FICO Overrated
If any of you read my post a while back titled "Why FICO Stinks", you are aware of where I stand on the issue of credit scores and such. Well, apparently, Dave Ramsey was on the CBS Early Show last Tuesday discussing our good ole' friend Fair Isaac. If you happened to catch the show, it was an excellent explanation as to how consumers have been brainwashed, er, i mean, sold debt and the debt lifestyle.
Dave also went into how the scores are calculated and where it lacks to tell a lending institution about the individual and their personal situation. Most just look at the score and say yea or nay. Dave compared it to monkeys sitting behind the desk, oooohoooo, high score, yes.....oooohoooo, low score, no. It was quite entertaining to say the least.
Think about this for a second, in order to have a high score, one must have debt. Apparently, debt shows lenders that you are fiscally responsible. I don't think I have heard anything more absurd in my life. Let's see, I don't know how to live within my means so I have a handful of credit cards, a car payment, a mortgage, and Lord knows what else, and that is being fiscally responsible? Give me a break!
Have you seen that commercial for FreeCreditReport.com? You know, "I'm think of a number between 700 and 8oo." He goes on to say that his score is, uh, I don't know, high, and because it is high he is able to save a lot of money. I laugh every time I see it and then think about all the people that have fallen for that trap. How in the world can you save money when you are knee-deep in debt? By getting a good interest rate for borrowing more money, to go further into debt? Yeah, that's intelligent and no thanks. Dave says that the "only way to have a good credit score is to have debt and stay in debt for the rest of your life and it is not an indicator of wealth. Now, I'm not gonna go and trash it. But all this, "I'm gonna make all of these moves and I'm going to continuall pay the bank for the rest of my life so I can have a high FICO score"...that sounds like a great plan...for the bank."
Dave also mentioned in the interview that the FICO score is not an indicator of wealth as some have assumed. "You can have $1 million given to you or make $1 million a month and have a crummy score. It's not a wealth indicator." In fact, The Millionaire Next Door tells us that the majority of the millionaires in America became millionaires because they didn't have debt.
So, if you have a crummy FICO score because you don't have debt (not because you mis-managed your credit), and want to buy a house go to a lender that offers manual underwriting according to FHA, VA, and FannieMae underwriting guidelines. If you've paid your rent early (or on time) for two years, if you've had a steady job for two years, have nothing on your credit score except for your name and social security number, you qualify for the best mortgage rates around.
It'll take some work finding a lender that does manual underwriting though. About one in five lenders still does it and that means they actuall do the work. "They look at the human being involved. See you could walk in again with $1 milion in the bank and $1 million a month income and a crummy FICO score and not get a mortgage at some of these places."
Closing thought from Dave Ramsey:
"If you are making all of your financial moves to please the bank, it's gonna please the bank." Instead of trying to find ways to raise your FICO score, think about finding ways to buy the things you want, as well as need, with money you already have. Why is it that Americans, when they want or need something, first look to borrow before they look to see if and how they can afford it? Ironically, we're a rich nation full of poor people.
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I ran into another post about credit scores over at MoneyPants.com called Keeping Score. A good read.
Dave also went into how the scores are calculated and where it lacks to tell a lending institution about the individual and their personal situation. Most just look at the score and say yea or nay. Dave compared it to monkeys sitting behind the desk, oooohoooo, high score, yes.....oooohoooo, low score, no. It was quite entertaining to say the least.
Think about this for a second, in order to have a high score, one must have debt. Apparently, debt shows lenders that you are fiscally responsible. I don't think I have heard anything more absurd in my life. Let's see, I don't know how to live within my means so I have a handful of credit cards, a car payment, a mortgage, and Lord knows what else, and that is being fiscally responsible? Give me a break!
Have you seen that commercial for FreeCreditReport.com? You know, "I'm think of a number between 700 and 8oo." He goes on to say that his score is, uh, I don't know, high, and because it is high he is able to save a lot of money. I laugh every time I see it and then think about all the people that have fallen for that trap. How in the world can you save money when you are knee-deep in debt? By getting a good interest rate for borrowing more money, to go further into debt? Yeah, that's intelligent and no thanks. Dave says that the "only way to have a good credit score is to have debt and stay in debt for the rest of your life and it is not an indicator of wealth. Now, I'm not gonna go and trash it. But all this, "I'm gonna make all of these moves and I'm going to continuall pay the bank for the rest of my life so I can have a high FICO score"...that sounds like a great plan...for the bank."
Dave also mentioned in the interview that the FICO score is not an indicator of wealth as some have assumed. "You can have $1 million given to you or make $1 million a month and have a crummy score. It's not a wealth indicator." In fact, The Millionaire Next Door tells us that the majority of the millionaires in America became millionaires because they didn't have debt.
So, if you have a crummy FICO score because you don't have debt (not because you mis-managed your credit), and want to buy a house go to a lender that offers manual underwriting according to FHA, VA, and FannieMae underwriting guidelines. If you've paid your rent early (or on time) for two years, if you've had a steady job for two years, have nothing on your credit score except for your name and social security number, you qualify for the best mortgage rates around.
It'll take some work finding a lender that does manual underwriting though. About one in five lenders still does it and that means they actuall do the work. "They look at the human being involved. See you could walk in again with $1 milion in the bank and $1 million a month income and a crummy FICO score and not get a mortgage at some of these places."
Closing thought from Dave Ramsey:
"If you are making all of your financial moves to please the bank, it's gonna please the bank." Instead of trying to find ways to raise your FICO score, think about finding ways to buy the things you want, as well as need, with money you already have. Why is it that Americans, when they want or need something, first look to borrow before they look to see if and how they can afford it? Ironically, we're a rich nation full of poor people.
--------------------------------------------------------
I ran into another post about credit scores over at MoneyPants.com called Keeping Score. A good read.
posted by Emma at 8:15 AM
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