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Credit is Not King

January 14, 2010 Leave a comment Go to comments

What I’m about to say is blasphemy, but please hear me out.  Your credit score is not everything.  That’s an insane statement, right?  We hear so much about the importance of  our credit scores and the need to improve them.   How can improving your credit score NOT be your most important financial goal?

I’m not trying to say you should ignore your credit score.  Yes, if you need a mortgage or a loan in the next year or so, make sure you’re working to increase your score.  But, you must understand the purpose of credit.  Credit is a way to judge how risky you are to financial institutions who may lend you money.  The number is not an overall judgment on your financial health.

I have found that many people focus on their credit score to the exclusion of other important financial issues.  I often meet homeowner’s who cannot pay their mortgage but who are more concerned about their credit score than modifying their mortgage to make their home affordable.  These homeowners don’t want to ask the bank to modify their mortgage because a modification will often have a negative impact on your credit.  But what’s more important?  Maintaining your home and the equity you’ve built up or a number?

I’ve also met people who assume that they are in good financial shape because they have a “good” credit score.  But focusing on your credit score to the exclusion of other issues is like using your weight to determine your overall health.  It may help indicate whether you’re healthy but it doesn’t give you the entire picture. It says nothing of your financial goals and whether you’re achieving them.  

Do you have an emergency fund?  Are you saving enough for retirement?  Do you have appropriate insurance?  Are you saving enough for your kids’ education?  These are the important questions.  We must start looking past the credit score into other issues that impact  our  financial lives.

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