Despite Mixed Messages from Money Experts and Lenders, Good Credit Still Matters

People who are trying to get or keep their personal finances in order face many obstacles, not the least of which are seemingly contradictory messages from a range of sources. Take debt, for instance. On the one hand we have the personal finance experts who preach that for the most part debt is a burden best gotten rid of as quickly as possible. On the other we have merchants who strongly encourage us to buy on credit, and lenders who are only too happy for us to stay in debt for as long as we’re able to make payments. But the one consistent message we hear from most factions is that for better or worse, credit matters.

For those with credit challenges the issue of lenders may be moot to a certain extent, as many conventional lenders understandably don’t want to deal with people who have poor credit. Granted there are lenders who don’t require a credit check, but generally these are small, short-term loans with significantly higher interest rates than other types of loans. Even so they can be a reasonable option for people who can keep their commitment to pay the loan back in time without rolling it over and getting even deeper into the debt hole.

As useful as it may be to help handle a cash emergency, though, a short-term loan is no fix for the problem of poor credit or habitual debt.

The not-so-subtle ways we’re encouraged to stay in debt

In November 2015 Experian, one of the three major credit check agencies in the UK, announced changes in the way it scores customers. A response to changes in lender policies, Experian’s new criteria further penalise borrowers who miss repayments, but upgrade those who have large debts.

Less importance is placed on paying down your debts – Comparisons of your debts a year ago to your current debt level is no longer considered when assigning your credit score.

More importance is given to old debts that had been delinquent and have been settled or written off – Past problems weigh more heavily now than they had previously.

There will be more frequent re-assessment of your credit performance – This will result in your score potentially changing as new criteria are considered, increasing the importance of checking your credit score on a regular basis. Increase in the purview of your credit score is also an incentive to pay the credit reporting agencies for additional access to your credit score information – effective marketing on their part.

Customers with higher levels of outstanding debt but good repayment records will see their credit scores rise – This is the most obvious attempt to encourage continued indebtedness as well as on-time repayment of all debts.
The message seems pretty clear that debt is good, and to a certain extent the more debt you have, the better. But it’s a slippery slope, because if you miss even one payment it will, of course, damage your credit rating. Which brings us back to the central issue…

Debt or no debt, credit rating matters

While your credit rating isn’t something that should dominate your every waking moment, there’s no denying that credit is important in many areas of life, regardless of whether or not you are seeking a loan. Your credit affects far more than your ability to get a lower interest rate or more favourable terms on a loan, or getting a loan at all. Virtually every area of modern life is impacted by your credit score, from getting a mobile phone contract to insurance to bank accounts to employment to whether or not a landlord will approve your lease application.

Accordingly it behooves all of us to work to maintain or improve our credit score. The first step is to educate yourself on what your credit score represents to a prospective creditor. Naturally, it is a reflection of your propensity for living up to your obligations and how great a risk you represent to a lender. Beyond that, it is also a means by which the prospective lender, landlord, or service provider can estimate how much they will be able to earn by doing business with you.

Ironically, a positive indication on the latter can often outweigh a degree of negative information as to risk. Someone who maintains a significant debt level and makes almost all of their payments on time might be a more desirable customer than another individual who makes all their payments according to the terms of the agreement, but whose total indebtedness level is modest, or whose accounts are routinely paid off.

Just as the individual investor weighs the potential earnings against the risk involved, the potential rewards for lending you money are often just as important to a lender as how great a risk the investment or loan entails. Know your score, and work to position yourself as a minimal risk and a lucrative payoff, and you will be well on your way to a great credit rating with all the benefits that entails.