Money Rules for Life: Credit Is Not The Enemy

Before she became an expert on getting out of debt, before she wrote books and appeared on Good Morning America and Oprah as an expert in personal finance, Mary Hunt owed more than $100,000 on her credit cards. Partly by becoming a self-defined “cheapskate,” Hunt paid off all her debts and her experience became the basis of what would become Debt-Proof Living, a monthly newsletter and later a popular book.

Hunt recently published her latest personal finance book. Called “7 Money Rules for Life,” the book is the culmination of 20 years of Hunt’s work helping consumers improve their finances, with chapters on everything from spending to saving.

But debt, and getting out of it, remain at the heart of Hunt’s experience. Two of the book’s seven chapters focus on debt. The first, about ways to manage debt you already have, may seem surprising for an author famous for encouraging people to live debt-free. As Hunt describes, however, debt doesn’t have to be a four-letter word. If managed well, a little debt can actually help you build a stronger financial future.

Here’s an excerpt from the book, which appears in chapter six:

Rule 6: Manage your credit rating to achieve a high level of creditworthiness.

Please read this rule again, paying close attention to the words “credit rating” and “creditworthiness.” This rule does not mean going into debt, creating debt, or taking on huge sums of available credit.

Credit Is Not the Enemy

Credit on its face is not bad. In fact, having a good credit rating, which is measured by your credit scores, simply means that based on your past behavior, lenders, car rental companies, and others that you deal with can expect the same from you in the future. A high score is one of your most valuable money management tools for reasons we’ll discuss in a bit. Just let me be perfectly clear that credit, like other things in life, has the potential for both good and bad. If abused, your access to credit can ruin your life. This is where financial maturity becomes an important asset.

As much financial trouble as I managed to get into because I abused credit cards and ran up insane amounts of toxic debt, I don’t blame credit. I take responsibility for the foolish decisions I made and the horrific ways that I abused consumer credit. That my credit led to toxic debt was of my own doing.

Growing Misinformation

There is a trending belief in some circles that to have good credit you have to be in debt, or that a credit report is just a “debt report” because it measures your debt. That is not true. You do not have to be in debt to be found highly creditworthy. As you will soon learn, there are ways to build your credit score that do not involve debt.

With so much misinformation going around, it’s no wonder that consumer credit has become such a mysterious and complex subject.

Why You Need to Be Creditworthy

Without good credit, it’s difficult to buy a home or qualify for the best insurance rates. The practice is called “risk-based pricing” and it is perfectly legal. A growing number of companies check credit reports before making hiring decisions. Landlords want to see a clean credit report before deciding who gets the apartment.

Like it or not, banks, credit unions, credit card companies, and auto financing companies look to credit data to set interest rates. Most banks now require a credit check to open a checking account.

Insurers, employers, property management companies, and even car rental companies assume that you will treat their property and conduct your business with them the way you’ve handled things in the past. Whether it’s fair or not, a prospective employer can conclude that if you are sloppy with your own finances, you might be sloppy on the job. With so many candidates to choose from, why hire someone with lousy credit? With so many people wanting to rent that townhouse, why approve someone who has a history of paying late? The theory when it comes to creditworthiness is that your past behavior predicts your future behavior.

These days a poor credit rating can be costly, and that’s the reason you need to assume the role as your own personal credit manager.

What follows may appear at first glance as just technical stuff worthy of skipping over. Please do not do that.

To get up to speed quickly on this matter of maintaining a good credit rating, you need to be familiar with a few terms.

Credit reporting agency (CRA). A company that gathers consumer credit related information from banks, credit unions, public records, inquiries, department stores, property management companies, and others, then compiles it and sells it back to consumers, lenders, insurance companies, employers, and other businesses that have a legitimate business purpose for the information as individual credit reports. The three major CRAs are Equifax, Experian, and TransUnion.

Credit report. This is all of the information associated with your name and Social Security number that a CRA has in its credit file. This information can change monthly as new information is reported and gathered by the CRA. Negative information can be reported for seven to ten years (depending on the nature of the negative item) while positive information is reported indefinitely.

Credit score. This is a three-digit number that judges how well you handle credit over time. It is based on the contents of your credit report and rates the possibility that you won’t pay your bills in the future. While you have many credit scores, the one lenders use is the FICO score, so don’t waste your time or money on any others. Each of the credit bureaus has a FICO score for you, which is based on the information in their credit file.