I don’t know how it escapes the masses that a part of our problem is the way that we evaluate individual credit scores in the first place. Here we are in the midst of the most profound and far reaching credit crisis that many of us will ever experience in multiple lifetimes, but nobody is talking about personal credit and the way that we “earn” our own personal credit scores.
First of all, let me just start by saying that the 3-Bureau System we have has served its purpose, and has done so fairly well in many ways. On the other hand, it is not only failing, but it is contributing to the downward spiral that we are in right now. I know enough people that have incredibly high credit scores (above 750 or above) to know that the credit system is not teaching anybody anything except how to keep good credit. In that way, the system is serving itself…the credit system, that is. Many people are so worried about their credit scores that they literally worry themselves sick about it. These same people work hard, have nice cars, have never been late on a mortgage payment, kids in college etc. They are afraid of the “bad things” that will happen if their credit score drops to a number. They don’t even know what number is bad or what is going to happen if they miss a payment here or there. While I am not advocating late payments in any way shape or form, I am suggesting that it is not worth getting sick over and losing sleep over.
The real problem is that many people have great credit scores but they don’t understand money and finances and that is the real problem. If you are focusing on your credit score, but don’t understand money, then you are missing the point completely. It’s kind of like the testing for students across the country. There are Standards of Learning or SOLs in many states and one of the criticisms is that we are teaching our children how to take the test versus getting an education. So what we find in some, not all, cases, is that we have students who know how to take an SOL test, but are not learning materials. Basically at that point we are teaching the wrong subject…or to put it another way, we are sending the wrong message to our students. Among other things, we need to teach children how to learn as well as what to learn…but let’s get back to credit. The problem is that we have many people who have great credit, but they have no idea why they have fought so hard to have great credit, nor do they know how to leverage it to help them gain financial advantages other than getting a great interest rate on their next automobile purchase or refinance.
Don’t get me wrong, those are great things, but if that is all you are fighting for, then you are missing the big picture. You see, we have been taught to fear the credit bureaus over the past 20 years in a way that is becoming dangerous to the system, because we fear the system without knowing why. More and more people tie their self-esteem to their credit score and it is a false sense of pride or guilt depending on where you fall and what your score is. The truth is that you shouldn’t tie your self esteem to your credit score one way or the other. Your credit score has nothing to do with the kind of person you are and does not reflect what is really going on in your life, or has happened in your life. Your credit score is a continuously moving snapshot of an ambiguous cross-section of financial data. Now, there are some things we know about credit scores, but it is meaningless if we are not financially educated.
Among other things, I am suggesting that part of our credit score should be based on a standardized test for financial literacy…and yes, I know I just dogged standardized tests a few paragraphs up…But it shouldn’t be the ONLY thing that we use to judge credit scores…it should only be a part of it. The way that the credit system is currently set up, the credit of more and more people will be going down the tubes with foreclosures and late mortgage payments becoming a growing daily occurrence. How is this helping our situation? It isn’t, so under the heading of “If you aren’t part of the solution, you are part of the problem” then our current credit system is definitely part of the problem.
As an entrepreneur I have experienced wild swings in my personal income that are to the extremes of both poles. It has gotten to the point that when someone tells me they are an entrepreneur I joke back and say, “Yeah, my credit sucks too!” More often than not, I am met with a hearty chuckle. If you have never started a business or pursued an entrepreneurial endeavor, you would be amazed at how ridiculous lending requirements are for small business owners. If all you did was watch the news, you might believe that money was falling like manna from heaven for business owners. The truth is not quite that pleasant.
It is true that there is money for many first time entrepreneurs who have great credit and a good DTI and collateral. Not a problem. The challenge is that most businesses fail in a relatively short time and all that the “system” did was create a person with horrible credit out of a person with stellar credit. If you knew nothing else, that would tell you that our system is not working well. But let’s keep the scenario going. Now we have a person who had great credit and strong entrepreneurial drive and if that person fails, then they carry a stigma with them for many, many years. You may say, “Ok, that is the risk that they took” and you may be right. But the point is that the system rigorously penalizes folks who strike out on their own in the name of capitalization. We are not very tolerant of those who fail, which is in opposition to the idea of capitalism in the first place. It appears that as a nation we embrace capitalism as long as it is successful but we toss aside those who don’t make it, like yesterdays news.
Back to credit…there are many cottage industries popping up to circumvent the problems concerning credit, like credit repair companies etc. Whether you believe in these companies or not, which is a whole other story, you have to admit, that they wouldn’t be here if the system was not in need of a total overhaul. Now, instead of people dealing with their financial ignorance, we are making the problem worse by encouraging them to work the system against itself. It is a logical step, but is indicative of our deep psychological need to have instant gratification with regards to credit. It is also indicative of our refusal to deal with the real issues at hand, instead of becoming financially literate; we displace blame and don’t take accountability for our actions. WONDERFUL! (Now, we are encouraging a lack of integrity to support our lack of financial knowledge…this can’t end well!)
Kids and credit. This is a sore spot with me. To me credit is like tobacco in that it needs more than a gentle warning to those who are going to use it. It is a dangerous thing and needs to be used with great caution. We teach so many things in school, but we don’t do an adequate job, even at the collegiate-level educating and warning students about the hazards of credit. This needs to be addressed the same way that students are indoctrinated into college life. A short class or lecture on credit would be a great starting point, but is certainly not enough. Periodic and consistent messages should be programmed into students about credit…as I write, I can envision a program that parallels the “safe sex” public awareness campaigns around the country…THAT IS THE LEVEL OF AWARENESS that we need to employ! Anything less is a national crime against ourselves and our future!
If you don’t believe that the system is corrupt, just look at the amount of identity theft that has popped up in the past few years and also the products that protect credit and identity theft. This is crazy! Does anyone else see a direct correlation with the broken credit system and all of these problems??? Enough is enough! Let’s put our heads together and look for a better way to deal with credit. The system had the right concept in place, but it has gone unchecked for so long that it is out of control. We can’t expect things to get better by just sitting back and doing our best to keep our own credit scores as high as possible. It is a false sense of security. The real answer is personal knowledge of financial principles, not credit scores. If we encourage the education of personal finance and wealth building principles, then credit scores will increase. If we keep focusing on credit scores, the scores will most likely keep going down as will the knowledge that we need to bring the scores up in the first place.
If you are not a part of the solution, then you are part of the problem….Join me in becoming part of the solution.
Respectfully,
Robert D. Cass
V: 757.729.3124
E: rcass@LocalRealEstateDeals.com
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