Why Is Such a Big Deal Made Out of Building & Protecting Our Credit Scores?

By Patrick Kerney
NFL Player Engagement

In short, having a good credit score can make life a lot easier than having a poor credit score.  It lets those from who we want to borrow money know how likely it is that we will pay them back in full.  If our score reflects a low level of income and a history of unpaid debts, a lender is lead to believe our habits have not changed and that they are less likely to receive their original money and interest payments.  Because of this risk, the lender tries to recoup as much of its original loan as soon as possible. They do this by making the low credit scoring borrower pay more interest each year than the high credit scoring borrower from whom they are more certain to receive all that is due.

A high credit score also serves as one answer to “how the rich get richer”.  No one usually minds being a part of this crowd, so let’s look at an example (albeit an extreme one).

If any of us haven’t heard of Mark Zuckerberg, we have heard of the company he started: Facebook.  His net worth varies in step with the value of Facebook stock, but it’s safe to say he is worth many billions of dollars.  So why did he take out a loan on his home purchase (a mortgage) when he could have paid cash for a house 100 x the cost of his house?  The answer: his credit score.

Because of his high credit score and high net worth, Mr. Zuckerberg borrowed $5.95 million at a cost of 1.05% per year.[1]  On July 16, 2012, when this was reported, the 10-year treasury note, which is the standard for a risk-free investment, was paying 1.50% per year to anyone who lent money to the U.S. Treasury.  See below:

While Mr. Zuckerberg has the ability to pursue higher risk-reward investment opportunities, let’s say for example that he paid cash for his house and took the $5.95 million loan and purchased an equal amount of 10 year treasury notes (per the above table).  Because the U.S. Treasury would have been paying Mr. Zuckerberg .45% more per year to borrow his money than Mr. Zuckerberg was paying his mortgage lender to borrow their money, he is essentially “getting paid” $26,775 per year to live in his house.  Not a bad deal, right?

There are other risk factors associated with Mr. Zuckerberg’s mortgage that are important, but the moral of the story is that a high credit score will keep your cost to borrow money down.  In contrast, borrowing money when we have a low credit score will lead to high interest rates or, potentially, flat-out rejection.

For those of us who haven’t had a headline-grabbing contract, our ability to borrow at low rates will be crucial in our ability to make major purchases.  For those of us who have realized contracts that allow us to pay cash for a house, it’s not totally necessary to grow and protect our credit score.  But after looking at Mr. Zuckerberg’s example, why wouldn’t we?