There are a lot of ways to hurt your credit score – and a lot of them are just plain ridiculous. Not ridiculous in that it makes no sense, it makes perfect sense, a credit score is a combination of several financial indicators compiled together to form a quantifiable metric of credit worthiness. For example, paying off your car or mortgage will adversely impact your credit score, as it impacts your “credit mix” which according to FICO is “10% of your credit score.”
The bigger picture is understanding how managing your credit impacts your life and the level of significance you’re going to apply to it’s influence. Credit is only as influential as you allow it and the value of credit is different from one individual to the next. For example, credit to a real estate developer is mission-critical, without it, buildings never come to life, whereas, hand-over that million-plus credit line to a child and it’ll sit relatively unused. Tell the developer they’re credit pipeline is cut-off, the result is devastating, tell a child and it won’t impact their lives at all.
So, the next question is, what is more valuable credit or cash? Well, there is an old saying, “Cash is King” whereas, credit doesn’t get anywhere near the same marque status. If you have cash in one hand and credit in the other, you only control one of them – Cash. Credit is controlled by a barrage of complex policies from the retailers who will accept the credit, to the issuers, the processors, the regulators, if anyone of these variables changes it impacts the liquidity of the credit available and the cost of utilizing that credit. Money, while also impacted by a complex institution of variables, it far more transparent than the institution of credit and the impact of these variables is far slower.
Few people will consciously place credit on a higher pedestal than cash, yet when it comes to how they manage one over the other their priorities are reversed. For example, they’ll purposely pay just slightly more than the minimum balance to maintain a higher credit score, they’ll live out the term of their mortgage for tax credits and a higher credit score, and they’ll keep credit lines open simply because, yes, you guessed it, it helps maintain a higher credit score. Millions of Americans purposefully shell out thousands of extra dollars a year to help maintaining a higher credit score.
The credit industry livescore.is done a good job in helping shape the perspective of credit and the value of maintaining a high credit score. Visit a personal finance website and you’ll find several articles on the subject of maintaining a high credit score to save thousands of dollars in interest. You can find articles to learn the ‘lifetime value’ of good credit – these articles are talking as if credit makes you money – it doesn’t, it COSTS you money. Remember, while the average American lives a life choked full of credit and other debt instruments, your creditors want to be paid in money, obviously, money is the more valuable commodity of the two. Cash is an asset, it improves your bottom line, debt is a liability and subtracts from it. Cash can put you on the road to financial stability – debt will rob you of it.
Millions of American pay the minimum payment due on their credit cards only to rack up additional charges through the month because they’re out of cash – that’s a bad policy leading to financial disaster. People who do this are basically taking their cash and charging themselves interest to use it. If a household has no cash remaining after paying their creditors they must take drastic measures to realign their financial situation to something manageable. The longer a household let’s a situation like that grow out of control, the more interest, fees, and penalties will accrue. This will mushroom household debt into a horrible monstrosity of near unmanageable proportions – don’t let it get to that point.