The Financial Corner

It’s All A Game

By Richard & Michelle Dix

Don’t buy into the lies. See things for what they are. That is what you must remember when dealing with credit. Credit is a game that has been designed to keep most people at a disadvantage. I know it hasn’t been marketed that way, because we look at good credit as something desirable, something that we should be entitled to, but have you ever considered that the credit scoring system was designed as a way to enslave you. In fact, in the case of new workers and most minorities, the credit scoring system will not be beneficial due to the factors that go into creating the formulaic expression. Simply put, these individuals usually do not have the wherewithal to even play the game. Here’s why;

35% of the score deals with punctuality of payment. The primary payment that is looked at in this category is your mortgage payment – not rent.

Typically, minorities have fewer mortgages than non-minorities and for those that do, a great majority of them have higher rates of interest attached to them, which lends itself to higher payments, and a greater likelihood of falling behind on a payment if an unforeseen event arises. Minorities are still the last hired and first fired, even in the new millennium. They still struggle to make what their peers make in terms of salary and they have to endure longer periods of unemployment than their white counterparts. Top that off with the fact that sometimes they inherit the bad credit decisions and lifestyles of the previous generation. So, suffice it to say, survival and not good payment history is often at the forefront of their experience. In these circles, good credit is more of an afterthought or simply viewed as a means to an end, a game that can be played only when needed.

Minorities aren’t the only ones at a disadvantage; so are new workers. You remember how it was when you were entering the job market. The pay wasn’t that great and you were likely starting from the bottom even if you showed an immense desire to succeed. Oftentimes workers just entering the job market find themselves staying with a job only as long as they can afford not to. When better opportunities present themselves, they jump ship. Lenders know this, so often credit is hard to come by because the new worker is viewed as unstable. They surely aren’t going to be offered a mortgage just because they found a good job – they have to be tested first.

When dealing with credit you don’t get to play the game by the rules that make sense to you. The system is not designed to count what you deem important. Perfect rental history doesn’t count toward payment history. In fact, living within your means and not incurring debt is not even encouraged. Without a proper payment history, you lose 35% of the “plays” needed to win this game, and if you decide to play and get hurt (lose your job and have to pay your bills late on numerous accounts) your score will fall more than the 35% that is weighted in this area. Now isn’t that a trip.

As you continue to turn the pages on the credit system you will find that the next 30% of your score is based on the amount of indebtedness you have in relation to the amount of credit you have on record. Usually, this is where the real trap occurs. For those of you who aren’t getting turned down for reasons of payment history, you may be getting charged higher rates due to your debt to equity ratios being too high. Basically, you have run your balances up too high and have little or no available credit on the books. But don’t you worry, the lending industry has an answer to this situation -- approve your loan at a higher rate of interest (more money for them).

The practice of offering a loan at a higher rate of interest is a prime indicator that lenders are not out to help you, the borrower. Think about it. Your credit wasn’t bad enough to turn you down, but for some reason your score alarms them and they think you might not pay them back, as agreed. So instead of giving you favorable terms – terms that would assist you in times of difficulty, they decide to approve the loan, but at a higher rate of interest which pushes up the payment on the loan or stretches out the time of indebtedness or both. Either way, you lose.

Just in these two instances – payment history and credit balances -- we’ve shown you where 65% of the credit score game is lost or won. If you have little or no reportable credit that you are paying on time, or you have maxed out the credit you have been given, you really aren’t in the game; you are just getting used by the system. To top that off the next 15% of the credit score is based on length of credit history. That’s right, 80% of the credit scoring system is designed to work against the average Joe/Jane. No history, small balances and just entering the game puts you at a major disadvantage, and we won’t even begin to talk about those that have been in the game but have struggled along the way.

If you are still interested in improving your credit score, try and avoid the next mistake. Stop falling prey to businesses that get you to base your purchasing decisions on the fact that they will “report your good credit.” They may be telling the truth, but most of these businesses know; the type of credit you take out matters. Ten percent of your score is based on the type of credit you have on record, but the types of debt you incur is weighted differently. For instance, more credence is given to a mortgage vs. a car loan. Also, a credit card is better than having a loan for a stereo. The credit scoring companies make decisions about how you will handle credit based on the types of loans you have on file. So while you may be only interested in establishing your credit, make sure you know the difference between the following:

Installment Credit – has a fixed number of payments. These types of loans are typically home mortgages, construction loans, auto loans, student loans and other personal loans. These are the loans you want on your credit. Usually one real estate loan followed by an auto loan is the ideal situation for someone looking to have good credit.

Revolving Credit – does not have a fixed number of payments. The most typical debt instrument in this category is a credit card. You can also find Home Equity Lines of Credit in this category as well. You normally do not want more than three of these types of credit lines on your credit file at one time. If you must get a credit card, make sure it is with a reputable bank and not a company known for high interest cards, and by all means avoid those companies that require you to deposit funds into a savings account for the sake of “improving your credit.” It is a gimmick designed to take advantage of you. Not only are they making money lending you your money, but they are also making more interest through the use of your funds. Lastly, you are actually penalized by lenders when they find these types of cards on your credit profile.

Consumer Finance - refers to any company who lends to consumers. While these lenders offer the most easily attainable credit, they should be avoided. They typically lend at higher rates of interest and they usually make their money by targeting new, uninformed, or consumers with “less than perfect credit.” The mere presence of these lenders on your credit report makes a statement as to the category you fall in, and you can rest assured that it isn’t “preferred.”

The final 10% of your credit score is determined by how much you apply for credit. That’s right; inquiries bring your score down as well.

As you can see, you have your work cut out for you if you are trying to “improve your credit.” I would suggest you choose a more realistic goal of getting out of debt as opposed to playing the credit game, but if you insist on playing, here is the formula for success. In a two year period if you have excellent payment history with a mortgage, a car loan, and no more than three credit cards (2 majors and a gas card) with at least 70% of the credit lines available, then you should, if everything goes as planned, reach your goal of having good credit. However, you could use that same energy and within the same time period or less, find yourself in a position of being debt free, with the exception of your mortgage (but you can pay that off early too!).

The choice is yours, you can play the game the rest of your life and subject yourself to bondage or you can finally start to enjoy a life worth living. You decide.