I’ve been reading lately both about American history and the establishment of the National Bank, and the loans tried to be negotiated with the Dutch banks during the Independence War. At the same time, I’ve read a lot of folks having their Credit score lowered because of paying off either their cars or their student loans. Shouldn’t it be better if you didn’t ave any loans at all?
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Debt is important because it allows governments, businesses, people get what they need today and pay it off over time. A government at war or battling a pandemic needs money to spend today — it doesn’t have time to raise taxes, collect taxes, save up what it needs and then solve the issue. A business needs to buy equipment, build a factory, hire programmers before they can even get the first customer. And consumers need a car to get to that new job, need a house to raise their family in now… now after saving up for 30 years.
And lending money is also a solid investment — in return for loaning the money to the government, business, home buyer, etc. you get interest on top of repayment of the money loaned.
As for Credit Scores… well those are algorithms to determine somebody’s risk as a borrower so that a bank can decide whether to loan, a credit card company can decide whether to issue a credit card, etc. The scoring system uses factors like average length of credit accounts, credit utilization (balance on credit cards relative to limit), types of loans, any negative marks (bankruptcies, accounts written off or sent to collections, etc). So paying off an account can drop your score because it may reduce average age of accounts, may reduce mix of debt types. Often the score will drop initially and then climb back up. Does seem counter-intuitive that removing a debt obligation make one look like a higher risk, but it’s usually not a huge drop and score does rebound over time. But there are also variations of the score (there isn’t one single “credit score”) that get looked at by certain types of lenders that may give a more accurate picture relative to that type of loan, ie. an Auto Credit Score may give more weight to past car loans and them being paid off in full.
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