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Monday, February 09, 2009

The Present, The Future and The Myth That Your FICO Score Will Not Matter

There is a myth being sold to the American people regarding their FICO credit score.  Millions of Americans now find themselves in a situation where because of job loss or other economic hardship they must prioritize how they pay their bills.  I see an endless stream of financial experts who are telling people to pay for food, shelter and transportation and forget about student loans, credit card bills and any other installment or revolving debt because preserving your credit is a futile exercise. First, let me say that I understand, empathize and agree with the need to prioritize food, shelter and transportation.  But do not lead these poor people down the primrose path to believe that the damage they do to their credit will be harmless. The myth is sold under the guise of don't worry, there are so many Americans in similar situations that credit scores will simply have to be a thing of the past.  The truth is absolutely nothing could be further from the truth.  The truth is that the credit markets (home mortgages, car loans, etc.) will after this economic storm passes be more highly governmently regulated than at any time in our lifetimes.  In plain English, that will mean that before a bank can give you a mortgage, it will have jump through a series of government regulatory hoops.  Government programs and government oversight has never and can never be subjective.  It will always be driven by forms, procedures and benchmarks.  Therefore, if though you may have a wonderfully logical explanation why your credit is ruined, it will not matter.  In order for the bank to make you a loan, you will have to fit neatly into a government designed program.  The only existing benchmark that the government will be able to use to design the regulations they believe are necessary to prevent this disaster from reoccurring is your CREDIT SCORE.  So, bottom line, protect your family, but also make ever effort to protect your credit score.  It may not matter one iota today when virtually no one can borrow money, but it will mean everything in a year or two or three when the world rights itself.  


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Anonymous said...

This really is a very underlooked part of education in the US as well. Having gone to high school in a state where economics is a mandatory course (New York), nobody tells you about your credit score and how to manage, build, and maintain it. I didn't get a credit card to do just that until college was almost over because the message had been a scare of "Don't go into debt" rather than "Build good credit by establishing a payment history."

Your blog is incredible, especially nowadays. I'm glad you keep posting.

Big Wave Dave said...

The trouble is that your score isn't common sense. The easiest way to increase your score? Stop paying a large credit card. After six months, its written off, and your score-- goes up! Of course it takes the hit for six months, but chances are, you really don't need to buy anything for six months anyway, if you can't pay the bills you have now.
Radical debt relief-- walking away from debt-- is sometimes the best way to go. Everyone's situation is different, but don't ever borrow from 401ks or Roth IRAs to pay bills, unless you have good reason to believe things will be better in the short term.

David Coleman said...

Thankyou for this information. I found it very useful for understanding the impact of debt collection processes on credit in the US.