A Warning About Your Credit Rating
Gary North’s REALITY CHECK
September 24, 2004
I am spitting mad. At myself. I forget sometimes. I forget that the credit/debt system of this country is a raging, maniacal force that is structured to suck us all into the tender mercies of the bankers.
Last year, I checked my credit rating. This is a wise policy. You need to know where you stand.
Go to Google. Search for “credit rating,” Equifax, Transunion, Experian. You will find outfits that will let you buy your credit report from all three. Expect to pay under $10. It’s money well spent. It’s fast.
My rating a year ago was 801 out of 830. That’s the middle ranking of three ratings. That’s high.
I just checked. I’m down to 783.
What happened? Has a creditor shafted me by turning in a false report? Am I the victim of identity theft? Did my wife forget to pay a bill on time?
None of the above.
There are three credit rating services: Equifax, Transunion, and Experian. All three had dropped me at least 20 points. One dropped me 30.
I figured there had to be a common cause for all three of them to come to the same conclusion. Let’s look at the report.
Equifax reports the following on me:
Lack of recent revolving account information
Amount owed on revolving credit is too high
Lack of recent bank revolving information
Lack of recent installment loan information
Transunion reports the following on me:
Amount owed on accounts too high
Length of accounts have been established
Proportion of balances to credit limits is too high on bank revolving or other revolving accounts
Lack of recent bank revolving information
Experian reports on me:
Current balance on accounts
Length of revolving account history
Insufficient or lack of bank revolving account information
Insufficient or lack of revolving account information
WHAT DOES IT ALL MEAN?
Let’s start with this one: “Lack of recent revolving account information.”
A revolving account is a credit card account that does not get paid off at the end of the month. Every month, my wife pays our bills to the credit card companies. In the industry, we are called “freeloaders.” We don’t pay any interest charges or late fees. We use the cards and the convenient billing systems to keep track of our accounts. My wife is a hawk. She verifies everything. She catches mistakes.
There is plenty of information stretching back for 30 years. This information tells the same story: “bills paid on time every month.” Dull. Unprofitable. The response of the credit rating services is the same: “Lack of recent revolving account information.”
Now let’s consider this one: “Proportion of balances to credit limits is too high on bank revolving or other revolving accounts.” Bingo!
A few months ago, I began worrying about a $20,000 limit on my credit card. I am concerned about identity theft. I figured that it was not wise to have a $20,000 line of unsecured credit sitting there.
How did I find out that I had this line of credit? Because I spoke with a person at the credit card company about a suspicious purchase. It turned out to be legitimate. He then asked me if I wanted to raise my lending limit. I asked him what my limit was. He said $20,000. I countered: “Cut it back to $7,000.” He warned me that if I did that, I could not increase the limit for six months. I did not care.
Stupid, stupid me.
My decision to protect myself from identity theft sent a message to the three credit-rating services: “This man is living closer to debt problems than he was before.”
The rating services did not bother to ask if the reduction in my limit was my decision or the bank’s. It did not matter to the rating service’s formulas. A reduction is a reduction. It is obvious to the rating services that things are getting tighter financially for me.
My wife pays by credit card. She pays everything she can by credit card. She accumulates free flying miles. Then she flies to visit her family in California.
So, my monthly credit card bills may conceivably reach 50% of my credit limit on one card. Maybe. I don’t know. But before I had them reduce my credit limit, it was 20%.
It is clear to the system what has happened. I have become a higher-risk debtor. I don’t qualify for the magic 800+ number, the top rating. I call it my toll-free number: more unused credit than most people possess, and therefore no tolls.
FOR WHOM THE BELL TOLLS
It’s obvious how the system works. You are expected to borrow money. You are expected to pay it back on time with interest.
It’s clear what the formula is at the three rating services. They reward those people who do the following:
1. Borrow money.
2. Pay it back on time with interest.
3. Do this regularly.
4. Use this pattern to raise their loan limits.
5. Borrow even more money.
The bell tolls for people who do the following:
1. Borrow only on credit cards.
2. Pay credit card bills on time without interest.
3. Do this regularly.
4. Use this pattern to keep their loan limits low.
5. Borrow even less money.
The bell tolls loudest for people who do the following:
1. Don’t use credit cards.
2. Skip the free flyer miles.
3. Don’t borrow from banks.
I’m not sure which lesson I have learned. I guess this one: do without the highest credit rating. Stay out of the debt market.
But for children and for young adults, I would recommend this strategy in preparation for getting a loan to buy a home, assuming that they don’t buy one John Schaub’s way, i.e., with owner financing. (http://www.johnschaub.com)
1. Get a Visa-Buxx debit card — no credit extended.
2. Buy things with it.
3. Use the monthly report to create a budget record.
4. Buy a copy of Quicken if they don’t have one.
5. Learn how to budget.
6. Get a low-interest rate credit card.
7. Buy a $100 tool or other appreciating asset.
8. Pay off the debt over a 90-day period.
9. Never miss a payment.
10. Do this again and again.
11. Keep applying for credit limit increases.
The goal is to pay minimal interest on small-ticket items. This pattern of debt and repayment leaves a digital trail. This digital trail establishes good credit, which is based on a pattern of systematic repayment.
I have learned that it’s not good enough to pay off your credit card monthly. That is not what the lenders are looking for. They want someone who is addicted to debt. They want people who will suffer from double-digit interest rates.
As you build up your credit and your credit card limit, be sure not to buy anything that you would not otherwise have purchased. Buy tools of your trade. Buy used books on Amazon at a discount — books that you actually do read.
Go to the bank. Get a loan for something that will not depreciate or else something that will make you more productive. If it takes $500, don’t worry. Take out a 90-day loan and pay it off.
The interest paid, which is low today because of central bank policy, is a kind of dues payment. It gets you membership in the club of the debt-addicted.
When you are after that one big debt — a mortgage on a home that will probably appreciate — then you need a track record. Establishing this track record takes a systematic plan.
USING A TOOL PROPERLY
Credit is a tool for those who have made it in society — the top 20%. This tool is sometimes used as a means of gaining control over others. The Bible says, “The rich ruleth over the poor, and the borrower is servant to the lender” (Proverbs 22:7).
Debt is a tool for those who will someday make it into the top 20%. These people borrow money to buy tools.
The problem is, debt is also a means of lifelong subservience.
A wise debtor knows the difference between productive debt and unproductive debt. Unproductive debt is used to purchase depreciating items, especially consumer goods, and above all, retail consumer goods.
As with any tool, the more skillful you become in using it, the more productive you become. Debt is valid for some forms of education (not liberal arts bachelor’s degrees). Debt is valid for starting a business that you have invested at least 5,000 hours studying first hand.
As you get more experienced in the use of this tool, you will become more productive. One mark of this productivity is the move from borrower to lender.
In other words, the better you are at borrowing money, the more skilled you will become at paying off your debts. As real estate guru Jack Miller says, “The easiest way to become a millionaire is to borrow a million dollars and have your tenants pay it off.” He has done this many, many times.
My mistake was to drop my credit limit. Identity theft worries me. I was more worried about having too large a credit limit than about being docked 30 points on my credit rating.
I may call the card company and get my limit raised. Then again, I may not. I haven’t decided which is the greater burden: a credit card limit that tempts someone, coupled with a credit system that lets an imposter get into my account vs. “proportion of balances to credit limits is too high on bank revolving or other revolving accounts.”
I learned something else. When someone requests a credit check on you, the rating service may drop you a point. If the bank or lender checks on you, it can hurt your credit rating. This is why you must not make large credit requests very often. Keep things small and manageable. Don’t make it worth the bank’s time to run a check on your credit.
If you plan to buy a home, apply to multiple lenders within a 14-day period. This will not trigger a reduced rating. The rating services know that you’re shopping — which you should do. Rates can vary more than you might imagine. So do terms: points and similar charges.
This system of evaluating credit worthiness keeps people trapped in credit card debt, where interest rates are higher than banks’. The system rewards people who run up credit card bills at high interest rates and then pay off their debts.
A LIST OF NO-NO’S
This list is from www.freecreditanalyzer.com. Read it carefully. I should have.
1. Pay your bills consistently and on time. Probably the most important of the factors determining your credit score. Allowances are made for the occasional late payment, however multiple late payments, or payments over 60 days late can be detrimental.
2. Keep your debt reasonable. Try to keep your balance-to-Limit ratio a a reasonable number. Normally balances kept over 75% of the limit are considered high.
3. Maintain only a reasonable amount of unused credit. Banks look not only at the balances of your accounts, but also at the available limits. Keep in mind that if you have the ability to run up high amounts of credit (very large limits) that you can become a higher credit risk.
[Note: if you reduce your limits, the credit rating services nail you.]
4. Avoid too many inquiries. Keep the number of inquiries on your credit file to a minimum. More than one or two inquiries per year can make you a higher credit risk.
5. Don’t open too many accounts in any period of time. Lenders become nervous if they see you applying for too many accounts all at once.
6. Have patience. Building a solid credit history takes time. Many years in fact. A tall strong tree cannot grow in weeks, and neither can a good strong credit rating.
7. Your existing credit should have a minimal amount of activity. Having accounts with no balance or activity can sometimes be treated as not having them at all.
8. Maintain a good mix of accounts. A good mix of revolving credit accounts and installment loans.
9. Major credit cards are considered better than “retail” cards. Not to mention they usually carry lower interest rates.
10. Check your credit report and remove any errors. Keeping an eye on your credit is very important to ensure accuracy. Some companies neglect to properly report changes in account status. It’s up to you to make sure your credit history is accurate. If you don’t watch out for your rating, nobody will.
Possible reasons for a lower credit rating:
Amount owed on accounts is too high.
Delinquency on accounts.
Too few bank revolving accounts.
Too many bank or national revolving accounts.
Too many accounts with balances.
Consumer finance accounts.
Account payment history too new to rate.
Too many recent inquiries in the last 12 months.
Too many accounts opened in the last 12 months.
Proportion of balances to credit limits is too high on revolving accounts.
Amount owed on revolving accounts is too high.
Length of revolving credit history is too short.
Time since delinquency is too recent or unknown.
Length of credit history is too short.
Lack of recent bank revolving information.
Lack of recent revolving account information.
No recent non-mortgage balance information.
Number of accounts with delinquency.
Too few accounts currently paid as agreed.
Time since derogatory public record or collection.
Amount past due on accounts.
Serious delinquency, derogatory public record, or collection.
Too many bank or national revolving accounts with balances.
No recent revolving balances.
Proportion of loan balances to loan amounts is too high.
Lack of recent installment loan information.
Date of last inquiry too recent.
Time since most recent account opening too short.
Number of revolving accounts.
Number of bank revolving or other revolving accounts.
Number of established accounts.
No recent bankcard balances.
Too few accounts with recent payment information.
In other words, you must push the envelope of debt — lots of loans, but not too fast. Lots of payments, always on time. Keep the interest meter ticking. Get into the system. Tempt yourself. Get that plastic revolving!
If you overdo it, they ding your rating. If you don’t overdo it, they ding your rating.
Be Goldilocks. Not too hot. Not too cold. Just right. That’s the way the bears like their meals. Remember: you’re dinner.
The credit system makes debt-free people grovel. “Forgive me, Alan, for I have sinned.”
Depending on your age and your plans to buy a home or other big-ticket item, you should adopt a strategy to get your credit rating raised.
The credit card telemarketer did not warn me, “If you lower your credit limit, your credit rating will be docked.” That is probably illegal. It would be regarded as coercion. So, the credit rating services do it retroactively without warning.
If you stay out of debt, you’re an unknown quantity. You’re a threat to the economy. You’re a threat to the banks. They are wary of people like you. You must prove your good intentions by borrowing, paying interest and principal on time, and doing this over and over.
You can lose your top credit rating by doing something foolish, such as reducing your credit card’s loan limit. I know. I did it.
“Forgive me, Alan, for I have sinned.”