Credit Scores: A Lender’s Investment In You
A Typical Conversation
If dogs could talk…
Blue: “Man, I’m pumped I have a 820 credit score”!
Chloe: “Didn’t you ask to borrow $20 from me last week”?!?
Duke: “You still owe me $20 from 3 weeks ago”!!!!
Having No Credit Score is Better Than Having a Bad Credit Score
Look, here’s the thing. I’ll agree that having no credit score is better than having a bad credit score. Conversely, I’ll argue that some people may have a high credit score, but literally have NOTHING in their pockets or bank accounts. 60% of the population cannot afford a $1000 emergency. 20% of the population has a 800 or higher credit score, with another 25% having a 740-799. I wonder how many of those with a 740 or higher could cover a $1000 emergency? That’s the real statistic here.
What a Credit Score Actually Means
You know what a credit score is? For years I thought it meant ‘what I could afford’, but it actually summarized how comfortable lenders are with your ability to pay back loans or carry multiple lines of credit. Additionally, it’s the lenders’ ability to make an investment in your ability to make interest payments back to them. Remember, Interest Earned is a REWARD, Interest Paid is a PENALTY.
How is a Credit Score Measured?
>Credit Payment History (35 percent),
>Total Debt Load (30 percent),
>Length of Credit History (15 percent),
>New Credit (10 percent),
>and Mix of Credit, such as revolving credit or fixed-payment loans like a car payment (10 percent).
>How long you made payments.
>How much debt you’re able to carry.
>How often you’ve borrowed.
>New shiny toys that I borrow for.
>My collection of credit cards.
A credit score doesn’t define what you can afford, it’s how much and how often you’re willing to pay for something you can’t afford.