Do Not Focus on that FICO score. Do Not go into Debt, it is a Trap!

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Do Not Focus on that FICO score. Do Not go into Debt, it is a Trap!

Today in mainstream America, the FICO score is a commonly recognized brand name. Hundreds of millions of dollars have been spent on marking, and PR. No matter where one looks these days there is someone suggesting theneed to guard one’s credit score, build the credit, monitor it, fix it, and so on. There seems to be so many “experts” who agree that a “superior” credit score is an indicator of smart money management, winning at the money game. It is as if a high credit rating makesone an exclusive member of some kind with a right to certain perks. That kind of thinking could not be further from the truth. A true measure of wealth, being smart with money, or winning financially is a person’s net worth. While becoming wealthy it is critically important to ignore common “free” advice given freely by poor and broke people. One of the worst pieces of advice that I got was to build up my FICO credit score.

What goes into a FICO score? In a statement before a Congressional Committee Tom Quinn, who is the Vice President of Scores FICO, testified that “the data used to calculate the FICO score can be grouped into five primary categories as outlined below. The accompanying percentages are meant to give an indication of how important each of the categories is in determining a [FICO] score (Quinn, 2010).

--Payment history (35%)

-- Amounts owed (30%)

--Length of credit history (15%)

--Pursuit of new credit (10%)

--Mix of credit (10%)”

Notice that the FICO score is based only on debt? That means if one’s income tomorrow will double because of a promotion, the score will not be affected, yet this score is used to show credit worthiness. Financial counselor and author Dave Ramsey calls the FICO score an “I Love Debt Score” because the only way to have a score is to have debt and stay in debt. Plenty of controversy surrounds the issue; however the marketing departments of the credit corporations have done a remarkable job of brainwashing their consumers into thinking that a debt score is necessary to survive in this world. Not many people are immune to such marketing even many college broke finance professors have taken the bait and preach the message of indebtedness.

When I was much younger and was just starting out, I also was duped and became obsessed with building my FICO. As soon as I could get a credit card, I got one. I had a job and started spending and paying off the card balance every month. I was ecstatic when I got a card that when logged in online to my account there was a credit score meter that told me what my score was. It would slowly grow over the days, weeks, and months. Occasionally,it would drop a point or two so I became hooked to this little game of growing my score. I would purchase something, feel good about it for a couple of hours and sometimes days, and what made it feel good was that my score went up. I felt like I was making progress and was in control of my future. Then in a few weeks I would pay off the credit card as soon I got paid. What I did not care to notice was that my habit of spending was increasing and my habit of saving was going away fast, and every time it was getting harder and harder to pay off the debt. The price of an item was becoming less relevant. This is not unusual, in fact, “studies find that when you use a credit card, you buy more stuff and you're willing to pay a higher price for it. McDonald's began accepting credit and debit in 2004, diners who paid with plastic spent $7 a visit on average vs. $4.50 when they paid in cash. A 2003 survey of supermarket receipts found that credit-card shoppers rang up 30% bigger bills and carted out twice as much in nonessentials as cash buyers did. In an experiment that pitted cash and credit-card bidders against each other in an auction for Celtics tickets, Drazen Prelec and Duncan Simester of MIT's Sloan School of Management found that the credit-card payers spent twice as much as those who used cash” (Rosato, 2008).

The more I would let the need for instant gratification take over my rational thought, the more I would tell myself I deserved something long before I truly did. Then one month I could not pay off the whole balance. I paid some interest that month but what was worse was that a habit had formed, a very hard-to-break habit. My score grew very high, but my savings were gone. At about that time I decided I needed a newer car, a totally emotional decision that was backed up by an attempt to be logical. Many years later in sales training,I would learn that people usually buy emotionally and try to rationalize it with logic. A lifestyle of being in debt and trying to build a credit score up for the day I wanted to buy a house was in full throttle, and I found that I had no down payment for a car. With a very good score I got approved for a loan to go into more debt for a car that I could not afford. To clarify, having read books written by wealthy people, and meeting them, it became clear to me that when wealthy people say they can afford it that means that they can pay cash up front. Poor people say they can afford it when they think they can possibly make the payments.

Years later, I wish I got some different advice on how to win financially. I was not dumb, I just did stupid things with enthusiasm but because of some key formulas in my mind’s computer were instead viruses, figuratively speaking, planted by intense marketing, reinforced by people that were in a position of authority and also infected with the same bad advice. Being a lot more mature now and being actually an insider in the financial world, I know that one of the worst pieces of advice that I got was to build up my credit score.

References

Quinn, T. (2010, March). Credit Scores and Consumers. FDCH Congressional Testimony.

Rosato, D. (2008, July). Life Without Plastic. Money, 37(7), 90-95.

Great YouTube clip to watch...

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