The Credit Score System, Understanding The Game
BY C. Crudele
The best way to understanding the credit score system is to look at it like a game. Like any game, know what your objective is (like getting the ball in the basket), the rules, and most importantly what are the penalties. Creditors created this game, with the objective to make more money. We play, hoping to stretch our income and maybe even save money. But, creditors are at an advantage.
Arif M. Halaby, President and CEO of Total Financial Solutions, Inc. says, “Creditors believe they can ‘guess’ our likelihood to pay by looking at our past payment habits.” This “likelihood” causes them to risk or not risk loaning us money.
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As a consumer, if you were to pay cash for all your purchases, never buying more than you could afford, you would have a zero credit score. So, if you wanted to purchase a car on credit, there is a good chance your loan would be denied. At best, you may have to pay a higher rate of interest. In this game you are penalized for having no credit history.
How can we benefit from this game? The objective is to have a high enough credit score to qualify for discounted loan rates. A great example is car leasing deals which trump; “Only $1000 down and you can lease this car for $199 a month, for well qualified buyers”! “Well qualified” is referring to your credit score and your ability to pay. The car company knows most people will not be considered a “well qualified buyer”.
The small group of consumers that are “well-qualified buyers” can enjoy these kinds of offers. Arif M. Halaby recommends to consumers “Remember that creditors and credit reporting agencies make the rules. It is our job to learn the rules and to use them to the best of our abilities.”
Arif M. Halaby asks “Is debt good or bad?” Mr. Halaby goes on to say, “It depends. Debt in and of itself is not inherently bad. Debt is a tool; how it is used, and the purpose for which it is acquired is what should be used to determine whether it is good or bad.”
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Using debt to manipulate your credit score is one example of using debt as a tool. In order to have a high credit score, you have to purchase goods and services on credit. The more credit you have, the higher the score. The rules are very clear; you must make at least monthly minimum payments on time. Late payments usually come with penalties and fines. Once you are late on a payment, the rules can change.
The creditors can increase the amount of interest you are paying and lower your line of credit. The most challenging part of this game is to never have more debt than you can afford and to never create poor spending habits.
If you desire a higher credit score, know you can improve it. Again, according to Arif M. Halaby “Just like any game, the more you know the rules and practice with real life situations, the better your results.” Creditors want you to continue playing; the more you play the more money they make.
If you ever plan on buying something on credit, your credit score will matter. Your financial advisor can best coach you with how to improve your credit score and what is best for your overall financial goals.