Credit scores are very misunderstood including here on this board, but that’s not surprising. They are somewhat complex algorithms originally designed to standardize our lenders ability to extend credit.
I’m sure nobody can fault lending institutions for trying to have predictability around a persons willingness and ability to repay credit that they have extended to them.
Credit cards might be the most unique aspect. Interest income used to be the prevalent way a lender can make a profit with a credit card however in today’s environment the interchange income and fees are most appealing. Credit card providers write off millions and millions of dollars each month of unpaid balances that they can never collect.
That’s a conversation littered with complexities for a different day. But the mortgage loans, car loans, and boat loans that also have enormous impact on peoples credit score are just as important if not more so.
Today you can buy a $400,000 house and borrow as much as 97% of it from a lender and paying interest rate under 3 1/2%. That loan is amortized over 30 years, allowing the majority of us who don’t have $390,000 cash to put down on a house the ability to actually purchase a home at a reasonable monthly payment.
Same deal with a $30,000 car or a $50,000 boat. I’m not sure I can agree with anyone who thinks that that is a bad thing.
But they are not mandatory things as we often make mortgage loans to people who have no credit cards, or house payments, or car payments.
We will gladly validate that they pay their rent if they are renting or their utilities, water bill, cable bill or any other number of methods to validate that they take their financial obligations seriously and make their payments.
That, combined with the total amount of their debt relative to their income provides incredibly strong predictability around whether or not they will pay their mortgage on time and consistently overtime.
Yes, credit cards are baked into this and there are many people who do not have the control to properly use them. But the overwhelming majority of clients we see do you have the financial responsibility. In fact in today’s world of rewards we have many clients who never pay a penny of fees or interest, and accumulate thousands of “reward points“ by using her credit card for every day purchases like groceries and gasoline.
Just the other day I went on to Amazon to purchase a fishing rod travel carrier as I am going to Minnesota at the end of August for a week of Muskie fishing. When I went to check out Amazon automatically gave me the option of using points from my credit card to pay for the $110 item which I did. So I got it for free. My credit card has no annual fee and I pay the balance in full every month.
In the end it may be about education. We live in a time where it is easy to get credit extend it to you for under 5% and just as easy to invest that money with returns certainly an excess of 5%.
