These days everyone is concerned about their credit score. As credit continues to tighten up, lenders are requiring higher scores and credit bureaus aren’t giving out brownie points for being a real living, breathing, human being. And some pundits say don’t worry about it. Why?
First, you have to understand what a credit score is. The problem is that the determination of the score is a trade secret. A company called Fair Isaac Corporation calculates the most commonly used FICO score. Generally, the elements of the score are known to be:
- 35% — Payment History
- 30% — Credit Utilization
- 15% — Length of Credit History
- 10% — Types of Credit Used
- 10% — Recent use or inquiries for credit
The credit score says two things about you. One, how you handle the debt you already have and two, how will you likely handle any new debt. Notice that nothing there considers what it would be like to be debt free.
Second, you have to change your focus on credit. If you are looking to pay off your bills and be debt free or manage your debt without worry, the first thing you have to do is let go of any concern over what your credit score is or will be. That focus will only lead you back into more debt. Your mindset will always be on how much more debt you can get, not how to get out of debt. You don’t want more credit.
Third, as you reduce the outstanding balances on your debt, creditors will be pounding on your door to loan you money anyway. My latest analogy is that lenders are like drug dealers. They want you hooked on the minimum monthly payment. If you are making ten minimums every month a greater portion of your income is going to interest rather than paying down the balances you owe. One or two monthly payments (or no payments) mean you get to keep more of the money you earn. With zero balances, you can built real wealth.
Change your focus on bills and you will see that a credit score no longer matters. After all, if you walk into a car dealer to buy a car and offer cash, who cares what car loan you can get. You will be golden.
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Thanks for an awesome article, Gene! I try and teach people this over and over again – that’s why I’m working on a new book called Break The Debt Cycle – For Good! Creditors have tried to convince consumers for years that they can’t reach the American dream without using credit to extend their income. Yet we were much more prosperous individuals 50 years ago BEFORE credit cards were “invented” as an incredible profit line for creditors. Here’s hoping that many more people see your article – I’ll be sharing your new site with everyone I coach or speak to.
Peace,
Paula
[...] This post was mentioned on Twitter by Scott Garver, JC Law Group. JC Law Group said: Your Credit Score Doesn't Matter, Go Balance Zero | Money Health Central http://bit.ly/bB8RPu [...]
Thank you for publishing your post in my weekly Financial Independence Compilation.
Please take the time to review the other articles published:
http://ditchtheboss.blogspot.com/2010/08/financial-independence-compilation_16.html.
I hope to see another article in my next release on Sunday August 22.
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Hello Gene Melchionne,
Thanks you for your post, Too often people strive for perfection and as the saying goes “nothing is ever perfect”. How many times have you thought you had something perfected to a fine art only to find that it can actually be improved. Yes, all to often.
Cheers