This is an opinion piece from Steve Stewart, Personal Finance Architect at MoneyPlanSOS.com. As you will see from his article, he is very passionate about helping people avoid debt and the credit trap.
Stop the insanity!
That’s what Susan Powter used to say and it’s a saying that repeats in my mind every time I hear someone say “I need to build up my credit score” or “Ding your FICO score”. UGH! Stop, please.
A company that sells to companies
FICO is the Fair Isaac Corporation, a company that collects information from creditors about consumers. They sell that information to other companies and to creditors that want a quick, easy way to evaluate a consumer’s ability to repay a loan. Simply stated, it is a company that sells to companies.
When was the last time YOU used a FICO score?
Can you think of one time you used your FICO score? I don’t mean your score was used by someone else for you but that you actually used the 3-digit number to do something? Never, right? The credit score is not for you, it’s for creditors. Admittedly, it is a simple, quick, and cheap way for a creditor to quickly find out your payment history – well, part of it at least.
A one-sided measurement of debt
There are five major components to a FICO score: Payment history (on debt products), amounts owed (debt), length of credit (debt) history, new credit (debt), and types of credit used (debt products). In other words, it grades us on debt products and debt products alone! Doesn’t that seem a little lopsided to you? Kind of a one-sided measurement of debt, don’t you think?
Your score is good enough unless you don’t make payments
Here’s where the insanity begins. We have been taught, preached to, and almost violated with seminars about “building your FICO score” so you can qualify for a loan. Truth is, if you make your regular monthly payments then you are good for a loan. It’s a creditors job to sell you a loan, so they will do whatever it takes to “get you into that sweet deal”. If a creditor doesn’t like your number then he can USE IT AGAINST YOU and charge you a higher interest rate. Translation: A FICO score can be use to DISQUALIFY you for the best rates.
You don’t need a FICO score
What did Grandpa do when he and Grandma bought their first home? (Note: I am making an assumption that he didn’t build it himself and had to take out a reasonable mortgage). FICO didn’t exist until 1956 and wasn’t widely used until the mid 1970s. Shoebox Credit and Manual Underwriting still exists today, although it does take more time and effort to go through the process. You could bypass the entire loan process by saving up and paying cash for whatever it is, but that’s not American now is it? (Yes, you should be hearing my sarcasm).
Buy a house without a FICO score
The Equal Credit Opportunity Act was enacted in 1974 to protect consumers rights when applying for credit. In Regulation B of the ECOA it states that creditors are required to consider anything you present that demonstrates your credit worthiness. One such service now exists that is on the side of the consumer: eCredable. This 3rd party verification service will literally change the credit reporting industry because it creates a credit rating based on ALL our payments, not just those based on debt products. Your electric bill, your cell phone payment, even your monthly rent check can be used to prove your credit worthiness with eCredable. Essentially, you could graduate from college with no credit history and still prove you are credit worthy for the best interest rate on a mortgage or prove to an insurance company that your lack of a credit score does not mean you should be charged more for car insurance. What about employment? Same deal, prove your brilliance to the interviewer by having zero debt and a strong record of making every month’s rent payment on time.
Everyone should be eCredable
OK, that’s not entirely true. Only those who need to prove their credit worthiness for a mortgage refi, better car insurance rate, or possible employment opportunity will truly benefit by using eCredable. But it is 100% true that you can get through life without ever going into debt except for a reasonable mortgage and still qualify for the best rate around.
You would be weird, but without any debt you wouldn’t be broke!