What Exactly Is "Good Credit," Anyway?

by Tom Fragala   

I was reading a blog about personal finance and credit, written by someone who's chronicling the journey of paying down her huge credit card debt. Essentially, the blog recounts the trials and tribulations of this person trying to get her credit card debt to zero, a multi-year process. The ultimate goal of this blogger is to get out of debt and immediately cancel all her credit cards.

I found it odd that someone who was obviously very much absorbed in her personal credit would plan to cancel all her credit cards. Canceling longstanding accounts can seriously hurt your credit score. Now, you may say that this is a person with a bad history of paying off cards, so maybe canceling them is a good idea. But that doesn't make sense either, because simply canceling your cards doesn't remove them from your credit report.

I contacted her and suggested that maybe she should reconsider the goal to cancel all her cards. After all, 15% of your FICO credit score is based on the length of your credit history. If you cancel a card, you lose the value of that account in calculating your score. Now, I realized that my advice would likely not be welcome, as the entire focus of her web site/blog is to cancel the cards! But I was quite interested to hear her response.

She responded by saying, "I'm not worried about my credit score. We have great credit, and we're not planning to make any major purchases in the near future."

That statement is so fraught with misguided notions that I thought it would be useful to analyze it. Let's break it down:

1. "I'm not worried about my credit score." Well, that's a strange thing to say, coming from someone who runs a personal finance blog. It's also strange because a poor credit score can come back to bite you in so many ways. The lower your credit score, the higher the interest you pay on everything from mortgages to auto loans to insurance premiums. That's money pulled right out of your pocket.
2. "We have great credit." This is a real head-scratcher for me. I don't know how you can be oblivious to your credit score and yet still think you have good credit. How would you know? And like it or not, if your credit score is lousy, then as far as virtually every financial institution goes, you DON'T have great credit.
3. "We’re not planning to make any major purchases in the near future." People make this mistake all the time. It takes a long time to build up your credit score. You usually shouldn't wait until you're considering a big purchase to suddenly get serious about your credit score. By then, it's too late. There are legitimate steps you can take to improve your credit (watch out for scams and bad advice, though), but it almost certainly will take many months to years to see the results.

The takeaway here is that there's a lot of misinformation out there. Even people who you think are experts don't always know the very basics of credit reports and credit scores. So be proactive about your credit, and understand that managing your credit can save you big money. Take our credit and personal finance quiz to see how your money management habits are affecting your credit.