Understanding Credit And The Importance Of A 750 Or Higher Credit Score
This chapter may prove to be the most important chapter in the book if you were ignorant like me. It will literally change lives if it is embraced objectively and applied as directed. It should be a required read for every student from grade school through college.
As African Americans, we just do not realize the tool we have in the credit scoring system of America. It is truly fascinating and we don’t seem to understand its significance. Beacon and FICO scores – to me – are up there in importance with things like FREEDOM and the right to VOTE! But we are ignorant of their power. I advocate that we need to protect our personal credit just like it was one of our children. We’d never put our kids in harm’s way nor do anything that would knowingly harm them. We stick up for them through thick and thin – building them up, nurturing, carefully examining and monitoring them all their lives until they are able to care for themselves. I submit to all that we need to treat our personal credit with similar love, care, and respect. I’m serious!
With banking becoming so driven by technology, we find that nowadays everything is pretty much automated and that credit has been reduced for the most part to a numbers game. Everything from home loans, to auto loans, to major credit card loans, and interest rates related thereto are all determined by this magic number that is called a Beacon or FICO score. We have all learned that if we maintain a 700 or above credit score, things tend to be significantly better for us financially. I would even go so far as to say many times it serves as a barrier breaker when it comes to African Americans and lending institutions.
It is great for us that we can apply and shop for Home Mortgage loans online with financial institutions and obtain approvals via automated systems opposed to individual bankers. This is a gift from heaven. Traditionally, we were somewhat disadvantaged in that we had to visit personally a banker at a local branch for these types of loans and sweat bullets, hoping and praying that he would think enough of us to grant us a loan, regardless of how good our credit was. And we’ve already learned that probably 97% of bankers who have decision making power in America are White. It’s not as much their fault that those percentages are that high as it is ours. Nonetheless, it is what it is. Much of the prejudices that occurred in times past have been eradicated on the personal side of banking when the automated systems were established. Now it’s a different story altogether when it comes down to business banking, but we will not address that in this chapter.
With automated scoring systems dominating the industry, it has almost turned Black people into Whites when it comes down to obtaining premier mortgage loans at prime interest rates. It is a documented fact that White mortgage bankers (not so long ago) discriminated rampantly against Black qualified applicants because of their race. What’s more, it is also widely known that bankers purposely charged Black applicants significantly higher interest rates than they did White applicants with the same credit profiles. Federal government agencies were actually found to be guilty of these practices and even settled tons of lawsuits for these practices.
I am personally aware of this as I remember a close business partner explaining to me how his aunt and her husband would go and apply for government farm loans and were outright denied because they were too dark in complexion. They noticed in the process, however, that their colleagues and neighbors who were White farmers in the same community would be granted the loans with ease despite the fact that they were less qualified. Needless to say, my partner’s aunt and her husband, along with numbers of other Black farmers, ended up losing their farms and equipment due to lack of funding. Nevertheless, the government reportedly settled with his aunt after years of struggle and financial hardship for a substantial amount of money – upper six figures. So for all the skeptics who swear this doesn’t or hasn’t happened, here is strict proof thereof.
So you see, I love this invisible system that doesn’t prejudge an applicant by the color of his skin or by the clothes he is wearing because it can’t see them over the computer screen. All it sees is a credit profile which is largely made up of a FICO score – then it figures in debt to income ratio, and assets possessed.
This automated banking system is prophecy fulfilled and Dr. Martin Luther King, Jr.’s dream partially realized. I understand that Dr. King dreamed that White people would personally judge us by the content of our character and not just a mere computer model but hey, close enough for the time being. There are still some loop holes with this system with regard to zip code profiling but for the most part it has opened up a whole new level of opportunity where personal credit is concerned.
Once again, ignorance has a tendency to rob us of any benefits, in roads, and advantages gained by this FICO system and many others. Therefore, it is so vitally important that we endeavor to understand and appreciate the value of these vehicles and take full advantage of them. While many African Americans are complaining about the disparities that exist (and they do) in this country and demanding that the government take more measures to close gaps even further (and it should), we find that Blacks are not embracing the systems that are already in place to make up the hedges.
I often wondered why the nation’s school systems do not teach students about topics such as personal finance and credit. It seems to me that these issues are so vitally important that certainly our school boards and educational administrators are bright enough to know that our children are doomed to financial failure without this knowledge. I just don’t understand it. But instead of complaining about the obvious, the prudent thing to do is for us to take the initiative independently to become financially literate, and likewise make certain that our children receive the same.
I’ve never had the privilege of attending private schools so I cannot say whether their curriculum allows for it, but it just seems to me that it is so irresponsible of our school systems – public or private – to send our nation’s children in the world so ill-prepared to succeed financially. I am a strong advocate for a good education, but what I want to know is: “If Jimmy left for San Francisco from San Antonio by bicycle at 2:00 P.M. on Thursday and George left from the same place by car at 8:00 A.M. 2 days later, who will arrive in San Francisco first and at what time?” What does that have to do with real life and being successful therein?
Now I realize that those trivial word problems have some significance, like when planning a mission to outer space or something- and that’s great. However, before you get into to all that, teach our children how to create a sound budget, the importance of sticking to it, the significance of establishing and maintaining great credit, and saving or investing for the future. After all, the power of compounding interest is a principle that can be taught to 5th graders. Come on, we can’t be competitive with other nations when the vast majority of our population are proud “CONSUMERS” of everything we get our hands on and financially illiterate.
This is an indictment on our country’s Educational System and leaders, but a call to action for every parent who wants their children to be the best they can be and live their lives to the fullest. For those of us who are poor or otherwise financially challenged because of our ignorance, it would be a disgrace to allow our kids to experience the heartache and agony that we subjected ourselves to because we did not appreciate or value the gift and power of a great credit score.
The thing about the credit FICO system is that absolutely everyone can and should have a credit score of over 700. Many believe that a 740 or higher credit score can only be obtained by the White people in great authority, like senators and diplomats, or the affluent. This couldn’t be any further from the truth. The truth is that even the poorest guy in the city who works for minimum wage at the local convenient store can and should have a high credit score. Some of us believe that credit agencies hand these scores out as they choose, giving high scores to the rich White folks and all the brothers get the crumbs – you know, the 450’s and 500’s. Again, a lot of us Blacks and Whites alike are ignorant of the FICO system and how it works, thus resulting in many of us esteeming its importance very little.
A good or bad FICO score has nothing to do with where a person works or how much money they make. It has nothing whatsoever to do with a person’s race, religion, creed, or social status. I have seen politicians, preachers, White folks, Black folks, little sweet old ladies, professors, as well as accountants all with jacked up credit scores in the low to mid 400’s.
A friend of mine often told of accounts he had in dealing with credit during his years as an automobile salesman. He would be responsible for gathering personal information and pulling a customer’s FICO score to determine credit worthiness. “Boy, boy, boy!” he’d say. “It’s one thing to have jacked up credit – but it’s another thing to have jacked up credit and perpetrate the fraud by getting a poor sales person’s hopes up knowing good and well that they hadn’t paid their momma back, let alone a creditor.”
He explained how these types of customers were always the ones that worked him down to the bone on price -$100.00 Flat Commission- and stayed at the dealership for hours tying up a brother’s whole day. “By the way, how’s your credit Mr. Councilman?” he’d ask. Or his favorite, “On a scale of 1 to 10, with 10 being the highest, how would you rate your credit?” They’d often reply, “Oh credit’s good, young man!”
My friend would explain how he got all excited after hearing that. He’d take the application to the manager and pace the floor, waiting for the verdict. Much to his dismay, however, he learned that much of the time these high-class people that you would expect would have the 740 FICO scores couldn’t buy a box of cracker jacks on credit. “They couldn’t get a bank to loan them $20.00 even with a co-signer,” he’d often say. He recalled his sales manager telling him one night, “Chase that guy out my showroom! Git, git, git ‘em outta here!”
I don’t mean to belittle or make fun of people in this predicament, but only to emphasize the point that all types of people have messed up credit. The very people you would swear had perfect credit, you’d be amazed to discover that they are in similar straits and even worse.
Then on the other hand, my friend told of an account where he witnessed a customer come in who he knew lived in a single wide trailer in the local trailer park, but had perfect credit – “all aces,” he called it, speaking of her credit report. That’s what’s up! This lady didn’t make much money either. He may not have been able to make a huge commission because her income was limited, but he knew she would get approved for a loan so a brother was guaranteed to get the sale and a commission of some kind. Can you dig it?
Somehow that lady, who was Black by the way, managed to learn and put into practice sound principles of finance and appreciated the power of maintaining outstanding credit. I guess she taught everybody a lesson that day because my friend admitted that everyone, including him, had pre-judged her because of where she lived.
Credit scores and profiles are determined by each individual’s repayment practices. It’s up to each person what his or her score is gonna be and their financial behavior determines it. The system has a reputation of being very ambiguous and complex, but is actually quite simple and as we begin to understand how it grades us, we can begin to configure on purpose the credit profile and score that we desire.
Most people are either really good with their finances or really terrible, but in neither case do many actually understand how they got the score they have – only that they pay all their bills on time or pay none of them on time. Actually, a person could pay all of their bills on time faithfully every month, but still have a low credit score and not qualify for a mortgage or auto loan. Then on the other hand, a person could actually pay all of his bills 29 days late every month and have a 700 credit score and qualify for basically whatever he wants. This is what frustrates so many people and explains why they feel that this credit score business is largely unfair. Once we understand how the system grades us, it’ll make perfect sense. There’s no need to continue to grumble and complain about something that is never gonna change to accommodate us. The smart thing to do is stop letting the system work us, but become educated on what makes it tick and begin to work the system to our advantage.
I love the FICO scoring system and it’s simply because I understand it. I don’t hope, wish, pray, or beg the system to deal favorable with me as most Americans do. Neither am I on pins and needles when I go to apply for a loan of some type wondering if the banker is gonna approve my application. I know exactly where I stand before I attempt to secure financing for two reasons. Number one is I don’t want to look like a moron or feel like an idiot when I’m sitting across from the banker who is looking at my credit on his computer screen. I’m gonna know exactly what he’s looking at and not with my fingers and toes crossed hoping that somehow everything or at least “something” on the report looks okay. And the second reason is I always make sure that I am empowered with the information that is necessary to ensure that I am speaking to him from a position of strength whereby I can negotiate favorable financing terms.
Most people, especially those of us who may have credit challenges, deal from a “I hope I get approved” position where it is evident to the bankers or managers that we’re ignorant of the system. As a result, we are then prone – more specifically at car dealerships – to be charged higher rates even though we may have great credit scores. Ignorance, financially or otherwise, is not a virtue!
I want to take this time to offer 5 reasons why everyone should put a demand on themselves to establish and maintain great credit scores. As I stated before, our credit should be highly regarded and prioritized way up there with stuff like . . . yeah, our Kids!
5 Reasons To Have Good Credit And High Credit Scores
- High credit scores can qualify us for the best interest rates and terms on loans which means we pay less.
- High credit scores portray us to others as responsible and trustworthy in not just financial matters, but as a whole.
- High credit scores put us in a better position to realize our dreams such as nice homes and leverage for investing.
- High credit scores can be the determining factor of whether or not we are hired for certain employment positions. Employers now are reviewing credit as part of their employee interviewing and screening processes.
- High credit scores are qualifiers when choosing spouses. A high credit score just might be the thing that tips the scale in your favor when your potential spouse is weighing whether she’ll say “I do” or “I’d better not.”
6 REASONS TO NOT HAVE LOW SCORES AND BAD CREDIT
- Consumers with bad credit pay more for everything they buy on credit to the tune of double and sometimes triple in some cases. The prime interest rate on a 30 year mortgage right now is about 5.9%. Consumers with bad credit can expect to pay 8 to 10%. A good credit consumer would pay about $593.14 on a $100,000.00 mortgage whereas a bad credit consumer would pay about $877.57. Then once they add mortgage insurance, the mortgage payment jumps to over $1,000.00. A good credit consumer would pay interest of about 7% on credit card accounts where his counterpart would pay 29%. The same is true for automobile loans. The average rate on a new car for good credit buyers is about 5% and up to 18% or more for those with bad credit.
- Consumers with bad credit are generally viewed as untrustworthy, financially illiterate, and irresponsible in not just money matters, but everything else as well.
- Consumers with bad credit are often denied the ability to attain their goals in life due to their reckless records. Employers now look at credit reports to help determine the overall character of applicants prior to hiring. How can a person be responsible for making key financial decisions with a corporation when they’ve established by their credit file that they’ve made a mess of their own personal finances. This is an eye-opening reality and many employers don’t even disclose that they are reviewing your credit. But read the disclosure at the bottom of their employment applications that you are required to sign. This may be the reason you didn’t get that job that you just knew you’d get.
- Consumers with bad credit disqualify themselves from rental or lease opportunities because of poor credit histories. Many apartment agencies, luxury and otherwise, will not rent to applicants with scores below certain levels.
- Consumers with bad credit can be eliminated from becoming on the short list of the best choices in life-companions because their credit history indicates that they are irresponsible and have a proven track record of making poor choices. Why would anyone want to marry someone like that?
- Finally, a glimpse at a person’s credit report and score generally gives a good snap shot of a person’s character. Nobody else will tell you this, but a 500 FICO score pretty much means that the consumer is unreliable, untrustworthy – sort of an outright liar! They promised 10 different creditors 10 different dates that they’d pay them back but – for whatever reason– didn’t do it!
Now I fully realize that these are some pretty tough pills to swallow and really don’t require a lot of elaboration, but I thought it fitting to supplement just a little where the adverse credit was concerned.
Having experienced the devastating effects and compensation of low FICO scores and bad credit in the past, I feel I can openly talk to those of us who find ourselves in this predicament currently. Believe me, I feel your pain and know what it’s like personally to be in such a position. It’s like a self-inflicted sentence to slavery all over again and to those who have never been enslaved or second class citizens, having bad credit gets you as close to it as you can get. If for no other reason, everybody should strive to get out of this situation because of this reality alone.
Having bad credit gives creditors license to treat people with lack of respect and dishonor. It empowers bill collectors to talk to grown men and women like they are children and interrogate them profusely during the process when many of those doing the bill collecting are in similar or worse positions. Nonetheless, the recipients of this degradation are in no position to resist for fear of adverse action being taken resulting in repossession, foreclosure, or lawsuit.
I remember getting mad and copping an attitude with bill collectors when they called all times of the day and night. Each time it seemed that they were all taking my deposition individually and it angered me to be treated like that. However, I had no choice but to concede that I put myself in that position. I had to acknowledge the fact that if I had only sent them their money when I agreed to they wouldn’t be calling. They weren’t calling just for kicks – they were trying to get the money they were owed and because of it, I had to be subject to them. A wise man said, “The rich rule over the poor and the borrower is servant to the lender.” I know that’s right! Well if that is so, why do we knowingly and so eagerly sign up to be indentured servants? Makes no sense – does it? We have to transform our thinking.
Who came up with this ridiculous mindset anyway? It is psychotic! We even go so far as to go in debt for sneakers and pocket books and high heel shoes – gold rims and gold teeth. We sign up as servants for riding lawn mowers, gas grills, furniture and stereos. This is insane when you really think about it.
I want to point out Twelve (12) things that I think are vitally important for everyone to know about their personal credit scores.
- There are three major credit bureau agencies that lenders rely upon to examine the credit worthiness of applicants. They are Equifax, Experian, and Transunion.
- More than 90% of people have errors of some kind that adversely affect their credit scores. Incorrect information can be disputed and corrected if one can demonstrate that the information is inaccurate.
- Creditors are not allowed to report late payments made on a person’s credit cards, mortgages, installment loans and other reported accounts until they are OVER 30 days late. A person could actually pay every credit card or installment account 29 days late every single month for 20 years and maintain a 740 Fico score, though it would be ill-advised.
- Accounts such as utilities, cable, internet, home and cell phones are generally not reported monthly on personal credit reports. They are, however, reported as derogatory once they become over 30 days delinquent, are turned over to collections, or are charged off.
- Rent payment history is not reported on personal credit reports. However, judgements due to unpaid rent can be reported.
- Using over 35% of available credit on credit cards can adversely affect a personal credit score by 100 points or more depending on the number of credit cards in this state and various balance to availability ratios. This explains why a consumer can pay every account on time each month but still have a score in the 500’s – they are simply maxed out and the scoring system reflects it.
- Inquiries on a personal credit report are crucial. Every time a person applies for credit and their credit is pulled, that inquiry is reflected on the person’s credit report and lowers their score. Be careful to limit these inquiries. Be aware that car dealerships and some online mortgage and credit card companies will send your information to 10 or more lenders at a time seeking approval and it could kill your score. And also be aware that now-a-days companies are pulling all three bureaus.
- Check your credit often – every other month at least. Identity theft is one of the fastest growing crimes in the world where criminals are stealing the identity of consumers and opening new credit accounts in their names. These accounts go unpaid, of course, and can totally destroy a person’s credit profile. It generally takes an act of congress to dispute and correct it when it occurs. Vigilance is the key as it is commonly reported that consumers are the victims of identity theft months before they know it because they do not monitor their credit.
- Learn to notice when your billing cycle ends and a new one begins. Try to avoid making charges prior to the end of the cycle. Instead, wait until the new cycle begins and it gives you close to 30 days before having to pay it down. Be sure to pay the card off or down to below 35% BEFORE the end of the cycle. Most credit card companies report to the 3 credit bureaus right after each month’s billing cycle. You could be doing the right thing by paying off your balances each month, but doing so at the wrong time because of ignorance of these facts. You could be paying the card balance off in full the day after the cycle ends and getting penalized 50 points on your FICO score as a result. Many of us are unaware of this little known technique that is powerful in keeping scores above 700 while at the same time needing to run up balances on cards each month.
- Having a mortgage history on a credit report scores a lot of points versus not ever having a mortgage history.
- Credit Card accounts typically have the most impact on credit scores so be careful how you maintain them and their balances.
- Avoid collections and judgements. They are score-killers, especially the more recent ones. Try to make payment arrangements before it gets to that point.