Changing How You Think About Credit: It’s A Trust System.

I’m incredibly passionate about educating others on credit and credit scores. Not everyone wants to buy a home. Not everyone is in the position to buy a home. I get that. But to get there, you must a good credit score.

Whether you are looking to buy a home now, later or never. Everyone needs a good credit score regardless. Even those who live debt free and pays for everything in cash. Very rarely, will an individual go through their whole lives without ever needing a credit score. It does happen and many people have been able to successfully go without a credit score. However, in this modern day and age, with the paper dollar getting phased out, it’s getting more and more difficult.

The lack of education and understanding of a person’s credit is a major flaw in our modern society. Due to the ignorance, it then becomes a generational challenge. If your parents lack the understanding of how to build and maintain a good credit score, the likelihood that you learned it or even prioritized it, is slim. That is just not fair. You don’t know what you don’t know.

At the time of writing this article, the United States credit card debt has hit an all time high upwards into the trillions of dollars. This is because it is so easy to swipe a little plastic card to buy something, you may or may not have the money for. The ultimate, buy now, pay later exchange.

I hate that in this society, we have been reduced to a number. Our status is ranked. Our lives are impacted, either negatively or positively, by this number. The higher your number, the easier your life. The lower your number, the more expensive life is for you.

It’s not a complicated system, there is just a lack of understanding of how it work. So let’s break it down. We are going to strip the credit system down from all of it’s big fancy words and complications.

First step: Think of the credit as one big TRUST SYSTEM. It tells the person who is letting you borrow money, how likely you will pay them back and are you “good for it?” This person, knows nothing about you. This is not a family member or friend or co-worker. They know nothing about you but you are now asking to borrow money. It could be hundreds of dollars. Thousands. Tens of thousands. Hundreds of thousands.

This person is in business loaning money to get a little back in return. But they are not in the business of letting others borrow money, only for you to disappear and run off, never to be heard from again. C’mon. We all know that person we spot $50.00 to float them to their next paycheck and then got our phone numbers blocked.

Just like trust, it takes time to build. It starts small. But with each and every term of the agreement met, the trust builds. Just like trust, it can be broken or shattered with one incident.

Example: Your parents set a curfew of 10pm. And you are never late and come home by your curfew every time. If you happen to be a little late, you communicate that with them. You give them a little notice or time you will be home. Eventually, they will trust that you are a responsible person and give you a little more wiggle room. On a trust scale of 1-10, you are an 8.

But let’s say, you lost track of time and fell asleep at a friends house one night and wandered home at 2pm. Your parents would be worried sick, possibly even had called the cops. They didn’t know where you were. If you were hurt or dead somewhere. All those years of building that trust with them, down the drain in one fell swoop. It doesn’t erase your previous history of being on time. That positive history actually helps. They may be disappointed and upset. But they may trust you a little less. Now you are at a 6.

But life isn’t over and overtime you continue to build their trust by honoring the curfew. They will also start to trust you again. Given enough time, that little incident has a lesser impact on that trust. You are now building that trust back from the 6.

Now let’s apply that same example to parallel how the credit system works.

When starting off, you are typically a “credit ghost”. You don’t have bad credit. Just nothing to base your trust worthiness off of. Your credit score starts at 300.

So you start small. Maybe a credit card. The bank may give you one. But with a small limit. You charge the card to make small purchases. And pay it off every month. Overtime, the bank sees that you are “good for it” and trust you more and increase your limit, giving you a little extra wiggle room. If you are unable to make the full payment, you could pay the minimum to communicate that you are still here and haven’t run off with the money. You have built your score up to 700.

After years of on time payments and a great history with your credit card company, you went out of town and completely forgot to pay your credit card this month. By the time you realize it, their trust in you has dropped a little bit. It’s now at a 640. But you go back to making your payments on time again, even putting your credit card on auto pay, so this never happens again. You are rebuilding that trust from the 640.

I want you now to imagine you are the person/bank on the other end. Not the person borrowing the money, rather, the person putting up the money for the loan. Wouldn’t you want your money paid back at the agreed time? Would your trust be shattered if you let someone borrow the money, only for them to not take it serious enough to pay you back? You worked hard for that money. You have bills to pay too.

I hate that we are reduced to a number. But this is the most efficient system to measure how much a person can be trusted with money. Your credit score is how a part of your character is measured. The part where, if I were to let you borrow this money, to buy what you want or needed, would you pay me back? Are you good for it? Remember. I don’t know you. Your word is not good enough. I want to know your history of doing what you say you will do. And this is by looking at your past history of borrowing money.

Disclaimer: The scores and examples used in this blog are for example purposes ONLY and are not an accurate or exact interpretation of how the credit modeling works.

Previous
Previous

Home. It’s Where The Heart Is…..

Next
Next

To understand why I love what i do, you have to understand how I got here.