The Real Purpose for Credit Scores....
Once we made the decision to be debt free, we began to develop our own debt elimination plan. We soon realized that if we continued to make minimum payments on our credit cards, we would never pay off our credit card debt.
The more we talked with our friends and family, the more we realized we had all been taught to buy what we wanted on credit and continue to get further into debt. There didn't appear to be any realistic debt solution.
Without knowing it, we were all being trained to spend most of our paychecks on interest payments (i.e. home mortgage loans, credit card debt, auto loans, etc.).
As I learned more about the various types of credit scoring models and how credit score are calculated, I realized they were designed to reward you for having credit, using it, and making your payments on time, but never paying the balances in full.
The more you do this the more your credit scores increase. In other words, I discovered the real purpose for credit scores is to get you to use credit to buy more, to incur more debt, to continue to pay more interest.
It's really a pretty smart concept.
If you get focused on just increasing your FICO credit scores, the scoring model can change what impacts your credit scores and motivate you to do what's then necessary to get higher scores.
Without realizing it, you may make financial choices that may not necessarily be in your best interest financially.
For example, lets say the scoring model is adjusted so that next year scores will increase if you keep a minimum of 3 cards with a minimum balance of $2000 each.
If you only focus on getting higher scores you will try to keep at least 3 cards with a minimum balance of $2000 each.
If the scoring model is changed again later, you will adjust to that change and so on and so on. You may remember that at one time you only needed a score of 620 to get a mortgage approved. Then the number changed to 640, 680 and who knows, it may eventually go to 740 or back to 620.
The point is, the scores become a way of manipulating your financial behavior to benefit lenders who make money on interest.
Think about it. Everytime you make monthly interest payments someone on the other end makes money! So lenders are obviously very interested in how you pay your debts and they want you to continue to pay the interest on time every month. It makes sense.
But....if you were debt free, you would not pay interest to anyone on the other end. So the lender needs to keep you motivated to use your credit and make payments on time. The lender wants you to continue paying interest monthly.
This is one reason your FICO scores get lower if you close your accounts or stop using your credit cards.
But, your FICO scores get higher if you have multiple accounts for a long time, keep a reasonable balance and pay on time each month.
It's a difficult concept to get at first, but the more you think about it the more you realize that businesses, banks, and the U.S. economy itself, all depend upon your use of credit in order to thrive. Remember, approximately 70% of the economy is driven by consumer spending. If you stopped using credit for purchases, less money would be spent in the economy.
Believe it or not, merchants and creditors have economic plans based upon how you spend your money.
If you want to learn more about how the economic system works, there is an interesting book you should read: "The Creature from Jekyll Island" by G. Edward Griffin.
The author describes the history of the Federal Reserve Banking system and how your use of credit impacts the economy.
Now that you know the real purpose for credit scores and how they work, you can use the credit scoring models to your benefit.
Use your increased credit scores to be debt free faster. Then invest the money you were spending in interest and start receiving passive income to befinancially free.