you’re having trouble getting approved for a traditional credit card, a secured credit card can help you build your credit score. Secured credit cards require a deposit, which serves as collateral for the credit limit.
6. Become an authorized user: If someone with good credit adds you as an authorized user on their credit card, you can benefit from their positive credit history.
7. Take out a credit-builder loan: Some banks and credit unions offer credit-builder loans that can help you establish a positive credit history.
8. Diversify Your Credit Mix: Having a mix of credit types, such as credit cards, auto loans, and mortgages, can improve your credit score. However, you should only take on new credit if you need it.

Remember, building your credit score takes time and effort, so be patient and persistent. With responsible credit behavior, you can improve your credit score over time and achieve your financial goals.