The credit score is the looming shadow that watches over all of us. If you want any form of loan, you need a credit score to back it up. Lenders that don’t care about credit scores are going to charge you high-interest rates.
The shocking thing is you even have landlords performing credit checks these days. That’s right if you have bad credit you might not even be able to rent a desirable place.
My belief is that the credit score concept is the biggest capitalist scam of this century. It’s disgusting and the way it’s taken hold of society is a disgrace.
So why has the credit score changed the game?
Understanding the Capitalist System
There are many aspects that separate a capitalist system from, say, a socialist system. Obviously, you have the free market, but you also have the credit system.
The reason why capitalist societies can grow at far greater rates than other society is the availability of fast and reasonable credit. Anyone can jump into the free market because they don’t need to use a whole lot of their own money.
And as anyone knows, you play with bigger amounts you get bigger returns. 1% of $1,000 is always going to be less than 1% of $1,000,000. That’s before we factor in that sweet sweet compounding.
So credit is often the lifeblood of our fast-growing economy. Credit is needed to keep the economy going.
Today, 18 to 29-year-olds now possess $1 trillion of debt, which is the greatest level since the year before the financial crisis of 2008.
The credit tap continues to run due to a wide variety of factors. But, either way, it’s a huge return for lenders in the long-term.
After all, why would they want you to be financially responsible and save for things instead of taking credit?
The Excuse Behind the Credit Score
The main aspect of the credit score that its proponents promote is that you can get an accurate readout of someone’s credit history by simply looking them up. In theory, you can get an idea of the character of the person you’re lending to.
I will concede that this is true. If someone has a habit of skipping out on their debts or paying late, a credit score will tell you.
The problem is that anyone who’s financially responsible gets screwed by this system.
Want to know what my credit score is? It’s precisely nothing. I’ve never taken credit in my life and I have no intention of doing so. I pay for everything in cash. Whether it’s houses, vacations, or a cup of coffee I pay everything in cash.
If I can’t afford it, I don’t buy it. A strange concept in 2019, I know.
That means nobody is going to lend to me at a decent rate unless I use a significant asset as a security. I’m fine with that, but I know most people don’t have this luxury.
The only way around this is to take out credit they don’t actually need.
Credit Scores are Helping to Power the Financial System
These days Americans are more indebted than ever before. You’ll find that consumer debt levels in the US are at $14 trillion, and they’re only expected to go higher. Not all of this consumer debt is bad debt. A significant amount comes from people who’re trying to build their credit scores.
Now, obviously, you can’t get any numbers for this because it’s all based on intention, but read any financial guide and they’ll tell you that you should be building your credit score immediately.
It’s not that I disagree with this advice. You can only play with the pieces as they are arranged on the board. But I do find it completely perverse.
People are borrowing money they often don’t need to borrow so they can borrow money later when they really need it.
And it’s naturally helping to power the whole financial system. Like it or not, capitalism is all about the endless cycle of debt. The most powerful people are those with real money and little debt.
No bank is making money from me when I buy real estate because I pay cash. No interest rates. No fixed-rate mortgages. No money for them.
I must admit I take great joy in knowing that.
A Lack of Financial Literacy is Making it Worse
Debt is good for the financial system. A bank would love nothing more than to take everything you have. Granted, mass defaults are bad, but little defaults here and there are ultimately a good thing for them.
Why do you think the quick payday loans companies do so well?
Remember, the interest charged to you is a number brought out of thin air. You never borrowed that money.
If you’re the type of person who can only manage to make the minimum monthly payment, you’re essentially just paying the interest down. Give it a few years and you’ve already paid back more than the initial loan amount.
After this, everything the lender takes is pure profit. If you mess up and they can seize your assets, it’s a great day for them.
The sad fact is that two-thirds of Americans can’t pass a basic financial literacy test, and it’s not getting better at a rapid pace, either.
So after you eventually pay down these loans, you might have struggled along and now your credit score is in the toilet because you had to use more than 30% of your total credit limit.
Well, I guess you’re going to have to get one of those credit builder loans and start getting that score up.
And thus the cycle begins anew.
Combine a need to build an arbitrary score on a screen with a largely ignorant population and you wonder why so many Americans mess up.
Did you know that one in ten people who earn $100,000 plus live paycheque to paycheque?
Sorry, but unless you have multiple ex-wives and too many kids, you’re a moron. You are a stone cold moron if you’re living paycheque to paycheque on $100,000 per year and you don’t have a damn good reason weighing you down.
And, no, I don’t want to hear about the cost of living in New York or San Francisco. Move. Take a longer commute.
It’s no wonder that the American public is in so much trouble.
But What About the Other Factors Driving Us into Debt?
I do admit that it’s not just general ignorance that leads us into this situation. If I had to sum up the current system in the US today, I would put it like this:
It’s fucked. You’re fucked. Everyone is fucked.
I write more about this in my article entitled Why Am I So Poor in the Richest Country in the World?
It’s true that our system is making it harder for us to save money and to survive. Naturally, it’s the poor who suffer the most. They have to use credit as a survival tool.
Consumer credit card debt in the US is now $1.04 trillion, and it’s largely driven by how difficult it is getting just to live in the US.
I’ve written before about the rising cost of housing. Just to reiterate, it’s now 88% more expensive for the private sector to build when compared to the year 2000. That is insanity and is just one reason why salaries are not keeping up with the average American’s biggest expense every month.
So, yes, there are plenty of factors driving people into debt. It’s not just the credit score, but the credit score definitely isn’t helping.
How Should You Approach the Credit Score?
The credit score is more a harm than a help. It encourages people to take credit when they have no need to credit, therefore it further powers the financial system and leads to greater and greater profits.
So what should you do about the credit score?
I understand that I speak from an extremely privileged position. I don’t have a normal job and I left the developed world to pay $100 a month for a place to live in Mexico. So I can pay for everything in cash.
But what about the average American today?
1. Look Into Credit Ranges Not Credit Scores
I find people get carried away with the exact number. Is there really a difference between 700 and 710? No, but ask some people and they will see it as the end of the world if their score drops by 10 points.
Practically all the experts agree that you should focus on credit ranges, not credit scores. Here are the four ranges you need to know about:
300–629 — No, you can’t go below 300. You have to have done something really bad to go as low as 300. Only people like Bernie Madoff will ever have a score this low.
What this range means is that most lenders won’t touch you. Only secured loans, cards with high-interest rates, and specific credit builder loans are open to you.
630–689 — You’re not yet in the ‘good’ range, but you now have slightly more options. Expect to have to pay higher interest rates and not have access to the more attractive credit cards.
690–719 — You’re now able to take advantage of the majority of offers and claim lower interest rates. This is what you should be aiming for as a minimum.
720 — The Sky — After 720 you’re in the top range and you’ll be able to gain access to nearly every offer on the market. You shouldn’t worry about increasing your score after you pass into this range. It makes little difference at this point.
2. There’s a Difference Between Good Credit and Your Credit Score
There’s a subtle difference between your credit score decreasing slightly and having good credit.
Naturally, your credit utilization rate contributes and your debt to income ratio matters. The funny thing is people who finish paying off their mortgages are sent notifications that now a part of their credit portfolio is closed they may see their score drop.
Some people begin to panic over this. They really shouldn’t.
Seeing your score drop slightly because you successfully paid off a loan is no cause for concern. You still have good credit and your credit score is only part of your loan application.
The credit scoring system is a sham, remember. It doesn’t cover for a history of good credit. They’re not one and the same.
3. Remember the Two Major Sections of Your Credit Score
Not a lot of people know about what their credit score is made up of. The two major sections of your score are credit utilisation and payment history.
In other words, how much credit you’re using is important. More than 30% is bad. Less than 10% is also bad. This is why people regularly swipe their credit cards when they make ordinary purchases.
Your credit score also comes from your payment history. A successful history of paying off loans will always stand you in good stead.
Believe it or not, you can have a top score of 750 and still get rejected for loans because your credit utilisation is just too high.
4. Yes, You Do Have to Build a Credit Score
As much as I hate it, the average American does have to build a credit score and should do so as early as possible.
Even though it’s ridiculous, you should have a couple of credit cards and you should use them as much as you can. Try to avoid paying cash.
But only spend what you can pay off immediately. The interest rates don’t kick in if you pay your bills in full at the end of each month.
I can’t understate how important this is. The average interest rates on credit cards for existing customers is a huge 14%. It can go all the way up to 20% for brand new customers. So it’s in your interest to make sure you pay it off in full at the end of every month.
Credit Scores Might Be a Scam But…Too Bad
I believe that credit scores are little more than a scam to keep people in debt for longer. I believe it encourages people to use credit cards when they already have the cash to make that purchase.
However, most people live in its shadow and almost none of them can do anything about it. In today’s America, you can’t buy a house and you can’t rent in a desirable location without a half decent credit score.
The world has come to this and so we have to adapt to that.
Have you started building your credit score yet?