Beware the Lure of Good Credit

Photo courtesy of www.flickr.com by Philip Taylor PT taken on April 25, 2012.

A typical American college student ventures into a car dealership for a test drive, some sort of promotional gift, and hopefully their first new car. He or she has successfully saved for a down payment and desperately needs a safe vehicle for their university commute. They pride themselves on hard work and expect to live the American dream. The employees swarm the entrance and a particular eager staff member pounces on the potential customer. The employee only requires a driver’s license before they can select a car. With the make, model and color already chosen, they head toward the lot with their salesman right behind them. They climb in and take a cruise around town, while gathering details about safety features, highway mileage, warranties and maintenance packages. They return to the dealership brimming with excitement. If they stretch their budget, they can definitely afford the payments. Today marks the beginning of their new mobile life. The sales associate disappears to finalize the paperwork, but returns with bad news. The dream shatters, because the applicant lack good credit. Everyone wants good credit, but how to get it eludes many.

Americans live in a society that relies heavily on credit, which creates an entitlement attitude. Young people want now what their parents have earned over a lifetime. They want unlimited use of a cell phone, their own car with insurance and a gas card, the ease of shopping with a credit or debit card, travel, laptops, Xbox Live accounts and more. These luxuries require income, financial responsibility, and in most cases, good credit. Teenagers receive credit card offers in the mail. Banks target young adults for student loans, auto loans, credit cards and even mortgages. Easily obtained credit lures people into buying something now without the income to cover it. Popeye’s character, Wimpy, echoes this sentiment when he declares, “I’d gladly pay you Tuesday for a hamburger today.” Unfortunately, Tuesday and the consequences arrive much sooner than expected.

While Americans easily obtain some forms of credit, they must maintain a delicate balance to keep a high credit score. Lending institutions utilize credit scores to help improve efficiency and gain market share. Instead of invasive interviews, lengthy applications and a complicated underwriting process, they can determine credit worthiness by a simple score. A high score represents an applicant with a low risk of defaulting. Statistical analysis aids in setting a score cutoff. Statistics may show that a bank can safely approve all applicants with a score of 700 or higher and only 2% will default. With a streamlined new customer process, a lender expands their market base while minimizing risk. This method allows that some good applicants will be rejected and some bad applicants will be accepted, but the lender remains profitable overall. Most industries have adopted this scoring process. Consumers strive to earn the label “good applicant” by raising their credit score. To raise a credit score, credit must be utilized, but not over-utilized. Shoppers must run up their credit cards and pay them back down again, while resisting the temptation to overspend. Few succeed in this balancing act.

The credit cycle traps unsuspecting dreamers. Like hamsters in a wheel, citizens first chase the American dream using credit as a crutch, and then fight to climb their way out from under crushing debt. Credit scores neglect to consider employment and income, so applicants often receive approval for credit beyond their means. Obtaining new credit requires the use of more credit. A frugal spender who foregoes credit chooses a challenging path. Entering into cash-only transactions prevents debt, but also reduces options. A bank completely disregards a borrower without a credit history, even if they demonstrate a low risk with high and steady income. Like a cancer patient on chemotherapy, Americans need credit to survive, but it can also kill. In an ideal world, the only good credit would be no credit.