By Rick Hopkins, Co-Founder
Black Income Shifters, LLC
Fans of the old “Popeye the Sailor” cartoon series of my youth will remember this famous quote from Popeye’s buddy, Wimpy. Wimpy loved hamburgers, but was always broke. Because he had no money, he would constantly try to borrow money from his friends to buy a hamburger with the promise to pay them back next Tuesday. I assume Wimpy must have had a job, although it was never mentioned; and that Tuesday was his payday. It was a moot point because no one ever lent him any money anyway. But what if credit cards had been around back then? How much debt do you suppose Wimpy would have found himself in due to his lack of financial discipline? Would he be just another victim of what today is known as the “credit trap?”
Credit affects every aspect of our lives today, from taking out a loan to getting a new job. A sometimes unfortunate byproduct of the information age in which we live is that all sorts of information, good and bad, is now available to almost anyone with a computer or a smart phone. In a very real sense, good credit can save, or even make you money; bad credit, on the other hand, will definitely cost you money. Metaphorically speaking, if you have good credit, you get the elevator; if you have bad credit, you get the shaft! We hear a lot today about credit repair or credit restoration programs; and an incalculable number of variations that will show you how to “fix your credit.” Some companies even claim to be able to “do it for you;” which is misleading because you will still end up having to do most of the legwork yourself anyway!
This is why Credit Education is so important. If people were more educated about credit and how it really works in America, it would change their lives and their finances forever. W2 employees are hardest hit with credit issues; which sometimes causes them to have to leave satisfying jobs and careers for better paying options that are much less fulfilling. Let’s be honest, W2 employees, as a group, are among the lowest paid, highest taxed and most in-debt segments of our country’s workforce. As a cashflow management consultant, I specialize in working with nonprofit organizations and employees to help them legally, morally and ethically create new cashflow from the money they already make. The key word here is cashflow; and having bad credit, or a low credit score, adversely affects your cashflow.
“Cashflow” is not to be confused with “income.” Income is money that you earn. Cashflow is created by the decisions you make with the income you earn. Bad decisions with the income you earn can result in bad credit. Bad credit causes you to have to pay higher interest rates; which, in turn, causes you to have to spend more of your hard-earned salary on the same goods and services that others pay much less for. This explains why credit scores in this country are in free fall while interest payments on debt are rising exponentially. We are a capitalistic society; therefore, it should be no surprise that credit repair companies are seeking to capitalize on this opportunity. Your best defense is Credit Education which encompasses credit repair, restoration and monitoring; as well as credit building and debt reduction strategies.
The majority of credit repair programs focus almost exclusively on raising your credit score by “removing negative entries” from your credit report. The primary way to do this is by sending creditor dispute letters to the three major credit bureaus: Experian, Equifax and Transunion. No doubt, this is an important step; however, what they don’t tell you is that removing negative entries counts for only 35% toward the calculation of your credit score! That leaves 65%, the majority of influencing factors, completely unaccounted for… unless, of course, you strategically incorporate the Credit Education component. So what makes up the remaining 65% of factors that are involved with calculating your credit score? There are actually five weighted components that are considered:
PAYMENT HISTORY (35%) – The higher your proportion of on time payments, the higher your score will be. This is where the creditor dispute letters come in. Negative entries end up on your credit report because you have been late on payments or missed them altogether… or perhaps they were assigned to you by mistake. I the creditors cannot document that the entries are accurate, then the dispute letters will prompt the credit bureau to remove them.
CREDIT UTILIZATION (30%) – How much you owe makes up another big chunk of your credit score; more specifically, the proportion of the money owed compared to the available credit. As a general rule, using a high percentage of your available credit is bad; while using a lower percentage of your available credit is good. I would suggest keeping the amount of debt-to-credit owed between 20% and 30% of your capacity.
LENGTH OF CREDIT HISTORY (15%) – The longer your history of making timely payments to creditors, the higher your score will be. A long history of making only cash-and-carry transactions may seem like a good thing; but not having any debt management track record whatsoever actually lowers your credit score. Simply stated, you must have a credit history for lenders to review, or they will not be able to evaluate the risk level for your application.
CREDIT MIX (10%) – There are two types of credit accounts that are considered: Revolving accounts, which has differing payments each month based on a balance (i.e. credit cards); and Installment accounts, which have a fixed payment over a given span of time (i.e. mortgage). It is good to have a variety of credit accounts to show how responsibly you manage different types of credit.
NEW CREDIT (10%) – Shows lenders how actively you are searching for credit, and how frequently. Two types of credit inquiries are considered: Hard Inquiries, when you actually apply for credit, and which stay on your report for two years; and Soft Inquiries, which are for any reason other than applying for credit, and which don’t appear on your credit report.
Yes, credit repair and restoration are extremely important; however, the building, maintaining and monitoring of your credit is just as important… if not more so. Remember, Credit Education is the key. Don’t fall for the “old okey-doke!”