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Credit scores matter. Yet they also shouldn’t matter so much. They matter because they’re widely accepted as a trusted indicator of a consumer’s financial health and thus often determine their ability to borrow for life’s more significant purchases. The reality is, a credit score is not the best measurement of a person’s financial success. 

The number is based on the individual’s credit files, which are largely sourced from the dominant credit bureaus of today, Experian, Equifax, and TransUnion. Those credit bureaus provide information to financial service organizations in the form of repayment history, length of credit history, types of loans, and credit mix, which details the specific kinds of loans a person has had (e.g., auto, credit cards, or mortgages). A high score, typically between 670-739, means a member has “good” credit. A score typically between 740-799 is considered “very good,” and scores 800 and up to the maximum of 850 are considered “excellent.” On the other hand, credit scores of 300-579 are considered “poor,” while scores of 580-669 are considered “poor-to-fair.”

A disproportionate number of consumers in the U.S. are not even aware of the credit scoring system until they attempt a major purchase, such as buying a home, taking out a business loan, or purchasing a car. In fact, a November 2023 survey by BadCredit.org found 31 percent of Americans don’t know their credit score. A 2020 study found 54 percent of Americans never check their credit scores, and the U.S. Governmental Accountability Office found that as many as 45 million Americans have no credit history, otherwise known as being “credit invisible.” That means no data from that member has been reported to any of the credit bureaus, or simply that member has no credit profile. 

Essentially, good credit management leads to higher credit scores, which will, in turn, lower the cost of borrowing. Using their finances within their means, managing debt wisely, and paying all their bills on time – particularly credit card payments – are financial habits that help to build strong credit.  

Why credit scores shouldn’t matter so much

Conversely, such intense focus on credit scores is just as unhealthy, and not actually as important as it’s made out to be. In fact, according to finance coach and advisor Christine Luken, regularly checking your credit “report” is important and worth your time, but constantly checking your credit score is not (but also is). Here’s why: 

  1. Credit scores don’t say as much as you think they do. So many consumers believe there’s this one single score they need to focus on when, in fact, there’s at least three: three credit bureaus, three scores, three different opinions. The truth is that each credit score rating is “educational,” and subject to different interpretations, depending on the financial institution or service. Additionally, scores change frequently, maddeningly dropping one month, and then buoying the next. That can leave consumers pulling out their hair in confusion. 
  2. The best measurement of financial success is not credit scores. Two members could have the same credit scores, but their individual net worth, assets they actually own and control, could be very different. Credit scores do not take into account one’s income, account balances, investments, business ownership, or equity in their home. 
  3. Credit scores represent merely one aspect of members’ financial health. You wouldn’t base the overall health of your business on a temporary spike in revenue, would you? No! When you advise or mentor your members on their financial health numbers, you have to discipline them to check all the numbers that have an effect: net worth, income, cash flow, savings, investments and, granted, their credit score.
Credit Score
Photo: Anete Lusina | Pexels

How having a poor credit score hurts members

Poor credit can result from a number of reasons. If members get in the habit of paying their bills after the due date, penalty fees won’t be their only issue. Late payments and poor borrowing habits will erode members’ credit and inhibit their ability to get loans in the future. 

Below, we give some reasons how having poor credit limits members’ ability to improve their financial lives: 

  1. Limited loan approval. Poor credit makes it difficult to get loans for a car, and home, or even qualify for a credit card. Members could begin with getting a secured credit card and start building credit. 
  2.  Inability to pay off loans. Failing to pay off loans is a slippery slope for many financial maladies. With little-to-no funds, the member cannot pay off the existing loan, which creates another subsequent roll-over loan, and places the member in a destructive debt trap. 
  3. Higher interest rates. Even if they are offered a loan, it will most likely have a higher interest rate. 
  4. Lower scores pay more. Members with lower credit scores usually pay more for auto and home loans. 
  5. Credit checks. Potential employers and rental home managers often run credit checks, especially if you may be applying for a management job or a position that handles money. 

Helping members maintain good credit habits

If we’re going to waffle over whether credit scores are good or bad, establishing good credit habits should also be mentioned. How does a member begin to build good credit habits? Here we go: 

  1. Pay loans on the due date, every time. A bedrock financial habit is making sure payments are made on time, every time. An easy way to do that is by setting up automatic payments. If a payment is missed, get current and remain current. 
  2. Don’t even approach the credit limit. Particularly with members battling poor purchasing habits, make it a solid principle to avoid even getting near their credit limit. Work with them to acknowledge credit scoring models and how close they are to “maxing out” their credit. Financial experts, in fact, advise consumers to keep their use of credit to no more than 30 percent of their total credit limit. 
  3. Good credit history takes time. For those dedicated to the cause, building a solid credit history will take time. Ultimately, the more experience in credit your members exhibit, the more info there is available to determine a positive credit evaluation.
  4. Only apply for necessary and purposeful credit. Credit scoring formulas consider recent credit activity as a sign that a member needs more credit. If they are suddenly applying for more credit, the formula may see a red flag. 

Help members build their credit. By partnering with QCash, members who borrow from your credit union can take out digital small-dollar loans with ease, right from your credit union’s digital app. By paying off such loans on time, and having those loan repayments reported to the three credit bureaus, you help your members pave the way to improved credit scores and better financial health for themselves and their loved ones.

Additionally, QCash also assists your credit union to be accessible to those who wouldn’t otherwise qualify for a small-dollar loan due to their poor credit history. QCash is an immediate small-dollar solution, but also a gateway to more upstream borrowing and banking products and services.