If I heard it once, I heard it a thousand times. I can buy anything I want as long as I have good credit. There is a common held belief that a FICO score also referred to as credit score is a measure of how well you’ve managed your money over time. The entire world is focused on raising their credit score. If I were a betting man, I would bet that the majority of you reading this article consider a credit report to be your financial report card. Many of you are very protective of your credit report. I’ve had many cases where various clients will hire me as their financial counselor and allow me to review their entire financial profile including investment statements, insurance policies, mortgage documents, household expenses, debts and other financial records. But for one reason or another when I tell them I need to pull a copy of their credit report, they refuse. They asked why do you need my
credit report? My other financial advisor never asked for a copy of my credit report.
First off, I’m not a typical financial advisor. In fact, I disagree with a lot of what the “conventional type” financial advisors recommend to their clients. I’ll admit it—I’m weird. I don’t ascribe to conventional wisdom just because that’s what everyone else believes or that’s what everyone else is doing. I’m the type of person who wants to know what does the p’s and q’s stand for in the phrase “mind your p’s and q’s. You hear everybody using the expression. I asked over 100 people what does it mean. Not one of them knew the answer. I think it was Earl Nightingale who said, “if you have no successful model to follow, just look at what everyone else is doing and do the opposite.” He says that the world has it wrong. In the Bible, 1 Corinthians 3:19, it reads “For the wisdom of this world is foolishness in God’s sight. As it is written: “He catches the wise in their craftiness.” I’m not suggesting that God descended from heaven and breathed newfound wisdom into me. I admitted to being weird—not delusional. But whenever the world is sold on an idea, I question it. Because of the fact I question conventional wisdom. From time to time, I’m able to catch the wise in their craftiness.
I told you in my last article entitled “You’ve been hoodwink, bamboozled, led astray, run amok” that I was going to prove to you how the banking, credit, insurance, and financial industry has craftily transferred your future wealth from your pockets to theirs. Think for a second. Who sold you on an idea that you could buy anything you want as long as you have good credit? Who sold you on an idea that a good credit score is a measure of how well you’ve managed your money? Who would be motivated to sell you on those ideas? Someone who is interested in selling you credit. I was recently on a conference call with two brilliant individuals. A comment was made that as long as I have good credit, I can buy what I want. Before, I could catch the words flowing from my mouth I retorted “that’s a poor man’s way of looking at things.”
A credit score has nothing to do with how well you’ve managed money. I know a lot of poor people with high credit scores. A credit score is a statistical measure of an individual’s probability of default.
A credit score measures the likely hood of you repaying your creditor for the money borrowed. What’s a good measure of how well you measured your money? There’s an equation that’s used in accounting that’s a true indicator of how well you’ve managed money. The equation is Assets – Liabilities = Net Worth. If you want a true financial report card, you need to know what’s your net worth. When I say that I help ordinary people make extraordinary progress toward their financial goals, I’m saying that over the course of time I want to see my clients net worth grow to reach $1 million or more. The irony is a credit score is competing with your net worth.
You see, Assets – LIABILITIES = Net Worth. A credit score is record of how well and how long you’ve managed your LIABILITIES. It’s hard to grow your NET WORTH when you’re content with managing LIABILITIES. I show my clients how to efficiently payoff liabilities. During this process, they have begun the process of building wealth. At the same time, I put contingency plans in place in case something comes up that can throw them off course.
A byproduct of working my plan is the fact that you’ll rebuild your credit and maintain your credit in an excellent standing for the next 15 years. I’m not advocating that you don’t pay your bills. I show people how to get current on bills. I encourage them to make their payments on time. In fact I encourage them to pay the accounts off early—preferably in two years with the exception of their mortgage. Following the advice of getting current, staying current and reducing your balance in relationship to your credit limit accounts for 65 percent of how your credit score is measure. If you heed my advice, you’ll have a good credit score. Considering the fact that the average person following my advice will have a mortgage for 12-15 years your credit score will remain in good standing for the next 12-15 years.
I think that a realistic view of how well people has measured their money is to measure their net worth in their older years. These people have lived through the test of time. They’ve raised children. They’ve purchased cars, homes and other big ticket items. Most of them followed conventional wisdom. According to a study done by the US Department of Health and Human Services, 96 percent of people aged 65 and older retire or die BROKE!
(Mortgage and Money Coach Damon Carr is the owner of ACE Financial. Damon can be reached at 412-856-1183.)