It’s well known that earning and maintaining good credit is to your benefit. Perhaps because our credit scores have such a big impact on our lives, credit scoring models, such as those created by FICO and VantageScore, receive a lot of unwarranted criticism from consumers, consumer advocates, the media, and many others. When it comes to credit reporting and scoring, almost everyone’s a critic, unless they’ve got an 850 credit score in their pocket.
Although misguided, it’s somewhat understandable why some might harbor resentment toward the way credit scores are calculated and used in the United States. No one likes to feel judged. There’s also no question that life with credit problems can be difficult on many levels.
Unfortunately, these feelings of disenchantment can lead to some dangerous misconceptions about credit scores.
The Problem with Blaming the System
A lot of misinformation floats around the internet on the subject of credit scores. Adding to this problem is the fact that many financial celebrities gain a huge following by essentially blaming the credit scoring system and/or credit cards for everyone’s debt related problems.
These popular advisors will even go as far as to call credit scores “debt scores.” They help to perpetuate the myth that credit scoring models reward you for going into debt and, as a result, building a cash-only life free from credit is the best way to live.
Of course, the idea that credit scores reward you for going into debt is completely false. In fact, quite the opposite is true. Blaming credit scoring systems or credit cards for your problems is like blaming your scale or forks for those extra pounds you’re carrying around. Not only does this line of thought defy logic, but if something else is responsible for your problems, then you have no power to change your situation.
- Related: Debunking Four Popular Credit Myths
Debt and Credit Scores
To understand why having debt isn’t actually good for your credit scores, you should first take a look at a credit score’s purpose. Credit scores are designed to help lenders predict the risk of doing business with you. This is achieved by analyzing the data on your credit reports, and producing a number that lenders can use to easily determine your level of credit risk. The higher the score, the less risk the lender is taking on by extending financing.
According to the Equal Credit Opportunity Act (ECOA), credit scores must be “empirically derived” and “demonstrably and statistically sound” to be used in lending decisions. Simply put, this means that credit scores must be built using proven, scientific methods and must actually work. If FICO or VantageScore designs a credit score used by lenders in the U.S., it must meet this criteria. Spoiler alert: All of FICO and VantageScore’s credit scoring models are ECOA compliant.
Credit score developers review tens of millions of credit reports any time a new credit scoring model is created. As a result of studying the behavior of millions of consumers, one fact is certain – higher levels of debt lead to higher levels of risk. Because of the increased risk that debt represents, credit scoring models penalize consumers for being in debt, particularly credit card debt.
- Related: Comparing Your Many Credit Scores
Managing Your Debt
Although your debt does have the ability to impact your credit scores negatively, that does not mean you should be afraid of borrowing money. It is completely possible to earn elite credit scores, well into the 800s, with debt of any type, including mortgages, auto loans, student loans, and, yes, credit cards.
The bottom line is simple. Credit scores don’t reward you for being in debt. Credit scores reward you for managing debt properly. Credit scores don’t reward you for using credit cards. Credit scores reward you for using credit cards responsibly.
- Debunking Four Common Credit Myths
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John Ulzheimer is an expert on credit reporting, credit scoring, and identity theft. He has written four books on the topic and has been interviewed and quoted thousands of times over the past 10 years. With time spent at Equifax and FICO, Ulzheimer is the only credit expert who actually comes from the credit industry. He has been an expert witness in over 230 credit related lawsuits and has been qualified to testify in both federal and state courts on the topic of consumer credit.