Did you know that credit used to be as good as a man’s word? When it came to trust, you knew that you could rely on a person who gave their word. That person had excellent credit! Then, credit became the handshake. A shake of a person’s hand meant that you could trust them beyond a shadow of a doubt! The signature used to be an excellent judge of credit. If a person signed their name to a contract, then you knew that they could be trusted.
TRW is the credit reporting agency that we all became familiar with in the past. They became Experian in 1996, however, when we think of credit we still think of TRW and the old rules from as far back as the 1960’s and 1970’s. This is the knowledge base that our economy is using to determine good credit, and it is tremendously out of date, impractical, completely dysfunctional, and totally not user friendly.
So how do you recognize the old rules when you see them? Here are some examples:
1. Pay your bills on time. You’re probably thinking “How could this rule be old or wrong?” This rule is old because we now know by experience that when you make your payments early, you give yourself room to react if something happens in your life that is unexpected. It is best to have a leeway of 3 – 6 months where you can live comfortably without interruption even if you lose your job.
2. Working on my credit will be too much work! I’m sure you thought the same thing when it came to eating healthier and exercising, but you soon realized that your well being depended on your decision to care for your health by taking control of how you eat. Credit isn’t any different. Your financial well being also depends on your decision to take control of the way you use credit, so make it a point to become aware and create goals for what you want your credit to do for you.
3. Credit just means being approved for credit cards, and credit cards create bad credit! No one would know how reliable or trustworthy you are when you pay your credit debts if they didn’t have a way to create a picture of your debt responsibility. Credit is just a way of saying “This is how trustworthy I am.” with examples of current and previous debts you paid.
Credit cards are just a resource that your credit allows you to use when you have been responsible. Continuing to be responsible keeps your credit from becoming bad, and a great way to do this is to stay away from applying for credit that you cannot afford. You should never use credit resources such as credit cards to pay for other credit resources, such as your home or your car or other credit cards. You are borrowing that money, and should always have the cash on hand to pay back what you borrow.
4. Isn’t “working on your credit” illegal? Those credit companies probably wish that were true. The worse your credit scores are, the higher interest rates creditors, lenders and funders are able to charge you, and the more money creditors make!
You are literally paying thousands and thousands of dollars more per year than you have to. It is illegal for those companies not to work with you when you dispute negative information on your credit reports. It is illegal for someone to use your credit without your permission. It isn’t illegal to understand what these companies expect from you and make your payments, rearrange your habits and create new schedules to take better care of yourself.
5. It’s better just to pay cash instead of using credit. Not true! While credit seems like a middle-man who is just passing your money from you to your purchase, something much more exciting is happening. Every time you use your credit the right way by keeping it current and making your payments early, you are telling lenders and funders that you have integrity and credibility in your financial life, and they actually have the proof to see it!
If you ever need anything, they will jump to give you what you want. This fact literally makes dreams come true, because you can then purchase assets – things you buy that add money to your income – that will actually take the place of income from your job in paying for your home, car and other necessities!
There is no way for lenders, funders and creditors to determine on their own how you honor your business relationships if you only pay for things in cash. Receipts do not have your name or other identifying information on it, so they cannot be used to your benefit.
Credit is just another way of saying credibility, or a person’s reputation of being reliable. Credit scores and reports and a picture of your debt responsibility called the credit profile were created to provide a “tangible” picture of how you value your business relationships when times get hard regardless as to what you say in your defense. The credit profile of a person with bad credit says that when times get hard, their business relationships are the first to be let go, regardless of their situation.