Finance Friday, Tips

Finance Friday: Are Credit Scores evil?

What is Capitalism?

Merriam Webster’s online dictionary defines Capitalism as “a way of organizing an economy so that the things that are used to make and transport products (such as land, oil, factories, ships, etc.) are owned by individual people and companies rather than by the government.” Unfortunately, capitalism often gets a bad reputation when people don’t understand that it is a reasonable way to help distribute wealth throughout our society. However, while I believe capitalism has a place in our society, I also believe there is a lack of understanding and education regarding how individuals can responsibly benefit from it.

As individuals we have to understand our relationship and role regarding capitalism and how we can better respect our economy, and then make informed and educated decisions on how to improve the way we buy and sell. For starters, when I think about capitalism and our role as citizens in America, I think about our credit-worthiness and our desire to have the American Dream.

Several years ago, when the housing market crashed. The economy took a hit that was the greatest depression I have seen in my lifetime. Part of the problem was that many lending standards were reduced to allow some people who were not as credit-worthy to qualify to obtain mortgages. I believe, the problem, wasn’t that the standards were reduced, but that people who were not credit-worthy, were not educated on how to become better borrowers who understood the severity and consequences of non-repayment and defaulting on loans. They also were not given an opportunity to show they have learned how to have better financial habits.

Unfortunately, many banks were not in the field of educating those who had not learned how to develop the discipline needed to repay loans. Credit scores are not against borrowers, they are a reflection of the borrowers habits. Truthfully, some of the lower standards helped benefit urban areas, which meant minorities were able to purchase homes. Instead of just changing the standards the less than credit-worthy new mortgage holders should have required classes so these new borrowers would learn how to become credit-worthy in the process. Thus, I believe that education could have prevented the financial ruin that so many people face today.

If I were given an opportunity to share information with future borrowers who want to learn how to build their FICO scores and become credit worthy I would say:

1. Spend less than you make.

Of course that should be common knowledge, but in a credit card age that screams “Buy it now,” patience with saving for what you want, is almost long forgotten.

2. Save a little from every source of income.

Regardless of how or where you make money, put a little from each increase received, so you can have money for emergencies and other expenses.

3. Don’t borrow more than you can reasonably afford.

Frankly, if you want more, than work more. Resolve when you borrow that you do not want to become a slave to your debts. Resolve that you have a reasonable plan to pay back what you owe without putting strain on yourself or your family.

4. Access your priorities.

Getting the latest model car or a brand new car from a car dealership may not be feasible for your financial situation. Access what you can have as long as it is in good working condition and isn’t going to become a liability because it needs tons of repairs. Think wisely and responsibly.

5. Compare yourself with no one else.

Often our desire to have, is largely linked to what possessions we see others enjoying. Sometimes we look at others and say to ourselves if he or she can afford this or that, well so can I. Listen, I am not advocating that you short change yourself. No, on the contrary,  I am merely recommending that you try not to exhaust yourself trying to be like everyone else. In the end, if you try to keep up with the Jones, you’ll never be satisfied.

6. Check your FICO scores.

We live in a time when identity theft is real. Recognize that you need to review what is on your credit at a minimum of once a year to make sure there is not anything that should not be attributed to you and your financial history.

7. Understand that credit scores are not evil.

Your credit score is not against you! Instead of thinking it is, please take note of the score and guard it, just as you would your reputation. Learn how to pay everything on time so that your score can constantly rise. I view credit scores as an extension of integrity. Your credit score says a lot about you and what you value.

Reader response:

What do you wish you knew about credit and debt before you became an adult?

 

Reference:

MerriamWebster.com. Capitalism. Retrieved January 20, 2015 from www.merriam-webster.com/dictionary/capitalism

 

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