The Other Cost of Credit

When most individuals think about the negative connotations regarding their personal credit histories; specifically what costs these scores may hold when credit goes bad, they tend to think about the costs in terms of being denied credit when it is needed most or the high interest rates and fees associated with poor credit scores.

But, there are also high costs in maintain good credit.

To maintain great or even good credit usually means using your credit and it is this use that has costs associated with it.

Some of the most important items in maintain good credit scores and their costs are:

Credit must be used but not abused. Most credit bureaus calculate the difference between the amount of credit available (usually revolving credit like credit cards) and the amount being used. Thus, if you have $20,000 in revolving credit available to you but only have outstanding balances of $2,000 it shows that you are managing and not abusing your credit. The opposite is true as well. If you have $20,000 in revolving credit but have maxed out the full amount, then it shows that you are abusing your credit and your score falls.

Therefore, the goal is to have as much revolving credit available to you but not really use it. However, this can mean applying for credit that you really don't need. One cost that can be associated with having and maintain credit accounts you don't use is that some creditors will charge fees (like annual fees) just for having an account with them. Closing these accounts can save you these fees but will also hurt your credit score.

Further, in today's credit market, if you don't use your credit accounts, your creditors will close them without warning. Again, closing these accounts and reducing the difference between what is available and what is used can really hurt your credit score. Thus, you have to use these revolving accounts (which usually means using your credit cards even when you have the cash on hand to pay for your purchases). This also means buying items you don't want or need or trying to find ways to keep balances on these accounts - balances that are unnecessary especially when you get charged interest and fees for these balances. Both of which cost in terms of spending money that does not need to be spent or paying avoidable interest and fees.

My wife and I try to rotate our credit cards in an attempt to keep small balances on each one of them each month. We also pay off these balances each month (trying to reduce the overall costs of holding these accounts). But, before online bill pay, we were also having to pay additional costs like envelops and stamps in mailing all these payments to difference credit companies (very thankful for online bill pay) as well as the time and effort it takes to monitor and manage each account. Additionally, by spreading out or rotating our charges, we are no longer able to take advantage of the best rewards programs to their fullest. This is actually a cost to us in missed opportunity costs or in getting some return on the money we spend in their form of cash back or other rewards.

However, we think that these additional costs are worth the trouble because in today's world, it is only your credit that matters too many companies from banks and lenders to employers, insurance companies and the likes. But, these costs are really not our choice as they are a result of the rules set in place by the credit reporting agencies - something that most credit companies what to keep in place as they force you to use their credit products.

So, in maintain your credit and trying to show how well you can and do manage your credit - based on their rules -creates additional, but unnecessary, cost to borrowers.

Term debt. All credit reporting agencies take into account the amount, type and time frame (the time that these accounts have been outstanding and paid as agreed) of term debt. Term debts are credit facilities like car or recreational vehicle loans, personal loans or home loans or, from a business owner's prospective, items like bank debt or SBA loans. While these are great accounts to have on you credit, they are also very costly to maintain. As you pay off these facilities, your credit score can suffer over time.

We recently had the opportunity to pay off our home loan. However, fearful of taking a hit against our credit, instead of paying off the balance we refinanced a very small amount for an extended period just to keep a mortgage term account in our credit histories. The costs, including the amount of interest we have to pay while this account remains outstanding, also included the refinancing fees (like origination fees, closing costs, application fees, taxes, funding fees and the overabundance of other fees these mortgage companies charge) as well as costs associated with the property like appraisal, survey and inspections and let's not forget the costs to record and maintain the deed on record in our county offices.

All just to maintain some reasonable high measure of credit. Because, without a high credit score - you will end up paying other costs; costs outside your being a borrower - costs like not getting the job you want, not being able to open a checking or savings accounts, high auto and home insurance rates or simply being turned down for a loan when you actually need it.

Poor credit scores can come from a lack of using credit just as fast as it can come from abusing or misusing it. In either case, there are very high, and in my opinion unnecessary, costs associated with both scenarios.

Bottom line is that you are dammed if you work to maintain your credit and dammed if you don't. Either way, your credit score will cost you in the long-run.

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