JW’s Financial Coaching Podcast JW’s Financial Coaching Podcast-A show devoted to answering your personal financial questions and covering current events in personal finance. Giving people a new perspective on their money!

April 1, 2013  
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Highlights of today's show:

  • The Credit Score lie
  • The facts about the FICO
  • What makes up your FICO score
  • The alternatives to credit scores
  • What to focus on instead of your credit score

Don't Be Fooled By The "Build Your Credit Score" Lie!

Today's show is being hijacked by Steve Stewart, my friend and cohort from MoneyPlan SOS. He is passionate about exposing the manipulative messages from those trying to get to your money and the lies that we are told about debt, including building your credit score.

By all measurements, Steve is considered eccentric. His views on debt are not conventional and his view on credit scores make him sound as if he is broadcasting a conspiracy theory. He accepts that misconceived view and hopes you will listen to his message: That he has been lied to about building his credit score!

Don't misunderstand, he certainly does not want to hurt or damage your credibility. However, his message is being published in order to help you see that there is something seriously wrong with the Credit Scoring system. He will also show you how to win IN SPITE OF IT.

The Facts about FICO

FICO stands for Fair Isaac and Company and was renamed Fair Isaac Corporation in 2003. FICO is a publicly traded company on the New York Stock Exchange that provides analytics and decision making services intended to help financial service companies make complex, high-volume decisions. One of those services is Credit Scoring, which simplifies the process and summarizes the information into a 3-digit number.

What makes up a FICO score

Your FICO score is generated from a computation of five things http://www.myfico.com/crediteducation/whatsinyourscore.aspx

  • 35% from your payment history on debt products (loans, credit cards, etc)
  • 30% is based on the amount of money you owe
  • 15% comes from the length of history on those debt products
  • 10% takes into consideration the types of credit you use
  • 10% evaluates how much new credit you have

I urge you to make the observation that should be completely obvious here: The entire FICO score is based on debt and debt products. It is a one-sided measurement of debt. Did you notice there is no mention of how long you have worked at your current job or even the balance in your savings and retirement accounts?

Credit Score pays off debt LIE picAlso, notice how everyday purchases and normal monthly bills are not included in the calculation? Your cell phone payment, your electric bill, even your rent payment will never help your credit score, but miss one single payment by a day or two and they will ding it! Fair Isaac isn't really all that fair, is it?

Who uses credit scores

When was the last time you used your credit score? You can't remember because it has never happened. You have never used your credit score, only companies and lenders do.

I never gave my permission for FICO to collect my information and sell it to a bank in order to rate me. I never signed a form that gave them the permission, did you? Isn't it funny that we live in a world where people are supersensitive about giving out their Social Security number, or even having their phone number listed in the phone book, but WANT the credit reporting industry to collect their personal banking information and allow them to make a profit by selling it to a bank that is trying to sell you money? That's crazy to me!

Credit score lies!

You've heard it all over the place: You need to build your credit score. We are told to have at least three credit cards and use 30% of the available credit in order to have the best score. If I had three credit cards with a $5,000 credit limit on each then my available credit would be $15,000. According to the traditional advice we are supposed to run 30% of that balance ($4,500) through our plastic each month. I don't know about you but I would have a hard time paying off that bill to avoid interest charges, thus going into more debt. That is just really bad advice!

We are also supposed to have a good mix of debts. A highly-regarded personal finance expert once told the father of a female grad student with no debt, a good job, and a decent chunk of money in the bank to consider getting a small installment loan in order to build her credit score. THAT IS SIMPLY IRRESPONSIBLE ADVICE!

I know of guy offering a credit-building program for $1,000 (or four monthly payments of $297, that's convenient!). He states that the program "will teach you how to raise your credit score, so you can pay off your debt!" LIAR! Does he take us for fools? How does a great credit score pay off debt? Does FICO cut us a check? Maybe they will send us a coupon or rebate voucher. Credit scores do not pay off your debt. DON'T BELIEVE THE LIES!

FICO spokesperson Craig Watts once stated that "In rare circumstances it is possible to get a [perfect] FICO score of 850. For a broad section of the population, it probably isn't possible, even if they do everything right." So what the heck are we doing all this for? What is all this energy wasted on building a stupid score supposed to get us?

Calm down Steve. It's not that big of a deal

Granted, a better score could allow you to refinance higher interest rate debt to lower interest rate debt, but you still have the debt to deal with. Don't mistake reduced interest payments with savings. Paying off the debt once and for all will save you more interest than any low-rate transfer balance ever could.

As a side note: My financial security will not be compromised because of an idle threat that someday an employer may want to pull my credit report or my insurance rate might be a little higher because I don't have any debt, thus can't have a great FICO score. I'll more than make up for missing out on a great score by staying out of debt and building wealth instead. Employers don't even care about the score as much as a trouble-free credit report and my insurance agent can go jump in the creek if they jack my rate because of a silly 3-digit number. I'll just go to Flo if that happens, she'll take care of me.

Credit score alternatives aren't sexy

It just infuriates me that people are being led to the debt-slaughter without a clue. If news stations want sensational stories and controversial commentary then why won't they feature a segment about the unknown alternatives to the FICO score? I'll tell you why: They aren't sexy!

Credit cards are sexy. Expensive luxury vehicles driven by celebrities (or crashed by Amanda Bynes) are sexy. Discussing tricky ways to manipulate your credit score is sexier than the dull, mundane, yet successful way of building wealth by saving money in a bank account or investing in your boring retirement account. Well, that is until the market has a correction and then the financial world is coming to an end (we'll leave that for Jon in a future podcast episode.)

Do the right thing

Here are four morally-based ways to do the right thing while maintaining a good credit score without being trapped by debt:

  • Pay your bills and debts on time: Anyone can be creditworthy if they just follow this one rule
  • Save $1,000 or more in a savings account: Emergency savings is the antidote to avoiding new debt
  • Cut up your credit cards: Stop borrowing more money. If you don't like living without credit cards then somebody will issue a new card. Target or your local gas station would be glad to have you back!
  • Check your credit report for free: Go to AnnualCreditReport.com http://AnnualCreditReport.com for access to your credit reports at no charge. Challenge any discrepancies with the credit bureaus. Save your money by saying "No" when they offer to sell you your score.

Don't I need a great FICO score to buy a house?

This is the question that keeps people in the credit-score-building game for life. We have been led to believe that we can't buy a house if we don't have a great credit score. First of all, you can buy a house with a good score, a great score, or even a bad score if you pay for it with cash at the closing. I understand that this isn't easy to do, especially for first-time homebuyers or people in debt, but investors are snatching up acres of real estate in Florida and California right now because they don't have to prove financing and don't have to wait to be qualified for a loan.

What you aren't being told: There is an Alternative to the Credit Score

The good news is that the market has answered our call for help when people trying to live a debt-free lifestyle need a mortgage (the only type of debt that is remotely acceptable). It is called "alternative credit". Actually, alternative credit has been around for ages, just under a different name. In the old days it was called "shoebox credit". As the name implies, you would bring a shoebox full of receipts and cancelled checks to prove your bills were paid on time. This process was very time consuming for banks - that is why they were so quick and eager to get away from the manual underwriting process in lieu of the credit scoring system.

Then came eCredable. I love eCredable http://MoneyPlanSOS.com/eCredable and what they stand for. This is a service that will verify all your payments - cell phone, cable bill, rent, etc - and provide your lender with password-protected access to your credit-worthiness report. Do they have to accept it? The Equal Credit Opportunity Act Reg B says they do. Steve Ely, CEO of eCredable, stated "Every creditor is required by law to consider anything that you present that helps them assess your credit worthiness when they are using other credit related information to determine your credit worthiness."

So there you have it. As long as you pay your bills on time, even if you don't have any debt, you can qualify for the best rates out there. You can have no debt and no credit and have no problems.

You can get a free account by visiting http://www.ecredable.com/money-plan-sos and use the promo code SOS.

Don't Be Fooled By The "Build Your Credit Score" Lie

Let's review:

  • Credit scores are 100% based on debt
  • You don't use your credit score, banks do
  • We never gave FICO, a privately held company, the authorization to make a profit from selling our data
  • You are being misled by experts who say you have to build your credit score
  • Good financial behaviors, like saving money, are not sexy and don't warrant airtime on the news
  • You don't need a FICO score to buy a house, there are alternatives that you aren't being told about

Want to see my credit score?

Once I learned how money really worked I stopped worrying about my credit score. I've been on a mission to educate everyday Americans like you about the trappings of debt, credit scores included. I was curious, however, to see if my credit score had eroded away. After all, I haven't borrowed any new money or had any open credit accounts for over 5 years and the only debt we have is a small mortgage. We can all assume that my credit score is really weak!

I created a vid-torial to show the readers of my blog how to get their score. In the process I discovered that FICO tries really to sign you up for a $14.95 a month credit monitoring program - really hard! It made me really cranky. Watch the video to see what I mean and you will discover, just as I did, that I have been lied to about "Building my Credit Score" http://www.moneyplansos.com/cranky-old-guy-gets-his-credit-score/

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If you have any comments, questions, or ideas for future shows you can send them to me and I will integrate them into a future show. There are two ways to get in touch with me: 1.) Email me at JWFinancialcoaching@gmail.com - Please put “podcast” in the subject line and keep your questions brief so they are readable on air. 2.) Simply fill out the form on the contact page. Please fill out your name, email, and your question/comment/suggestion and we will read it on air.

You can find prior editions of the podcast at the podcast archive page.

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