There’s the things you know, and then there’s the things you know. You can take something for granted, assuming you know the processes at play, but then there comes that eureka! moment when some knowledge really sticks itself inside your mind. This is a little tale about one of those moments.
Credit: good, bad, or none at all; somewhere along the line a big collective dupe has been played, and many folks have just started accepting the inevitability of having a credit score. And even those, such as myself, who have been generally apathetic or dismissive of such a thing, have been led to the broad assumption. that a credit score is a measure of how much risk a lender would expose themselves to by lending you money.
This last assumption is incorrect. In fact, it’s almost dangerously misleading. Here’s how I came to properly know this:
I recently applied for a credit card. To be clear, this is so that I can rent a car during an upcoming trip; I have never had or wanted a credit card. To be completely honest, my past experiences with other forms of credit have been, um… dismaying. Still, I have a need, so I filled out the forms. Minuted later, here in this lifetime, in this country, at my local bank, I discovered that I have absolutely no credit score at all. The ensuing conversation with my banker provided me with my first big clue.
I have now applied for a “secured card”. This device will enable me to borrow against my own money at 30%. What? Yes, it’s like you give me your own piggy-bank, and I lend you money out of it, while paying myself 30 cents for every dollar you “borrow”. Of course, I have zero desire to use this card, except to slap it on the counter at the rental agency. But just for educational purposes, I asked my friendly banker, “If I use the card, and promptly pay it off, will this create a positive credit score?”
She quickly and decisively answered, “No.” This was my second big clue. Apparently, credit agencies do not award positive scores for safe, prompt, reliable re-payment. While they do penalize for long-term delinquency, what they really “reward” you for is carrying a balance and making the maximum interest payment possible.
This is when it really hit me: a credit score is not a rating of my “safety” as a borrower, or my ability to repay/service a debt. A credit score is a rating of the potential profitability I present to a creditor. Those who are able to borrow and reliably repay large sums may well score lower than those who rack -up their cards to the maximum, never repay the balance, and yet continue to pay the interest.
Another way to look at it: Think of your money as a company, and the credit-card company as an investor. When you carry a balance, it is as if the creditor now owns shares in your company. The interest you pay is like a dividend the company is paying out to an investor. When you pay off your balance, it’s just like an investor selling out their shares in a potentially profitable company. When you carry a large balance and make the required interest payments, it’s like the investor owns a large stake of an excellent dividend-yielding stock. No investor would want to be arbitrarily sold-out of a lucrative dividend-yielding position. So it follows that no credit-card company would actually want to be re-paid any outstanding balance so long as the interest payments keep rolling in. It is the creation and maintenance of precisely this situation that is most highly-“rewarded” with the best credit score.
I used to think that a credit score was a pretty benign thing. If I needed credit, fine, and if I didn’t, it could be ignored. Now I see that a credit score is really less an indicator of my financial fitness, and actually a dehumanizing measure of my value as a commodity.