To Borrow or Not To Borrow, that is the (steward’s) Question!
I think it’s interesting (amazing/incredible) that the one thing that isn’t included in the FICO credit score formula is income. Your income doesn’t matter. It has been determined that your income is not an important factor in determining how likely you are to pay back a loan.
FICO credit scores range between 300 and 850. The median score in the US is reported to be around 723 (half of us have a score less than 723 and half have a score greater than 723). The average score is around 677.
Are you still wondering, what’s the big deal? OK here it is. Lenders use the score to determine whether or not to give you the loan. 75% of all mortgage decisions are based in part on FICO credit scores. Not only that, but lenders also use credit scores to determine what rate of interest to charge. The higher the score the lower the interest rate charged. For example, the FICO website gave this illustration a while back. For a 30 year, fixed rate, mortgage of $216,000 if your score was 760-850 the rate of interest charged would be 5.9%. But if your score was 620-639, the rate of interest charged would be 7.5%. You say, what’s the big deal? That’s only a difference of 1.6%. Well let me remind you that we are talking about a 30 year loan. Over thirty years that amounts to more than $80,000.
If you are still thinking, what’s the big deal, the spread between the highest and lowest interest rate charged on credit card balances is more than 25%. Your credit score determines which end of the spectrum your interest rate will be on.
Some insurance companies use credit scores to determine the level of premium you will pay. State Farm and Country (and most if not all of the others) use credit scores for this purpose. The higher the score, the lower the premium.
Almost half of employers look at credit scores of job applicants and the practice is increasing. It’s an easy and quick way to screen out applicants.
Some universities are beginning to use credit scores to make admission decisions.
More and more landlords are using credit scores to make rental decisions
The reason for the increasing use of credit scores is strictly a business decision. Increasingly lenders and others are pressed for time and the manpower to carefully review and analyze credit reports and other information. And we, on the other end of such transactions, insist on immediate decisions. Lenders and others want a fast way to evaluate us and the credit score is it. Character used to be an important factor in making such decisions but no more. The only thing that matters is the score. It’s easy. It’s fast. So, there must be some correlation between credit scores and how good a driver you are, or how good a tenant you are or how good a student you are or how good an employee you are. The use of credit scores wouldn’t continue to increase if there weren’t some correlation here.
You can begin to see how important credit scores are becoming for everyone living in the real world. Increasingly the real world is becoming a paperless, cashless society. As such it is becoming increasingly important to be able to use that “evil plastic”. It is becoming almost impossible to function in society today without a credit card (and/or a debit card and/or an ATM card). Not only is it becoming increasingly awkward to operate on a strictly cash basis, it can also be expensive, inconvenient, and time consuming. The question for us Christian stewards is, how can we function effectively IN the environment of this real world without becoming OF the world. We want to take advantage of all that this wonderful electronic financial/credit card/plastic environment has to offer without experiencing the problems it has created for so many people.
The answer in a nut shell is to establish and maintain good credit (high credit score) but don’t use it. This will require that you recognize and remember who you are and what your job is. Then it will require a great deal of discipline. First of all, open a checking account and manage it well by following two simple rules: 1) NEVER write a check for more money than you have in the account and 2) ALWAYS know how much money is in your account (contrary to what you may think, it can be done). Secondly, open a savings account and start putting some (even a small amount) money in it every week. Thirdly, obtain 2-3 credit cards (maybe one of each kind but no more than that), and maybe obtain a couple store accounts. Manage these accounts by following four simple rules: 1) NEVER charge anything on the accounts you can’t pay off at the end of the month, 2) ALWAYS pay off the accounts at the end of the month, 3) NEVER be late with a payment or miss a payment, 4) ALWAYS borrow money from the bank (or credit union) with a secured loan. Never buy big ticket items with your credit cards when it would result in your carrying a balance on your credit cards (or other revolving accounts). If you can follow these simple rules faithfully, you will be able to maintain a high credit score and you will be able to function reasonably well IN the real world today without being sucked into and becoming OF the world. Your high credit score will assure you of the best interest rates available and (all other things being equal) the lowest insurance premiums. Your high credit score may get you into the apartment you want or let you into the college you want or bring a job interview or even a job offer you want. It’s really important so don’t fool around and violate any of the rules.