Your Money or Your Life
One the greatest comedy gags of all time was the pregnant pause delivered by comedian Jack Benny, a notorious tightwad, when threatened at gunpoint with the choice between his money or his life. He was so cheap the gunman had to ask the question a second time to which Benny replied with some frustration, “I’m thinking, I’m thinking!”
With unemployment at 10 million (a 25-year high) many people are going to be faced with a similar question, “Your money, or your credit rating”. Unfortunately, many people believe they can ransom their credit rating by paying and paying and paying in the hope that their situation will improve. Unless the debtor has created an aggressive and sound budget, their credit rating will be gone along with what was left of their money.
The Purpose of a FICO Score
In the good old days before banking was deregulated, globalized and everyone became a number instead of a name, you had a banker who knew you. That meant he knew you by name, knew your family, your business and your character. Loan officers make judgment calls based on those factors. But, when banks became huge institutions with headquarters thousands of miles, or continents away, they no longer knew you, your family, your business or your character.
FICO (Fair Isaac Company) created a formula to assess how risky it is to lend money to an individual without knowing anything at all about them personally. It takes into consideration many factors: how long you have had credit, how much of the credit your have is currently being used, your debt-to-income ratio, whether or not you have liens or judgments and your overall payment history. That last item, payment history, is usually the culprit that destroys everyone’s credit rating. Unemployed and struggling to pay your bills, is your FICO score worth more to you than money?
Ruined Credit will not Ruin Your Life
People in debt trouble drive themselves crazy about things over which they have absolutely no control. It is common to read on forums the concerns of consumers desperate to lower their monthly payments so they can have enough money to buy groceries. When they consider stopping paying those 35 percent interest rate credit cards they invariably ask, “Won’t that hurt my credit rating?” Yes it will. But, paying minimum payments at thirty-five percent for any period of time over three months will not only kill your credit rating, it will likely put you into bankruptcy. These kind of questions are most confusing when they are asked by seniors in their seventies. What good is a credit rating to someone who is going to leave the planet in something under 10 years? Then again, if you are 30 years old a bankruptcy or ruined credit could hamper your chances to get the job of your dreams now or the promotion you think you earned tomorrow.
How to Make an Analysis that is Right for You
1. If you have no choice and can’t pay your bills – don’t. Survive to build your credit score another day. Keep one card current and use it as your road back to creditworthiness.
2. If you are a senior or if you don’t have your sights set on starting a business, buying a house, renting or leasing a car or involving yourself in a transaction that requires good credit, the cash in your pocket may be worth more to you than your credit score.
3. If you are just starting your financial life after college, every effort should be make to preserve your good credit. If you can’t do that, just make sure you spend some time with the branch manager of your favorite bank. Financial trouble is almost always temporary. Scoring a friendship with your local banker may be all you need to overcome a FICO disaster.
Your credit score really means very little when you have to choose between eating and keeping your cards current.
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