Thursday, March 5, 2009

Why You Shouldn't Worry Too Much About Your Credit Score

By Joe Weisenthal (Clusterstock):

Homeowners considering walking away from an underwater mortage obviously have to weigh the benefit of getting out from under a bad investment with the inevitable hit on their credit, plus any foggy "moral" cosiderations.

For those that are deeply underwater the math looks pretty straightforward. If you're $250,000 in the hole it's hard to imagine that your lowered credit rating will end up costing you that much over the next several years. If, say, you're only $50,000 it might be a closer calculation.

But maybe you should underweight your credit score as a factor in your decisions going forward. For one thing, there's likely to be major FICO deflation, as millions of Americans walk away from their homes. In a few years, 400 will be the new 600. And since banks and credit card companies will have to lend to someone (otherwise they have no business), you and your damaged credit score may look like compelling no matter what.

The other issue is that one-number credit scores are bunk. Warren Buffett talked about it in his shareholder letter, when he noted that buyers of Clayton Homes were less likely than other to default, not because their credit scores were that great, but because they had demonstrated incomes that comfortably allowed them to make their monthly payments. We'd guess more and more lenders will look at nuts and bolts stuff like that, going forward, rather than outsourcing it to a third party black box.

Bottom line, very few people will have perfectly pristine credit ratings when this mess is all said done. Better to save your cash than fret about a number of declining relevance.

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