A couple mortgage refinances ago, I almost screwed myself because I had an $8 judgment against me from my local utility company that crushed my credit score by ~100 points. I thought I had an excellent credit score of 780, and I did, when I first started my 100 day refinance hell. But when my refinance bank pulled my credit report again around the 90th day, my TransUnion score plummeted to 680.
My mortgage refinance was delayed by another 10 days as my bank investigated the situation. Thankfully, everything turned out fine in the end. Since that time, I decided to regularly check my credit score once a year like I check my latest insurance coverage and health coverage. It’s good practice given it’s estimated about 5% of credit reports have errors as well.
Given I finally got rejected from my latest mortgage refinance attempt by Chase, I’ve begun to question whether a credit score has any meaning anymore. You see, I never missed a mortgage payment on this particular mortgage, and my latest credit score showed a 787. Anything above a 740 is considered excellent, and good enough for the best rate by major lenders.
DOES A HIGH CREDIT SCORE MATTER?
From A Bank’s Point Of View
After refinancing multiple properties multiple times and talking to various mortgage officers since 2003, once you have over a 740 credit score, it doesn’t matter how much higher your credit score is. You will always be offered the best borrowing terms.
The only way to get even better terms (like a point credit when refinancing) is to have multiple accounts with an amount that qualifies you for top tier status. For example, Citibank designates clients with over $150,000 in investable assets as Citigold. Once you have over $500,000 in investable assets, you become Citigold Select. Benefits include free checking, a reduction in fees, a designated private banker, concierge service, and free tickets to concerts, sporting events, and dinners.
Unfortunately, big banks are so over-regulated that only the best creditors are getting loans now. Roughly 35% of mortgage applicants are getting rejected, so more and more people are just deciding to forego a mortgage altogether by just paying cash. If banks lent, then credit scores would matter more!
From A Landlord’s Point Of View
As a landlord for the past 10 years, a credit score with a clean report is only one of several things I look for in a tenant. Here are all the things I look for:
* A record of consistent employment
* No felonies, no sex offenders
* Good references from previous landlords and roommates
* A resume
* A balance sheet that can cover at least six months worth of rent in case of lost employment
* A pleasant personality that recognizes the importance of caring for the property
* A 720+ credit score
* A clean credit report with no outstanding judgments
Even after evaluating a candidate based on these eight basic variables, selecting someone is still a leap of faith. My very first tenants had no credit score because they came from France. But, one of the tenants owned a rental property in London, so that went a long way in allowing me to trust they understood the viewpoint of the landlord.
There was a super nitpicky doctor a couple years out of residency who made $300,000. The only problem was his credit score was around 680. If he was a normal person who appreciated my apartment, didn’t complain about the size of the kitchen, and other stuff, I would have welcomed him as a tenant. But because he seemed like a PITA from the very beginning and had a mediocre credit score for someone with such a high income, I passed.
All I want is for my tenants to take care of the property, pay the rent on time, not to sneak in new roommates who aren’t on the lease, and not to disturb the neighbors. Such things aren’t credit score dependent. But, if I’ve got a lot of demand, then I might as well narrow down the selection to those with over 720.
From A Car Dealership’s Point Of View
Back in September, 2014 I decided to lease a 2015 Honda Fit for $235 a month over three years. At the end of three years, the residual value is estimated to be about ~$12,600. My plan is to just buy the car in full unless I’m making gobs of money and some incredible model comes out in 2017-2018.
The Honda dealer didn’t care whether I had a 740+ or a <700. At $19,025 pre-tax, the Honda Fit is at such a low price point, they are used to plenty of people with mediocre credit scores buying such a car. The same goes for the Honda Civic. Most people making the median household income of $52,000 a year should be able to swing a $235 a month car payment, even though I advise people to make 4X the amount if they want to roll in a Honda Fit.
What was more important to the Honda dealer was a buyer’s down payment, income, and car payment history. My down payment was the $1,000 trade-in value of Moose, a 2000 Land Rover Discovery II with too many problems to list. For those with worse credit scores, a higher down payment solves a lot of problems. The dealership mentioned people usually come in with a $1,000 – $3,000 down payment to lease and a $2,000 – $5,000 down payment to buy.
Obviously, the Range Rover dealer is going to have stricter requirements if you’re trying to majority-finance a $100,000 Range Rover. They mentioned about 50% of the buyers pay cash, while 35% lease, and 15% finance. Most lessees put SUVs on their business for a tax deduction. The cash buyers are usually millionaires, and only those who can’t comfortably afford $100,000 vehicles end up financing.
From A School’s Point Of View
Yale University’s endowment is currently around $25 billion dollars. Whether you pay them back or not is not going to break their budget. Yale wants the best and brightest students to attend their university and make them proud afterward. Every single university wants the same thing.
I’ve never heard of a school judging a student’s loan interest rate by their credit score because they usually don’t have credit scores or have very mediocre credit scores due to a lack of credit history. If you borrow from the Federal Student Aid (FAFSA) department, like I did for business school, the interest rates are pretty much set by the government and the market. I was never asked what my FICO score was when borrowing.
The government understands the importance of education and is willing to subsidize student loans with lower payments. Unfortunately, you can’t get rid of your student loans in bankruptcy yet. Maybe one day!
Have Student Loans? Check out SoFi to refinance them as they no longer utilize the credit score as part of their loan process. SoFi is one of the leading new financial technology companies based in Silicon Valley that look at employment history, track record of meeting financial obligations and monthly cash flow minus expenses to see if you can get a great rate. If you’re right out of school, you’ve got a lot of upside, but perhaps your finances don’t look so great at the moment. That’s where SoFi can really offer lower rates because banks and government lenders can’t look at individuals holistically.
From An Employer’s Point Of View
There used to be a time during the financial crisis when more and more employers started checking prospective employees’ credit scores through background checks. Everybody was wigged out, and people who welched on their debt were not welcome due to all the pain they inflicted on those who continued to pay their mortgages.
But nowadays, we’re in a bull market. The tables have turned and employees are finding plenty of job opportunities, at least in big cities like San Francisco, New York, LA, and Chicago. Good luck trying to get a qualified software engineer, for example. Unemployment levels are back down to boom time lows (3.8% in San Francisco) and employers can no longer be as picky with their candidates.
I’ve worked at three different places since 2012 as a consultant, and I’ve never once been asked my credit score. I had to pass a thorough background check by one employer, but the other two employers didn’t do a background check at all.
From A Potential Partner’s Point Of View
One of the reasons why I waited so long to start P2P lending is because I just can’t stand people who don’t pay their debts. Be a Lanister and always pay your debts! If I’m getting into a business venture with someone, it would be great if they had great credit. But what I’m more interested in is hard work, intelligence, relationships, and personality compatibility.
The only time when I think it’s important to be completely transparent about one’s finances is before marriage. Given marriage is a union of two people’s finances, it wouldn’t be fair for a person with good credit and good finances not to know the person they are marrying has poor credit due to a bankruptcy and massive amounts of debt. The bad credit person might be marrying the good credit person for his/her money, which will probably end in tears. It’s best to start any relationship with complete honesty.
Update 2017: I’m very focused on investing in real estate crowdsourcing now. Higher returns than P2P lending and lower default rates. Check out Fundrise for free. You can invest surgically all across the country for as little as $5,000 instead of coming up with a massive downpayment.
CREDIT SCORES MEAN LESS IN GOOD TIMES
After thinking about all the various ways in which a credit score matters, I’ve concluded the stronger the economy, the less a credit score matters. Other variables play a much greater role in whether you’re able to qualify for a loan, rent a property, get a job, or find a spouse. That said, if you haven’t checked your credit score in a while, you might as well check our credit score for free to make sure there’s nothing funky going on.
* Check Your Experian Credit Score Today: For only $1 you can check what your latest Experian credit score is straight from their website. It’s a good idea to see what your credit score is before applying for a loan. If it’s below 720, you won’t get the best rate, but at least you can spend time to improve your score. Furthermore, 1 out of 4 credit reports have errors, negatively affecting one’s credit score. I had a $7 late electric bill that crushed my credit score by 100 points and almost derailed my mortgage refinance. The scary thing is, I had no idea! Check your credit score today
* Manage Your Finances In One Place: One of the best way to become financially independent and protect yourself is to get a handle on your finances by signing up with Personal Capital. They are a free online platform which aggregates all your financial accounts in one place so you can see where you can optimize your money. Before Personal Capital, I had to log into eight different systems to track 25+ difference accounts (brokerage, multiple banks, 401K, etc) to manage my finances on an Excel spreadsheet. Now, I can just log into Personal Capital to see how all my accounts are doing, including my net worth. I can also see how much I’m spending and saving every month through their cash flow tool.
A great feature is their Portfolio Fee Analyzer, which runs your investment portfolio(s) through its software in a click of a button to see what you are paying. I found out I was paying $1,700 a year in portfolio fees I had no idea I was hemorrhaging! There is no better financial tool online that has helped me more to achieve financial freedom. It only takes a minute to sign up.
Finally, they recently launched their amazing Retirement Planning Calculator that pulls in your real data and runs a Monte Carlo simulation to give you deep insights into your financial future. Personal Capital is free, and less than one minute to sign up. It’s one of the most valuable tools I’ve found to help achieve financial freedom.
About the Author: Sam began investing his own money ever since he first opened a Charles Schwab brokerage account online in 1995. Sam loved investing so much that he decided to make a career out of investing by spending the next 13 years after college on Wall Street. During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate. He also became Series 7 and Series 63 registered. In 2012, Sam was able to retire at the age of 35 largely due to his investments that now generate over six figures a year in passive income. Sam now spends his time playing tennis, spending time with family, and writing online to help others achieve financial freedom.
Updated for 2019 and beyond.