Tuesday, March 10, 2009

I Don't Care About My Credit Rating

Due to the Suze, I've been peripherally aware of credit scores and what affects them for awhile. Much American PF writing focuses on improving credit scores through elaborate practices and for the longest time I'd wondered: do they matter to me?

What has affected my credit:

(1) Education. As soon as I was accepted into my second degree, the money flowed, and at "preferred" rates.

(2) Income. At a Credit Union, I was turned down for even marginal student financing because of my low income at the time (although I indiginantly pointed out if my income was high I obviously wouldn't be looking into inexpensive credit for potential emergencies). At this point, I had paid every bill of my life on time and held a credit card in my own name with a perfect track record for five years.

(3) The amount of "revolving" credit open. Currently, I have something like $30K unused at various interest rates. Canadian lenders don't like seeing a lot of empty revolving credit or even dormant credit, according to a loan issuer I spoke with. Fair enough - the thought has crossed my mind to cash out the whole thing and make a run to a country where no one knows or cares.

I've concluded my credit score, frankly, doesn't matter to me and there's no point in spending any time or resources to attempt to increase it. BLASPHEMY!

Some disclaimers. I don't have a mortgage and don't forsee one in the next few years. I don't have a car or intentions to own one for the next few years. I don't need anything "financed" and I'm not carrying any consumer debt. The impression I've been given is that a credit rating, due to standardized lending practices in Canada (read: controlled by legislation), is far less useful or important than common sense about what might make you a good risk. The credit union was a perfect example of a strict policy uninterested if I was 1000 on a 900 point scale, no income = no loan.

Further, all of the above are logical sources of information I would look to if extending a loan and hoping to make a profit at it (i.e. the traditional focus of banks). Does the person have good lifetime earning prospects and reasons to be a good member of society? Do they currently make enough to support a minimum payment of principal plus interest? Could they empty the accounts and run for it? Not exactly rocket science. And further, if you don't meet those minimum requirements why are you borrowing money?

It makes me wonder if the usefulness of credit scores will fade in the USA as lending becomes more controlled, when and if consumers are protected from predatory lending, and as financing becomes more realistic. I've always been amazed at how cheap money is there, from zero percent financing to below-prime interest on student loans.

Economists and bankers attempt to intimidate people away from asking when things don't make sense. Credit Scores are a prime example of an overly-technical creation distracting from the fundamentals of good lending. From what I've read, scores can be manipulated by behavioral changes which logically don't have much to do with whether someone is a good risk. In another unsolicited and unqualified financial opinion it would seem to me that a "credit score" system has failed to provide an effective objective tool to assess lending efficiently. I'm sure this would elicit arguments about how the scores just haven't been used appropriately or other deviance and how it's a great system.

I would counter that a great system is only lending money to those who can pay it back, with interest.


The Government of Canada has a nice rundown for Canadians about what a Credit Score or Credit Rating is here.

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