Good Cents Financial Coaching

Navigating from stress to financial success

Breaking Free from the Tentacles of a Credit Score

I wrote a post a several months ago about the benefits of never ever having a credit score and why I dream my son never has one. If that sounds crazy, please take a few minutes to understand my reasoning before continuing. Here’s a brief summary – the credit score is a debt score; it is not an indicator of financial success. I don’t want my son to build debt; I want him to build wealth.

While I firmly believe no credit score is the way to go, I am a realist. I realize if you’re over the age of 18, chances are that ship has already sailed, the almighty FICO score already has its tentacles wrapped around you. Heck, I have one! I closed all my credit card accounts three years ago and have no car payments, but we still have a mortgage so I’m stuck with a score until the house is paid off.

Illustration by Little Man

Illustration by Little Man

FICO really does have its tentacles wrapped around just about everything doesn’t it? Or that’s what creditors want us to believe anyway. Just listen to the commercials. Not worried about your credit score? What is wrong with you? How can you function in civilized society? Here, we’ll give you your credit score for free. Hey, if you use our credit card, we’ll show you your credit score every month so you can totally obsess over it.

Why do creditors want us to believe our credit scores are so important? Because if we become obsessed with our credit, they can sell us more of it! It’s brilliant marketing really. They make us beg for their product – they make us beg to go into debt. “Please, please dear creditor, tell me what I need to do buy more of your product? What do I have to do to prove I’m worthy of your product? Take on more debt so I can improve my score so I can then take on more debt? Awesome, thanks, I can do that!”

As my Charlie Brown obsessed son would say, “Oh, good grief!” (Yes, his Thomas the Tank Engine obsession has been replaced with Charlie Brown, go figure!)

So what to do if you have a debt, uh, I mean credit score? How do we break free from its tentacles? Here are my thoughts…

Don’t play games:

“My mom said I should open up a store credit card, charge a little to it, and pay it off to build up my credit.”

“Always keep a small balance on your credit card, a zero balance will hurt you.”

“You should request a higher credit limit.”

“Don’t settle your debt, that will hurt your score.”

Do any of those lines sound familiar? I’m sure you’ve heard at least one of these and maybe even more outrageous ones from well-intentioned friends and family.

Here’s the truth, the formula used to calculate the FICO score is more top secret than the formula for Coca-Cola. No one knows exactly how it is calculated and it changes all the time.   I don’t know about you, but this ticks me off. This number that is supposedly sooooo important to my life, this number they say I can’t function without – nope, we’re not going to tell you how we came up with it. That’s for us to know and you to stress out about. Just one more reason to break free from its ugly tentacles.

So, all this well-intentioned advice? Might be true, might not. Some might think it’s true because they saw their own score go up or down; but, there are so many factors involved in the formula, do they really know what caused it go up or down?

Take a moment and read each piece of advice again. Do any of them improve YOUR life? Do any of them make you more financially stable or put more money in your pocket? NO!

Read them one more time. Do you see whom they help? The creditors! They got you to open up more cards and get a higher limit; both designed to entice you to take on more debt. And they got you to keep a balance, keeping you in debt. More money in their pockets!!!!!!

So here’s the deal….Don’t Play Games! If it’s in YOUR best interests, do it. If it’s not, it’s just playing games.

Paying off a credit card – no more interest payments – good for YOU – do it.

Making payments on time – avoids late fees – good for YOU – do it.

Closing out credit cards and lines of credits – removes temptation to go deeper in debt – good for YOU – do it.

Get the idea?

Doing what is in YOUR best interest will raise your score sometimes, but sometimes it will lower it (once again, see how stupid this number is?). If you do the things that lower it often enough you won’t have a score anymore (yay!) but you will have money (double yay)!

Verify your credit data is accurate:

An U.S. PIRG survey found that 79% of credit reports contained mistakes of some kind and 25% contained errors serious enough to result in the denial of credit.

Once again, seriously? Seriously?!?! This is what we’re supposed to obsess over? A number based on a secret formula using erroneous data.

“I just can’t stand it!!!” – Charlie BrownAugh1

To find out if your credit info is accurate go to www.annualcreditreport.com to get a free personal credit report in any 12-month period from each of the three credit bureaus. Note this is your credit report, not your credit score. It will list every creditor and the status of each debt account.

It’s a good idea to check these reports once a year for identify theft purposes even if you don’t care about your score. I checked all three of my reports last month in less than half an hour.

If you find any inaccuracies, you can make a request, in writing, for it to be corrected. A word of caution – please don’t fall for credit clean-up scams. The only information that can legally be removed is inaccurate information. You can do this yourself; you don’t need to pay someone else. This article provides some more detailed tips on how.

Get on a plan

Finally, you need a plan. Why? Because creditors already have a plan – a very well devised plan – to take your money. You need your own plan to combat theirs. This plan is known as a budget. Using a written monthly budget, over time, you will be able to make payments on time, pay off debt, build an emergency fund, and save up and pay for large purchases, even a car!   As you do these things, the tentacles will loosen and eventually fall away. Who needs debt, when you’ve got money?

 

Let me touch on a couple of special situations – buying a home and needing a car now.

Buying a Home

Let’s talk about buying a home. While it is possible (and totally awesome) to save up and buy a house with cash, I’m not saying you need to do that. A home mortgage is ok. But your good, bad, or no credit score should NOT be your deciding factor on whether you are ready for home ownership.

So when are you ready? Here are Dave Ramsey’s recommendations to keep the American dream of home ownership from turning into a nightmare. You are ready to buy a home if you are out of debt, have a fully funded emergency fund of 3 to 6 months expenses, can put at least 10% down, and can get a monthly payment of no more than 25% of your take-home pay on a 15-year fixed-rate loan. There is nothing wrong with continuing to rent until you are ready.

If you have a good credit score, finding a lender to give you a mortgage won’t be a problem, but please make sure to follow Dave’s recommendations too.

If you have no credit score or a low score, but you can follow Dave’s recommendations, you are ready to buy a house, now you have to find a lender with a brain. A lender who gets that you are more than your number – a lender willing to do manual underwriting. They exist! Churchill Mortgage is just one example.

Need a Car Now

“My car died, I need a car to get to work, but my credit is horrible.”

If your low credit scores are hindering you from meeting your immediate needs, I truly am sorry. I wish I could take a chain saw to the credit score tentacles and set you free. But I can’t and you can’t. You can start making changes in your life to slowly wiggle free, but it takes time.

First, think outside the box. Is there anyway to get by without a car for just a few months? Borrow one from a family member? Take the bus? Get rides to work from a friend?

Will it be inconvenient? Yes. Could it be a turning point in your financial life? Absolutely.

Imagine this scenario. Say you can find alternate means of transportation for four months. Say you “pay yourself” a car payment of $250 during that time. (Don’t tell me you can’t, two seconds ago, you wanted to make a payment to a car dealer.) So now you have $1000. Now you can pay cash for a used car, credit score be damned. Is it a nice car? Nope, not even close, but it will get you from Point A to Point B for a while.

Now this is where it gets cool. Now you have a paid for car. Keep making the payment to yourself that you would have made to a lender. After five months, you’ll have $1250, sell your car for $750, boom, $2000 car. Keep rolling along like this and you’ll have a paid for sweet ride in no time. Take that, stupid credit score!  Check out this neat little video that shows how you can retire rich by refusing to take out a car loan.

 

Ready to break free from your credit score tentacles? Ready to build wealth, not debt? I’m ready to help. Contact me today!

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