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You don’t need to carry debt to have great scores

Oct 06, 2009 | | Comments Comments Off

Dear Liz: I have no idea what my credit score is, because as my father said, “You never get rich paying someone else interest.” The only reason to borrow money is for a house or a car or for a home improvement for which a home-equity loan would be best. Credit cards, consumer loans and home-equity loans for non-house expenses are folly.

However, you and many other financial columnists are always advising people on how to keep their credit scores high. The implication is that your readers should be borrowing money when they should not. I use credit cards (for most of my purchases, in fact), but I always pay off my balance, so my credit scores are of no interest to me and I don’t know them.

Answer: You’re laboring under two common misconceptions: that credit scores aren’t important and that you have to have debt to have good scores.

It’s precisely because you don’t get rich by paying others unnecessary interest that you should care about your scores. The reality is that good scores have become critically important if you want the best rates and terms on mortgages, auto loans and other lending.

Credit scores are also used by landlords to evaluate applicants and by insurance companies to determine premiums.

But you don’t need to carry credit card balances to have great scores. In fact, the only smart way to use credit cards is to pay your balances in full each month. You also need to pay attention to your credit limits, since maxing out cards, even if you pay in full, can hurt your scores.

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