Beating Broke

Personal Finance from the Broke Perspective

The Building Credit Fallacy

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Building credit is a phrase that you’ll see around the Internet and anywhere most financial experts talk.  It’s basically the act of getting a loan with easily repayable terms, or piggybacking on someones loan, in order to create a positive record on your credit report and thus increasing (building) your credit score.

But, for many, it’s a fallacy that acts as another trap in the debt cycle.  Here’s the scenario.  You need to build your credit.  So, on the advice of a few friends or experts, you go down to the bank and get a $300 loan.  It’s all they’ll give you, and the interest rate is way more than you should spend.  But, you don’t plan on spending any of the money, so you’ve just got to come up with the payments with the added interest and viola! A shiny new positive mark on your credit report.  Except.  Except that after about 2 months, you get a flat tire.  Or you’re favorite band comes to town.  Or your friends want to go out on the town.  Something comes up and you need some money.  You don’t have any.

credit reportWhere do you get your money?  Why from the loan, of course.  You’re gonna pay it off anyways, right.  So, you’ll just have to scrape together a bit more for the next payment, that’s all.  Except.  Except, you don’t scrape together that money.  You use the rest of the funds to pay the next few months payments, but you come up short.  You still need to scrape a few dollars together to make the last few payments.  How’d this happen?!?  It must have been those parasitic lenders, right?

Not quite.  You did it to your self.  And instead of a shiny new positive mark on your credit report, now you’ve got new delinquencies.  And eventually, maybe a nice new collection note.  All because you thought it would be nice and easy to build your credit.  You fell victim to the fallacy.

It doesn’t have to be that way.  Many people pull this off, but it takes a mindset as well as the money.  If you attempt to do something like this, but you don’t have your whole mind in it, you stand a high risk of ending up with negative marks instead of positive ones.  But, if you’re determined to stay out of debt at whatever cost, you can make it work.  It means you can’t touch that money for anything.  No drinking with friends, no Bieber concert, and no new tires.  If you want to improve your credit score, and you’re in a situation where this is the only solution, you’ve got to be ready to make a few sacrifices.

Take a step in the right direction, take responsibility for your actions, and do the financially sound thing.  Building your credit can be that easy.  It’s not a easy task, but once you’ve built it long enough and high enough, maybe you can continue to build it with a nice used car loan of a couple thousand.

Image Credit: credit report by TheTruthAbout…, on Flickr

Regulation: Should FICO Haz Sum?

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Are you aware that the company that developed and markets the FICO score has little to no rules as to how it does so?  There’s no oversight into the algorithm that it uses to create your credit score.  There’s no regulation that delineates what factors they should take into account or how heavily they should weight them.

So what, you say?  Think about this for a second.  Your credit score determines whether you get a credit card or not.  Whether you get a mortgage or not.  Whether you get a car or not.  Some businesses are even using the credit score to help determine the worthiness of a potential employee.  Despite all that influence in your life, there’s nothing to keep them from deciding that the one late payment you had a year ago is enough to drop you several hundred points.  Sure, that’s not the way it works right now, but there is nothing to keep them from doing so.

In a perfect world, you wouldn’t need credit.  You could pay for everything in cash and not worry about it.  But, this world is far from perfect.  Very few people don’t use credit in some way, shape, or form.  And each of those people could just as easily be effected by any change in the FICO algorithm.  Almost every other financially related type of company has some regulation.  Banks, Credit Unions, Credit Card companies, Payday lenders, and even the stock market have lots of regulation and oversight.  But not the company that determines how much a person can use those organizations and whose product is solely responsible for determining how much they can use them or at what rate.  Shouldn’t they have some regulation or oversight?

It’s clear what I think on this.  (yes)  What do you all think?  Should FICO have some regulation and oversight?

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Beating Broke Guide to Your Credit Score

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Almost a year ago, I released the Beating Broke Guide to your Credit Score.  Since then, a lot has happened and it seems to me that your credit score could become more important than ever as we recover from this economic disaster.  Previously, I had it set up such that you had to sign up for the newsletter to receive a copy.  I’m changing that now.  The graphic in the right sidebar now links directly to the guide in it’s pdf form.

It’s one hundred percent FREE, so please grab a copy and take a look.  I think you might learn something.

You can download it at https://www.beatingbroke.com/BBGCS/BBGCS.pdf

The guide is now available for the Kindle as well!  Please note that the kindle version is not free as the pdf version is.  The pdf version will remain free for downloading.