It's human nature to be competitive. Give us a measure of success in life -- from the age our kids learn to walk, to grade point average, or cholesterol level -- and we want a better score than our friends and relatives have.
The latest measure of success may be the credit score. Great. Let the competitions begin.
A good credit score is important. You need it to get a mortgage, get into an apartment, and sometimes even to get a job. However, zeroing in on your credit score too much is not a good idea.
Before you get carried away obsessing over your credit score, consider these points:
1. Comparing your score with other people's scores is futile.
There are many different scoring models. Even Fair Isaac's (FICO 1.82%) FICO has more than one score. They're calculated differently, and their high and low ranges are not identical. Before you get excited because your score is 20 points higher or lower than your co-worker's, make sure you're even comparing scores from the same scoring model.
Another reason you shouldn't compare your score with someone else's is that it's such a narrow view of your financial success. Credit scores don't report how much you make, what kind of car you drive, or how much you have in your investment brokerage.
You may even have a higher or lower score than your spouse -- with all the same accounts and no obvious differences. That's the way it goes.
2. Checking your credit score constantly is discouraging.
Your score may go up and down by a few points every time you check. You'll drive yourself crazy trying to figure it out. It's like jumping on the scale four times a day, and getting discouraged when you've just had a glass of water. The small fluctuations don't matter.
3. Some things are out of your control, or don't make any difference in the long term.
You don't know when your creditors report to the credit bureaus. They could report right before you pay your monthly bill, causing you to show a higher balance one month. Thanks to the debt utilization ratio, which shows the percentage of your available credit you are using, your credit score may go down by a few points. Next month, it may report to the bureaus right after you pay and the balance is zero. Your score goes up. Nothing material has changed.
4. Past a certain point, your score can't help you.
You should certainly strive for an excellent credit score, especially if you may be applying for a home mortgage or other loan in the near future. Most lenders give their best rates to applicants with a 740 to 760 credit score or higher.
After that, a higher score may give you bragging rights at parties, but that's about it. It's not the kind of thing you can put in your holiday card (I hope).
To score a loan, you need more than a credit score. A score of 812 won't get you into a new home if you can't prove you have enough income to make the payments.
5. You can lose sight of the big picture.
Don't make decisions based primarily on how they affect your credit score. For example, buying a car on an installment plan may help your score. Buying a car you don't need, or a more expensive car than you need, and paying lots of interest is a bad financial move. It will hurt your total financial picture far more than it helps your credit score.
You are far better off spending your energy on your overall finances than trying to fine-tune your credit score every moment. Take care of your total financial picture, be fanatical about paying bills on time, and for the most part your credit score will care of itself.
