From the moment we become teenagers we are taught the ridiculously absurd practice of going into debt to prove you can be responsible with money. I think you would agree with me when I say that the ultimate in proving you are responsible with money would be the fact that you owe nothing to no one.
That is the pinnacle of self-control in modern society.
Yet, that is the opposite of how our credit system works. We are disincentivized to use cash or to save money. We are encouraged to take on as much debt as we can. Why is that? Would you be more proud of your kids if they used cash for everything, or signed up for a half-dozen credit cards?
A Story of Two Friends
When I was 16, (21 years ago) my best friend pulled out a shiny new credit card from his dresser drawer. He had lied on a credit card application about his age so he could get a credit card. I thought he made a bad decision and that in time he would learn why.
I avoided credit cards for as long as possible, not getting my first one until I was into my mid 20’s and the only one I would allow myself to have was a JC Penney card because I had been told by so many people I needed to build a “credit history.” So I would buy a $3 package of white socks and then send in a check the next day to pay for it.
By the time my friend and I were 25, his credit score was far and away better than mine, even though I paid cash for everything and never owed anyone any money. He taught me how the system really works.
So of course I started getting a few credit cards and paying off the balances every month…much like I did when I was buying socks.
The credit agencies don’t like when you do that. Paying off your balances every month gets you a slap on the wrist with a lower credit score. They want that I should be a good little debtor and just make my minimum payments, forever a slave to the credit machine.
So today, I ran a “What If” calculator for my credit score with a credit monitoring service I have through BofA. I don’t like these services but I thought I would sign up for a couple months just to see what it could and couldn’t do.
The image below taught me, yet again, that my friend was right and I was wrong. The only difference now is that the proof is glaring at me from my computer monitor.
I pay off my balances every month. I never carry anything over from month to month. I do this because the system requires me to, so I don’t pay higher interest rates on a home loan, when I get around to getting one.
But of course when the credit agencies run my account information to update my FICO credit score, there is always something on the account even though it is always just days from being paid off completely.
I asked the system, “what if” I paid off all my credit card debt. What if I paid off the cards…and left them at zero. Never used them again. Absolutely debt free. Not even a 30 day debtor. What if?
“…these actions may cause your credit score to decrease by six points.”
Once again, a system that punishes you for being debt free.
Categories: Personal Economics