Friday, September 26, 2008

Credit is a cruel mistress

The whole credit industry defies any logical sense. There are so many things wrong with it that I don’t even know where to begin. Firstly let’s start with how credit bureaus are allowed to tabulate and sell your credit report, but they charge you to see the information that consists of your most personal details. I had some inaccuracies in my credit report, and it gives you the option to say “this is wrong” and they’ll remove it, but they don’t give you the opportunity to actually correct it. Next, is the predatory lending practices, they want you to get into debt, which according to their scoring system you have to do over and over again if you ever want to be able to buy a house. Their scoring system punishes you for being so solvent you don’t have to use debt. You could make $200k a year, never be late on a bill, pay for your car with cash and they will decide you are “high risk”, whereas someone who needs to use debt repeatedly to afford their lifestyle gets rewarded. I have a $7000 limit on my credit card, which is more than ample. However my score is calculated by judging my debt-to-credit ratio. Since I have $4000 on my statement this month my score is penalized for using more than 50% of my available debt even though I will pay it totally off when my bill is due. The only way to avoid this negative mark, was to request them to double my line of credit which they happily obliged, of course. So even though I will likely never charge $14,000 in a given month it brings my debt-to-credit ratio under 30% which is more desirable on my credit report. It is a tricky, tricky game.

6 comments:

Lona said...

I don't even come close to understanding the intricacies of the credit industry. I am also far more interested in staying out of debt then increasing my credit score. Fortunately, my score is pretty good anyway.

Lona said...

oops thats Piri, I didnt realize I was still logged in as Lona, I was helping her pimp her blog.

Lynnis said...

I agree with the principle that staying out of debt is more important but you have to have stellar credit to get a mortgage these days and I would like to refinance my house in the coming years.

Gordon said...

From the perspective of the lending instituion you are a risk if you don't pay and you are ALSO a risk if you pay off too soon thereby negating the possibility of a profit if interest rates go down.

This accounts for the strangness of the scoring system. My advice is to ignore the credit rating system and be financially prudent. Cash is king.

Lynnis said...

Yeah, I am definately not their favorite customer. So far this year I have paid $13 in interest (from the month Brian didn't get paid) and they have promised to pay me $255 in cash back for rewards. It works more me because I won't fall for their traps.

Piri Jenkins said...

They still make money off of you, they get a percentage of every transaction, between 2.5 and 4% usually.