Is a good credit report really important?
Credit can be good or bad.
Let’s take a few minutes to think about the reasons why a good credit report is important. If we want to purchase something we can’t afford we will need to borrow money (go into debt) to be able to afford it. Of course to be able to borrow money we will need a good credit report. But can we really afford the item in the first place?
Before borrowing money for a purchase we need to ask ourselves these simple questions:
- What is the cost of borrowing?
- How long will it take to pay off the debt?
- Will carrying that debt prevent me from getting other more important debt (car loan or mortgage)?
- Is the purchase a “want” or is it a “need”?
- What will be the impact on my credit report?
That last point is one that few people consider. For us to build a strong credit report we need to have access to credit and we need to pay it down responsibly. Having too much credit can be a bad thing. When we have too much credit we may need to borrow from one creditor to pay another. When we have too much credit we not be able to add more credit to our portfolio without adding a significant risk to the new lender(s). Each of those considerations may impact negatively on our ability to borrow more money in spite of having a good credit report.
Returning to the original question “is a good credit report really important?” the answer is probably “yes” but only in the context of acquiring debt. If we have no need for credit because either:
- We have so much income, or assets, than we can buy (or trade for) whatever we need; or
- Because we always live within our means
If such is the case, a good credit report isn’t very important at all. As we noted in a previous blog many people filing for bankruptcy have strong credit reports which indicate that they are paying their bills on time, often using one credit card to pay another. Conversely people coming out of bankruptcy have poor credit reports but unless they are anxious to get back into debt again it really shouldn’t matter.
Being debt free is a great way to live, it is far less stressful than carrying big debts, less stressful than worrying about paying bills and it can be quite addictive. Perhaps instead of being concerned about credit reports we should be more focused increasing our income and/or living within our means.