(FT Press, May 2009)
It’s been said that love makes the world go ‘round. Well, actually, it’s credit.
We live in a global economy that depends on credit in order to make things work. Those of us in the business also refer to this as leverage. Not only are private enterprises, municipal and federal governments, and all of our large banks built on the foundation of leverage; individuals require it in order to buy the goods and services deemed both necessary and simply desirable.
And while we could talk ad nauseam about what caused the current credit crisis—not to mention what to do about it—the bottom line for the individual investor is that your personal credit score holds the power to shape your financial future. Period. Whether you call FICO a four-letter word because it has meant the demise of your financial life as you once knew it, or you savor its three-digit number because it has allowed you to move towards financial freedom: your credit score can literally determine your long-term success as an investor and as one seeking financial independence and freedom. This is heavy stuff.
This was the major takeaway I gleaned from Liz Pulliam Weston’s Your Credit Score: Your Money & What’s at Stake. I had never before fully respected and appreciated its value. Fearing that a book written entirely about credit scores might have the emotional appeal of sawdust, I was most pleasantly surprised to learn both the facts about credit scores and as importantly, the myths about scores, and how separating fact from fiction has the potential to impact one’s long-term financial future. This book is particularly needed today! Weston states: “Although most people had heard of credit scores, I’d found relatively few really understood the pervasive impact these numbers have in our financial systems and our day-to-day lives.”
Of course, pre-credit Crisis, most of us took our credit scores for granted. During the go-go years, we pretty much bought whatever we wanted, whether we needed it or could afford it. Or not. Our credit score was just one more piece of information woven into the fabric of our financial quilt. Other facets of our lives were examined with the same degree of intensity: our professional job titles, our income, assets, liabilities and long-term prospects for prosperity. But in today’s world, our credit scores can make or break us, literally, allowing us to live out the life we had imagined or depriving us from that dream entirely. For a poor credit score wipes out options, leaving us holding the leftovers of our hopes and dreams instead of the fullest possible package imaginable.
Consider that in 2007, before the Crisis, auto lenders approved two out of three borrowers with poor credit scores. By mid-2008, they were approving less than one in four applications from potential buyers who simply had bad credit. Mortgages became difficult to acquire as well. Today, home equity lines of credit, or HELOC’s, have all but disappeared. No bank wants to assume the liability, even for people with great credit. The rules of engagement have changed, and you need to learn how to participate to your best advantage.
Weston has enthusiasm for this subject area and desires to help you understand why your credit score matters, how it is calculated, how you can use it to buy the goods and services that you desire, and how you can repair yours should it need a major revision. If you’ve suffered through a credit disaster, Weston will lead you down the path towards reconstruction. If you’ve had your identity stolen, as I have along with the estimated nine to ten million people per year who have fallen prey to this crime, you will learn how to go about re-building your good credit and protecting yourself from further fraud. In fact, Weston’s chapter titled “Identity Theft and Your Credit” was one of the most practical; anyone who has endured the frustrating and time-consuming pathway towards restoration will learn the exact steps needed in order to make things right again.
Lastly, Weston debunks the ten most commonly-held myths about credit scores, surprising readers like me who assumed that, as financial service professionals, we really understood these things.
- Does closing out credit card accounts help or hurt your score?
- Do you raise or lower your score by asking your credit card company to lower your limits?
- What’s the truth about checking your own credit report and its effect on your score?
- Does shopping around for the best rate affect your score?
- Do you need to use credit in order to get a good score?
- Do you need to pay interest to get a good score?
- If you have an unresolved dispute with your lender, does sending in some of your sample writing help or hinder your score?
- Do you need to edit your closed accounts with verbiage in order to not get whacked on your score?
- Which is worse for your score: credit counseling or bankruptcy?
- Can you ever fully recover from bankruptcy?
This is recommended reading not only for investors who are looking into making a major purchase in the near future and who might be overly concerned with scoring; this is recommended for every investor who wants to learn and understand the truth about credit in order to better plan for long-term financial empowerment. Thumbs up to Liz for enthusiastically pointing us all in the right direction.
---The author is Carolina Fernandez, vice president of investments at Source Capital Group and founder of the SHEeo network at The Cornell Club.