I hope that it's only amnesia
Believe me, I'm sick but not insane
~Pousette-Dart Band
People often ask me how to improve their credit score.
My usual response is why?
If you need to improve your credit score, it usually means you have lousy credit.
Before trying to fix the score, people need to ask themselves how their credit got so bad to begin with.
Some would be better off not having access to credit at all. They can't handle it.
I'm not talking about people who got behind because of medical bills, life emergencies, or unemployment. Those are people with a good credit history who had something bad happen to them. They deserve a second chance.
I'm focused on the other category: people who spend beyond their means or spend money on stupid stuff.
I don't want those people to have access to credit; if they do, they will get in trouble again.
They need to figure out how they got in trouble the first time.
They need to look at themselves and understand some basic principles about finance.
I tell people to spend less, pay for things in cash, start budgeting and write down all of their expenditures.
Many need to learn the difference between needs and wants. People need food, clothing and shelter. They don't need the latest IPad.
People often get into trouble trying to keep up with friends and neighbors who also make stupid spending decisions.
Once that spirals starts, it rarely stops. Those who are caught up in it spend all of their lives trying to keep ahead of creditors.
And they think that getting more credit is their answer.
My advice rarely goes anywhere. Particularly with those out to impress their buddies.
I run into people who blow all their money every weekend and have no long run plans.
Gamblers have a term for people with that type of financial outlook: suckers. They call the money that these people spend "sucker money".
There are a lot of suckers out there. Likewise, there are a lot of people who want to take advantage of them.
If you have a lousy credit rating, there are a host of the sub-prime lenders, high-interest credit card issuers, check cashing companies and payday lenders dying to get their hands on you.
They will give you more debt and more bills to pay.
A cottage industry has developed among companies claiming they can improve people's credit scores.
I've never seen these companies achieve any real success. They prey on suckers looking for quick and easy solutions. Since the companies charge a hefty fee for their services, they get debtors even further into debt.
There are two simple ways to improve your credit score. One is to pay your bills on time. The other is to not have as many debts. If you don't have many creditors, it is easy to handle what debt you have.
I give that advice often. I then watch people's eyes glaze over.
If I were to turn evil and offer them an easy credit fix or a payday loan, I'd become a billionaire.
It is not easy to get people to take a hard look at themselves. Addiction to credit is like addiction to anything else: people usually won't get help until they bottom out.
When people with poor credit get themselves together, they often get amnesia about what got them in trouble. They make the same mistakes over and over.
That is not amnesia; that is insanity.
Don McNay, CLU, ChFC, MSFS, CSSC is one of the world's leading authorities in helping people deal with "Big Money" issues.
He is currently on a book tour for Son of a Son of a Gambler: Winners, Losers and What to Do When You Win the Lottery.
McNay is an award winning, syndicated financial columnist.
You can read more about Don at www.donmcnay.com
Follow Don McNay on Twitter: www.twitter.com/Donmcnay
Richard Zombeck: New Plan To Help Homeowners: Here We Go Again
Based on the past dismal failures of mortgage-related rescue plans proposed by current and past administrations, it's difficult to believe that the latest set of plans will be any more successful.
No wonder I couldn't borrow 20,000 from my credit union to add to the assets in my bank account to buy a small rental house. I guess my financial history is way too good to get a good fico score! Or maybe they just didn't want me taking a chunk of my savings out of their institution?
Remember: banks these days think that usury is a splendid idea. A credit-score can be used to "justify" this usury, and to lock the debtor into, well, "debtor's prison." To the bank, this is delightful: "the money just keeps rolling in." If you want to understand how this game is played and what damage it can do, read just about anything that Charles Dickens ever wrote.
So, Don, even though your premises are true to a point ... people must manage their borrowing and frequently don't ... I think that you also picked-up a very broad brush of pastiche and short sentences. We really do have a society-problem here. (Not to mention "a very bad data base.")
The process -should- be that, in order for a creditor to file a report against you, you must have the right to counter the report before it "sticks." The credit reports system should be regulated, and audited. Substantial changes of financial position should be noted. The very-powerful incentive that a lender now has, to attach to you a "scarlet letter" that's as big as he can make it, must be severed.
When the banks took our bail out money and then denied consumers and businesses loans, they had to create a reason to do that. And the reason they cited in denying 1000s of loans was credit score. 10 minutes after the banks received their bail out money, the credit bureaus raised the max score by 100 to 150 points and the effect was that those with excellent scores could still borrow. Those with very good scores could too. But no one else could. And so the banks got to keep the money. For the same reason, the SBA denied loans to otherwise viable small businesses and routed the money instead to Beltway Bandits and consultants who fronted for big business.
And voila - overnight the banks and credit bureaus ushered in the new age in banking: No risk lending. Banks now collect their 8 to 33% interest with absolutely no risk to themselves.
But the credit score system is clearly rigged in favor of the financial companies. Do I have any input over my credit score? Not really. Can I change it? No. Not unless I get some debt and pay it off. In fact, if I don't use credit cards, my score goes down. That's the opposite of logic. If a company wants me to pay something that I contest, it still goes on the credit report.
But beyond that, it's a nebulous game, based on some kind of financial system that has never been fully explained and most people don't understand. Usually, when you play a game, it's nice to know the rules.
Some people think you can't deal with those destroyers ... but the fact is, you CAN do it, if you're as patient, studious and strategic as they are. If you want to get a peek at how that's done, you can read every other page of my book for free.
http://www.scribd.com/doc/25443175/Debt-Hope-Down-and-Dirty-Survival-Strategies-Evaluation-Version-Complete
Now, insurance companies and employers get to look at your credit score to see if you are insurable and employable. How's that for a punch in the gut?
Seriously..... why is this scam still allowed to go on in this industry and in today's society?
And every time you use that oh-so easy to use iPhone app . . . heh, heh, heh.
Think like an insane person and it makes perfect sense.
Decided to buy a new house and my credit score was not particularly impressive for a guy with decent assets with no debt.
Found a community banker, like those that Arianna is encouraging people to use, who knew me and got me the loan.
I had "moved my money" to some of the local banks years ago. It would be very hard, if not impossible, for me to go the other way now.
Now I have a great credit score and deluged with credit card offers from all those banks who turned their noses up.. Don't want their credit cards and don't need them.
I'm glad to live in a small town where some of the bankers still deal on the "know your customer" basis. If you look hard enough, I am sure there are some where you live.
Our family is very lucky - house owned out right, no car loans, credit cards paid off every month - and guess what - we get a letter from one of our insurers saying that if we worked to improve our credit score we would be able to qualify for lower premiums. What the ((**%&%$) are we supposed to do?
These "scores" are being used to rationalize higher consumer costs regardless of how the consumer is behaving.
We've been told all sorts of stuff - we don't have ENOUGH revolving credit balances is my personal favorite.
Our officer at the bank where we have our business accounts just laughs now and as long as she knows we're good I will settle for that because I know that no matter how I dicker around with my record, someone is going to come up with a novel excuse for charging me more money.
Your debt/equity ratio (which in Don McNay's case, and probably in yours, is basically "zero percent") ought to be a "stairway to heaven" for a lender. If you've got money in your pocket free-and-clear, then the odds that you're going to default on my loan ought to be zero, too. Therefore, if the credit-score system were actually what it is supposed to be, it would be a "Reader's Digest Condensed Version" of: "hell, yeah!" :-)
But it isn't. The score is, variously, a "Mark of Cain," a source of slander, a mechanism for deceit, and, basically, "an intentional tort."
The last sentence is poetical - very nicely written.
It gets better - I'm and ex banker, commercial & investment, and yes - we're net zero debt/equity ratios types. Always have been and not about to change to gratify ratings agencies.
Funny how these ratings agencies, personal and investment, have gotten off track. It can only be because their compensation is in direct relationship to activity that no longer has anything to do with providing accurate credit profiles (as in S&P, Moody's, etc.) but reveals some under handed method of acquiring tribute.
I'll tell you what brought me out of my corner: "They need to look at themselves and understand some basic principles about finance." Every underfunded (some grossly) Defined Benefit Plan that I've ever encountered had an Actuary's report attached to the plan's 5500 report. When Mr. McKay has cleaned up the mess in his own back yard, he can come back and lecture the rest of us. Yes, I know the difference between a "Certified Life Underwriter" and an Actuary - but they've formed a community where most have proven to be dismal prognosticators and flacks for the insurance industry.
I once had excellent credit -- the highest. Then a lender committed fraud, which we have now taken them to court for. Still they used negative reporting as a threat -- "Pay or else." Numerous attempts to get the credit bureaus to remove the false information have gone ignored. The system is gamed to benefit the lending industry. The bureaus will always side with the lenders, even if you can provide them with court case information.
The credit bureau industry needs substantial reform.
In the current environment, there is no significant difference in the scores at the time of the mortgage between those people defaulting on their homes and those not defaulting. Even before the recession there was practically no difference.
"According to a Fitch study, the accuracy of FICO in predicting delinquency has reduced in recent years. In 2001 there was an average 31-point difference in the FICO score between borrowers who had defaulted and those who paid on time. By 2006 the difference was only 10 points. Meredith Whitney of CIBC World Markets has called the FICO score "virtually meaningless". Some banks have reduced their reliance on FICO scoring. For example, Golden West Financial (which merged with Wachovia Bank in 2006) abandoned FICO scores for a more costly analysis of a potential borrower's assets and employment before giving a loan. According to Richard Atkinson of Golden West, "some of our best borrowers had low FICO scores and our worst had FICO scores of 750"."
http://en.wikipedia.org/wiki/Credit_score_(United_States)
One thing that needs to be looked at is credit reporting. The fact that there are 3 credit agencies and some things are reported to some and not others, creating a different score across the board, is unknown by a lot of people. If a person is trying to open a new line of credit they essentially don't know which score will be looked at. Granted it is important for the individual to keep track of such things the entire process has to be easier than what is currently being done.