When you hear what I have to say about being distracted by credit scores you might envision a guy standing at a busy street corner shouting that the world is coming to an end.
Many people misunderstand my position on building credit. Their impression is that I’m preaching about conspiracy theories.
However, once you understand the facts and have all the information you will think differently about this important financial topic and join me in drinking the Kool-aid.
Facts about FICO scores
Fair Isaac Corporation (FICO) is a publicly traded company on the NYSE that “provides analytics and decision making services intended to help financial service companies make complex, high-volume decisions”.
More specifically, one of the services FICO provides is consumer Credit Scoring. This simplifies the loan approval process for lenders and summarizes the information they want into a 3-digit number.
In short: FICO created credit scores.
You’ve never used your credit score
When was the last time you used your credit score? Think hard. You can’t remember can you because it has never happened. You have never used your credit score – only companies and lenders do.
What is really crazy is that people are super-secretive about their Social Security number and take steps to keep their home phone number from being listed but they WANT FICO to sell our personal banking information (allowing them to make a profit) to lenders who then turn around and try to sell us money (debt). That’s CRAZY to me!
Hate the score, love the consumer
You’ve heard the phrase: “Hate the sin, love the sinner”. I hate credit scores but love the consumer. If your idea of building wealth and being smart with your money is playing the “build your FICO score” game then I have bad news for you. You are being duped!
I hate what the credit scoring system is doing to the consumer. It is promoting the idea that borrowing money is the way to wealth and happiness. Debt is a more accurate name for borrowing money, and it leads to stress, feelings of inadequacy, and broken relationships because the money is tight. That doesn’t sound like happiness to me.
For this reason I can not promote the credit scoring system. Once I learned what credit cards and loans were doing to my neighborhood I found that debt is actually against my religion.
What makes up a credit score
- 35% from your payment history on debt products (loans, credit cards, etc)
- 30% is based on the amount of money you owe
- 15% comes from the length of history on those debt products
- 10% takes into consideration the types of credit you use
- 10% evaluates how much new credit you have
What should be completely obvious here is that each one of these items is based on debt and debt products. How much money you make or how much money you have saved has no effect on your credit score.
Also, the normal monthly bills that are not debts (electric bill, cell phone payment, rent) are not factored into your traditional credit score. It sounds to me like Fair Isaac really isn’t fair when it comes to evaluating our credit worthiness after all.
What credit scores are doing to your wealth
When you are contemplating ways to improve your credit score you are being distracted from building wealth. Instead of gaining riches you will end up paying interest on debt by playing the credit scoring game.
The interest you pay is a penalty for your future. No only is debt dipping its hand into your future paychecks but a good portion of your debt payments go towards interest. What does interest buy you? Answer: Instant gratification for a low monthly rate.
It is a rouse, it’s a distraction, it is the way “the system” gets us to spend our attention on them instead of our family and our own financial wellness.
What experts aren’t telling you
The traditional advice is that you need to have a credit card and a mix of other debt products in order to “build your credit score”. I’ve also heard that you should utilize 30% of your available credit in order to have the best credit score. Okay Mr. Wizard, let’s do the math:
- If I have three credit cards with $5,000 limits then my available credit is $15,000
- 30 percent of $15,000 is $4,995
- Pay off the balance every month in order to avoid interest charges
I don’t know about you but I would have a hard time paying off $4,995 a month to avoid interest charges. Follow this advice blindly and you will find yourself in the credit card debt cycle fast!
By the way – don’t be fooled by those telling you that improving your credit score will help you pay off your debt. I know of a guy selling his credit-building process and promises to teach you “how to raise your credit score, so you can pay off your debt”. How does a better score pay off debt? Does FICO cut you a check? Do you get a coupon or rebate voucher? This is simply just a lie to sell you his $1,000 program.
Why don’t people talk about Alternative Credit?
There is something the “experts” aren’t telling you: There are other ways to prove your credit worthiness that don’t involve being in debt! Good old fashion manual underwriting is one way you can prove your credit worthiness in order to get a mortgage at a good interest rate. It takes a lot more work for a lender to go through this process, so most of them don’t bother trying.
The good news is that there is a service called eCredable.com that helps banks get through this process more efficiently – and it would only cost you around $100. What eCredable does is verify the payments you have made to your electric company, your cable company, even your landlord to prove your eligible for a home mortgage at the best rates. That’s great news for a guy like me who has no consumer debt but might want to refinance my home mortgage while rates are low.
Pay attention, not interest
You see? One doesn’t need to borrow a bunch of money and pay a bunch of interest to prove their credit worthiness. One simply needs to pay for the things they buy.
Your current and future finances will greatly improve if you worry about paying off your debt and staying out of debt forever as we have. If a time comes when you need to qualify for a mortgage then you would likely have a better down-payment, resulting in lower monthly payments and a better chance of qualifying. If the bank is being stubborn about your nonexistent FICO score then have no fear: You have an alternative like eCredable to help.
It is my hope that your mindset about credit scores has changed. Join me in my mission of killing off soul-sucking debt and helping everyday Americans to pay attention, not interest.
We will all be better off by being focused on building wealth, not from being distracted by credit scores.
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