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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Let’s say you want to buy a new car.
You could save $400 every month, until you had $20,000 saved and then buy your new car wish cash. The downside to this approach is that it will take you over 4 years to save that money, and you won’t have a new car during those 4 years. This is an even bigger problem when we look at buying things like *land* and *houses*, where it could easily take you 20 or 30 or 40 years of hard saving to be able to buy with cash.
Debt allows you to borrow the money now, buy the car now, and repay over time. The downside is that while you borrowed $20,000 to buy a car, you might wind up paying $25,000 or $30,000 or more over the 3-7 years that you’re repaying the loan, because you also have to pay *interest* on what you borrowed.
When we scale up to government-sized issues, the price-tags get really huge. Paving a road, building a new freeway, repairing water pipes… it’s all really really expensive, and having all that money as cash-on-hand isn’t always viable. You don’t **want** to wait ten years to save enough money to have clean drinking water, you want to do those repairs *now*.
OK, so that’s debt. Let’s talk about *Credit Scores* and credit history.
Credit Scores are meant to reflect your behavior *as a borrower*. Do you borrow a lot of money, or only a little? Do you repay debts on time, or have you missed payments? Do you repay loans according to schedule, or do you try to pay them off early, paying less interest to the lender in the process?
Probably the biggest myth around credit and credit scores is that you only have one credit score that every borrower cares about. Different kinds of borrowers have different goals, and care about different things. Credit card companies like people who borrow a lot of money, always make on-time payments, and don’t ever fully repay their credit card balances. Mortgage lenders like people who don’t have so much debt (or even potential debt) that they might struggle to pay their mortgage, and they like people with a history of taking out structured loans and repaying them on schedule. Two lenders, two different kinds of preferences, and those different needs are never going to be adequately met by a single numerical score.
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