Building Credit

I hear it all the time in my practice. People say they want to “build their credit.” Every time I hear this phrase I cringe. It’s held up like a badge of honor, building credit or having good credit. “I want excellent credit!”

Yet really, what does this mean? Building credit means creating debt for oneself and paying it back, not all at once, but in bits and pieces, so some secret algorithms can spit out a high number that allows one to become even more in debt.  This is insane.

Seriously. Building credit is building the ability to be in debt. This is what many Americans strive for. I want a good credit score! Why? So that I can borrow money and be in debt. Having a good credit score means having the ability to be in debt. Is this something one should really strive for?

Here’s a concept: how about building the ability to be debt free? Rather than constantly worrying about paying the debt that good credit score bought, how about saving money so that you don’t have to be in debt?

Many of my clients after bankruptcy will ask about building that score back up. I ask, “Do you really want to build the ability to be in debt again?” Most look at me like the thought has never crossed their minds. Many then get a little Aha! look in their eyes and consider the possibilities of not worrying about their credit score and not being in debt.

If everyone who is actually able to pay their creditors took the money they spend on paying debt and put that money in the bank, they would have the money necessary to pay for an emergency if one arises. The “emergency” excuse I hear the most often from people wanting to get another credit card. What if I need money for an emergency?

My answer to that question is that if you are in an “emergency” that requires money, then using a credit card is going to make that emergency bigger and the amount of money necessary larger as well. If you pay a loan shark to borrow money (and make no mistake, credit cards are legalized loan sharks), then you’re going to end up owing and paying a lot more for that emergency than if you used your own money. How? Because you’ll pay interest on the money needed for that emergency. If you didn’t have the money to pay for the emergency in the first place, you’re going to have to make payments on that credit card (or loan). You’ll pay interest on the payments. This means that a percentage of your payment will pay back the loan, but the rest will line the pockets of the bank. You borrow $2000, you end up paying much more than that. If instead you use your own money from your own savings, you’ll just be putting your payments back in your own account and all of the money will be yours for future “emergencies.”

Further, often “emergencies” are expenditures that should be planned for, such as car repairs or a new furnace. If you set aside money each month to pay for these periodic expenditures as they arise, they won’t be an emergency and you won’t have to pay a loan shark to deal with them.

Of course I realize that many, many Americans do not make enough money to even pay minimum dues on credit cards or loans, so they certainly won’t have enough to set any aside. There are many struggling with this scenario and there are no easy or pithy answers. These are the people that the serious loan shark lenders prey upon, payday loan lenders and places like Springleaf Financial. The only way out of this situation is to bring in more money (not easy) or lessen expenditures (also not easy). This situation is not one I am going to solve in a blog post, but I’m not going to pretend it doesn’t exist.

Yet these people near the bottom economically are not usually the ones who are begging me to tell them how to increase their credit scores. No. The beggars are the ones who have enough discretionary income to want a good credit score. They are the ones who want to have the ability to be in debt. Having a good credit score means you can be in debt, and really, this is not something to be proud of.

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