Saturday, March 10, 2007

Credit Score Insanity

Credit Score Insanity

I hope that it's only amnesia

Believe me, I'm sick but not insane

Pousette-Dart Band

People often ask me personal finance questions. The most common is how to improve their credit history score.

If you need to improve your credit score, it means you have lousy credit. Before trying to fix the score, people need to ask themselves how their credit got so bad to begin with.

Some would be better off not having access to credit at all. They can’t handle it.

I’m not talking about people who got behind because of medical bills, life emergencies, or unemployment. Those are people with a good credit history who had something bad happen to them. They deserve a second chance.

Almost anyone who went through Hurricane Katrina has a lousy credit score. Many lost everything. Borrowing money could help them get their lives back together.

I’m focused on the other category: people who spend beyond their means or spend money on stupid stuff.

I don’t want those people to have access to credit; if they do, they will get in trouble again.

They need to figure out how they got in trouble the first time.

They need to look at themselves and understand some basic principles about finance.

I tell people to spend less, pay for things in cash, start budgeting and write down all of their expenditures.

Many need to learn the difference between needs and wants. People need food, clothing and shelter. They don't need the latest IPod or videogame.

Yet often times when it comes to those extravagancies, they never really want the item that badly in the first place. Rather, they feel as though they need it to keep up appearances.

People often get into trouble trying to keep up with friends and neighbors who also make stupid spending decisions.

Once that spirals starts, it rarely stops. Those who are caught up in it spend all of their lives trying to keep ahead of creditors.

And they think that getting more credit is their answer.

My advice rarely goes anywhere. Particularly with those out to impress their buddies.

It reminds me of a scene in the movie Saturday Night Fever where Tony’s boss tells him to think about the future. Tony says, “**** the future.” The boss responds, “if you say **** the future, the future will **** you.”

Few would draw philosophical insights from a film like Saturday Night Fever. Yet Tony’s remark is a good example of the kind of attitude people have when they come to me for credit score help. They blow their money every weekend and have no long-range plan.

Gamblers have a term for people with that type of financial outlook: suckers. They call the money that these people spend “sucker money”.

There are a lot of suckers out there. Likewise, there are a lot of people who want to take advantage of them.

If you have a lousy credit rating, there are a host of the sub-prime lenders, high-interest credit card issuers, check cashing companies and payday lenders dying to get their hands on you. They will give you more debt and more bills to pay.

A cottage industry has developed among companies claiming they can improve people’s credit scores.

I’ve never seen these companies achieve any real success. They prey on suckers looking for quick and easy solutions. Since the companies charge a hefty fee for their services, they get debtors even further into debt.

There are two simple ways to improve your credit score. One is to pay your bills on time. The other is to not have as many debts. If you don’t have many creditors, it is easy to handle what debt you have.

I give that advice often. I then watch people’s eyes glaze over.

If I were to turn evil and offer them an easy credit fix or a payday loan, I’d become a billionaire.

It is not easy to get people to take a hard look at themselves. Addiction to credit is like addiction to anything else: people usually won’t get help until they bottom out.

When people with poor credit get themselves together, they often get amnesia about what got them in trouble. They make the same mistakes over and over.

That is not amnesia; that is insanity.

Don McNay is Chairman of McNay Settlement Group, where we help people make sane financial decisions. You can write to him or read other things he has written at His award-winning column is syndicated on the CNHI News Service and via RRP International. He is on the Board of Directors for the National Society of Newspaper Columnists.

No comments: