Imagine you’ve dusted off an old bottle and out comes a genie. Unfortunately, you won’t be granted three wishes. But you do get an offer for what many people would wish for – a million dollars.
“Or,” the genie says. “If you prefer, instead, you can have excellent credit.”
One out of three of you, according to a recent Capital One survey, would choose excellent credit.
I’m not going to mince words – that’s crazy. Put me in the camp that would take the million dollars.
Details on Capital One’s Confidence Study
It boggles the mind, or at least my mind, that a lot of people would choose excellent credit over having a million dollars. That’s one of the findings according to Capital One’s new study, “Capital One Credit Confidence Study,” which, as they say in their press release, “aims to understand people’s thoughts, attitudes, behaviors and expectations related to managing credit wisely.”
More than 2,300 people who are new to establishing credit, building their score, or re-building their credit were surveyed. Thirty-two percent said that they would rather have “excellent” credit than receive one million dollars.
Granted, this was an online survey, and it’s easy to imagine that if all of the people surveyed truly were offered one million dollars or the excellent credit, they’d take the money. But just for fun, let’s walk through this. Because you never know. Maybe one day you will come across a dusty old bottle…
What Does “Excellent Credit” Even Mean?
As you probably know, everyone has a credit score. The most commonly used type of credit score used is called the FICO credit score. FICO stands for Fair Isaac Corporation, which is probably only useful to know if you’re ever on a game show like Jeopardy, and even then, I doubt they’d ask you that. But what you should know is what the different credit score ranges are, so you can understand where you stand. See below for the ranges:
Credit Score Ranges and Quality
|Credit Score Ranges||Credit Quality||Effect on Ability to Obtain Loans|
|300-559||Very Bad||Extremely difficult to obtain traditional loans and line of credit. Advised to use secured credit cards and loans to help rebuild credit.|
|560-649||Bad||May be able to qualify for some loans and lines of credit, but the interest rates are likely to be high.|
|650-699||Average/Fair||Eligible for many traditional loans, but the interest rates and terms may not be the best.|
|700-749||Good||Valuable benefits come in the form of loans and lines of credit with comprehensive perks and low interest rates.|
|750-850||Excellent||Qualify easily for most loans and lines of credit with low interest rates and favorable terms.|
Obviously, getting and keeping excellent credit is important to anyone’s financial well-being. Some of the benefits include:
- Lower interest rates on major loans, such as mortgage and auto (see the table below to understand just how much of a difference this makes)
- Passing the credit check during the job application process
- A status symbol… yep, as crazy as it sounds, at least according to media reports, credit scores come up as a topic fairly early in the dating scene
- Easier to get access to credit, such as personal loans, when you have good credit. And you may want personal loans, for plenty of good reasons, such as furthering your education, or maybe you’d like to start a business
How Your Credit Score Can Affect Your Future Mortgage Rate
|Credit Score Range||30-Year Fixed Rate Mortgage||5-year fixed rate mortgage||7/1 ARM|
How Your Credit Score Can Affect Your Next Car Loan
|Credit Score Range||60-Month new Car Loan||40-Month Used Car Loan|
How Your Credit Score Can Affect Your Next General Loan
|Credit Score Range||HELOC||Home Equity Loan|
So, sure, everyone wants excellent credit. But, again, to turn down a million dollars…
“But that excellent credit can help me earn more than $1 million in the long run.”
That, apparently, was one of the top reasons people in the survey chose excellent credit over $1 million. It seems like a smart argument on the surface. You choose excellent credit so you’re able to get a personal loan to start that multi-million dollar business. Or you choose it so your mortgage, car, and other loans have a low interest rate, and thus you save thousands of dollars. And by saving thousands of dollars you can put money away in your savings account. And if you invest it, you could make millions.
That’s another good argument.
But that doesn’t make it correct.
Listen to the two-thirds of people who said they would take the million dollars.
The Reasons Most of Those Surveyed Picked the Million
There were three common answers among those who said yes to the one million dollars:
- “I can use that $1 million to pay off my debt and repair my credit score.”
- “I can use that $1 million to invest and earn enough money to make my credit score is irrelevant.”
- “The $1 million can help me buy all the stuff that I would need excellent credit for anyway.”
These are all good reasons to take the million, especially the first. One of the best ways to improve a credit score is to pay off debt. Of course, there are a lot of unknowns to these hypothetical scenarios. How much debt are we talking about? What kind of debt is it? How high is the interest rate? There may be some scenarios where you wouldn’t want to pay all the debt off at once, if you had, say, a million dollars in debt. Maybe you’d want to pay half of it down and take the other half (I guess we’re assuming the IRS isn’t taking your million dollars) and put into savings or stocks or some other investment vehicle.
But that’s the point anyway. One million dollars, or any great sum of money that you don’t need to spend right away, is a financial tool, just like excellent credit is. It’s a tool that can make you more money. And a million dollars really can buy a lot. You could get a house for half a million and still have another half left over (depending on where you live). With excellent credit, you’d still have to put $100,000 down for a half million house if you’re going to pay the 20% standard down payment.
With excellent credit, let’s say you were able to get a 30 year mortgage at 3.54%. At that rate, and with a monthly mortgage payment of around $1,805, after 30 years you’d end up paying $649,800 (on top of that $100,000). That’s $149,800 more than if you’d have paid for the home in cash.
If you had taken the million, you could pay in cash for a cheaper home and lose no money to interest. Or you could take out half the amount on a mortgage for the same price home, but pay far less in interest since the principal balance started off so small.
I’m sure we come up with different scenarios where the math works out in the favor of the person with excellent credit. Like, what if you wanted to buy a house worth $3 million. What then?
But I think some people, in their quest for the best credit score lose sight of the big picture in the name of protecting their credit scores. For instance, to use an extreme example, I remember during the recession and even after, reading about people prioritizing credit card payments before paying their mortgage. While credit card debt is costly and should be prioritized, it shouldn’t be prioritized over keeping a roof over your head.
In your quest for an excellent credit score, you should never forget the end goal: to be financially secure. An excellent credit score is not a guarantee of financial security. For example, you can have excellent credit but not have anything saved for your retirement.
Excellent credit doesn’t mean you have a windfall of cash in a savings account. It doesn’t mean you have a fantastic paycheck. Assuming we don’t have three wishes at our disposal, those are all things we need to work on, just as hard as improving our credit score.
Excellent credit is excellent. But I’d rather have the million dollars. Or better yet, both.