| Live for you, not your fico score. |
[Apr. 17th, 2008|01:12 pm] |
I've been arguing with people about debt recently, and it's a bit frustrating.
Some history for you, for context.
I got my first credit card when I was 17. I was $3000 in debt by the time I moved out of my parents house at age 20. At age 23, it was closer to $20k. At 25, it was $40k. I paid it all off in mid 2001 with a windfall. I then lost my job, sold my house and ran it back up to 12k.
At 29, it was back up to 30k.
During this time, I acquired a lot of stuff I've since thrown away, given away or sold. The debt paid for a pair of lawyers, a huge tax bill and a lot of stupid mistakes because I spent money before I earned it. I made a *lot* of mistakes.
During this time, my credit score was (and still is) amazing. I had access to well over $100k of credit, and could basically buy anything I could point my finger at.
About two years ago, I was driving down Interstate 95 to a friend's wedding and I heard Dave Ramsey yelling at people who made $30k a year driving $40k cars. I was wondering how anyone could be so dumb. And then another person called and was complaining about 30% interest on credit cards and how overwhelmed they felt. Haha jerk, I said!
Then I went home and tallied up all my debt. I was $22k in debt with credit cards, and $20k in auto debt with a brand new car in my driveway. A third of my net income was going to pay debt. And because I just landed a hot new job, I had a brand new TV in my living room. I hadn't even gotten my first paycheck yet.
I was the people I was making fun of right before one single thing blew down their financial straw home. I was three missed payments away from having 30% interest rates - reading the Terms and Conditions on my 3.99% fixed rate card, I saw how they could raise my rates if there was a problem with another debtor (including mistakes).
I saw the light, and began paying everything off at a furious pace. I returned that new TV. I paid over $1500 a month towards debt. I sold a bunch of stuff, and in 10 months had it totally paid off. When I sold my car last month, I removed the only monthly debt left. I have a saving account with more money in it than I've ever had at once, and it continues to grow. Because of the lack of debt, I've been less tied down to jobs I hate - I could take risks I would otherwise not be able to handle if they went poorly. This has led me to my job in Boston (via a few other companies) where I make about double what I made when I had this initial shock.
The arguments I've been having with people come from the question "How can I improve my credit score?" Invariably, some wiseacre come on and says to get a credit card and don't pay it in full every month. This is what got me in trouble. I listened to the people that were clever. I made the calculations and figured out all of the numbers. I was smarter than the banks, I thought.
I am not smarter than the people that sell things - my discipline is not as strong as the knowledge of advertisers and the peer pressure put on me to buy expensive shit and keep up with everyone else. The thing is, everyone else is broke. Most people I know don't have an emergency fund and are 1 paycheck away from needing to borrow money. When their credit runs out, they will be faced to ask for favors and live on sofas. I knew all of the rules about money - I knew the math, and I can explain what a beta coefficient is when we are talking about CDs vs Market Index funds. But I was flat broke.
Personal finance is not about the math, it is about the action. I was playing the arbitrage game on my credit cards and digging a financial hole one dinner out at a time - buying things I didn't need to impress people I didn't like. And justifying it by saying my credit is good.
Something I've discovered is that you don't actually need good credit to live, because if you live debt free, you don't often need to borrow money. There are exceptions to this, of course, I'll be getting a mortgage in about a year, but it will be for a much much smaller amount than I am able to qualify for, and my down payment will be enough that anyone with common sense will write me a loan. A manually underwritten mortgage with a reasonable monthly payment and 20% down will get you a mortgage, so long as you don't have a negative credit history. A negative credit history is *not* the same as no credit history - if you have none, a steady job, and the requisite down payment, you will be able to buy a home, I promise.
So I ask for you to start living for your future, and not your FICO score. Don't get wrapped up in the mess of credit cards, car payments and consumer debt. When you question this, think I'm full of crap, ask yourself what you would do differently if you had no monthly payments. If the answer is something other than "nothing", please please consider making it so you can do that thing.
What brought this on is that today, I checked my FICO score. It's averaged at 799.66 between the 3 credit bureaus. People say that closing credit cards and killing your debt is bad for your credit, however a score of 800 is something that people fall over themselves to lend cash.
My goal over the next year is to lower it by staying out of debt - to let things fall off - close open accounts, and get my name off as many credit card companies lists as I can. In the past 60 days, I've paid off a car note, closed 3 credit card accounts (zero balances, just sitting there) and had my credit checked at least 5 times by apartments, employers, and banks. My score only seems to be rising. When I canceled some of my cards, the "save" department actually told me my credit score may go down as a motivator to not only keep the account open, but to use it. They know the game better than the other players - and the only to truly win is to not play (thank you WOPR.)
Some idiocy I see on the report that I'd like to share with you, and a reason to not trust the reports:
In the "what's hurting you" category at TransUnion:
"You have not established a long revolving credit history."
Oh, really? Then you say this, "Your first revolving account was opened 13 Years, 1 Month ago."
Huh - 13 years on a 31 year old seems pretty long to me. And this is taking away from my score.
Wait - on the other side - it says what's helping me:
"You have an established credit history. Your oldest account was opened 13 Years, 1 Month ago."
FICO scores are computed by credit reporting agencies, who are primarily funded by banks and lenders. Their mission is to protect themselves from deadbeats and to find people who they can lend money to and will be able to pay it back. Part of that equation is to find people to borrow money from them - and if they can make you think you need it to keep your credit score healthy, it works for them in both ways.
Don't live for your FICO score, live to do what's right. Pay back money you borrow and make your debts as small as possible to the least evil people you can. When you borrow money from someone, it makes you their slave. Don't do it.
(PS your car drives better when it is paid for) |
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