Apparently I Don’t Borrow Enough

02 Nov Apparently I Don’t Borrow Enough


Using credit cards to improve credit scoreIn our recent move to Iowa and the subsequent search for a new house, we came to the sad realization that we would need to get a mortgage again in order to get the house we wanted. We were ok with that because it was a pretty small mortgage and we’ll be able to pay it off relatively quickly. No 30+ year mortgages for us!

Getting Pre-Approved for a Mortgage

Anyway, we had to go through the pre-approval process, something we haven’t done in years since we’ve been debt free and haven’t borrowed money for years. It wasn’t a big deal, but it certainly was an amusing process.

First, we had to list all our assets and income sources. No problem. We actually have assets now :). Then we had to list our debts. Easy. $0. That was pretty much it, except for verifying that we weren’t making any of our numbers up. Which we weren’t, although the bankers kind of acted like nobody like us has ever applied for a mortgage. They seemed taken aback when we said we didn’t have any debts. I guess we’re weird or something.

Our Credit Score Report

Then one day I got a letter from the bank. It was a courtesy letter more than anything – the letter was simply informing us that the bank had reviewed our credit history and that everything was ok. Our credit score (which I’ve never really worried much about) was in the mid 700’s. That meant we qualified for the best mortgage rate the bank had to offer.

But then the letter got funny. It proceeded to tell me that there were some things I could do to improve my score. If we qualified for the lowest rates, I wondered, why would I need to improve my credit rating? Amused, I read on. One of the reasons it said my score was “so low” was that I hadn’t borrowed money recently. Ha! Isn’t that the point – to not borrow money??

The letter also said my score was lower than it could be because there were too many recent credit inquiries. Hmmm, let me see. We moved into a new apartment. They did a credit check. We set up utilities. They did a credit check. We then applied for a loan to buy a house. They did a credit check. There seems to be a pattern here. I’m not sure how my moving means I’m more of a credit risk, but that’s what my bank was trying to tell me.

Now, don’t get me wrong here. I’m not mad at my bank. This was just a computer generated form letter explaining the results of my credit check and offering tips to improve my credit score. It’s not necessarily the bank’s fault. I just found a lot of humor in the whole situation.

Do I Even Need a Good Credit Score?

We don’t borrow money as a general rule. Because of that, we have money in the bank and no debt. We haven’t taken out any loans or used credit cards in roughly 7 years. We were able to put more than 70% down on our new house. The mortgage on our new house is less than what I now make in a year, and it’ll be paid off in 15 years or less.

Yet, despite all these factors, my credit score isn’t as high as it could be, according to the letter we received. So their solution? Get a credit card. Borrow some money. That’ll help me look more credit-worthy, they said. Isn’t it ironic that the things it would take to be a better credit risk are the exact same things that would put me more at risk with my finances?

What do you think? Should I borrow more money to improve my credit score? Or should I continue saying “No” to credit and debt?

 

26 Comments
  • Jon White
    Posted at 10:25h, 03 November

    Matt, I think you’re doing the right thing. The reason why you actually had money in the bank and were able to put 70% down on your home was the fact you weren’t trying to improve your FICO score.

    I also think it is funny though that you have a score in the mid 700’s and don’t have any debt, maybe FICO is getting smart and looking at your net worth when calculating your score. 🙂

    • Matt Wegner
      Posted at 18:05h, 03 November

      I think the good score is a carry-over from when we had our last mortgage, Jon. We have only been completely debt free for a few years so I don’t think the score had long enough to drop to zero. Either way, the bank recognized that it was a no-brainer to do the loan with us. Because it was a small bank, they were able to bend a few rules to make it work. I don’t think that would have happened with a larger bank.

  • Brad Chaffee
    Posted at 10:41h, 03 November

    This is the very reason I hate the stupid credit scoring system. It seems to be more about getting you to borrow more money and less about evaluating how you handle paying back the money you borrow. Senseless!!

    That’s why I’m an advocate for kicking your score to the curb! The system is rigged to set people up for failure. If you want to fail financially — all you have to do is worship your credit score. haha!

    Not I said the debt free guy that makes financial decisions based on what’s best for his family not his credit score. Great post!! Thanks for sharing! 😀

    • Matt Wegner
      Posted at 18:00h, 03 November

      Thanks Brad. Totally agree with you – the system sets people up for failure. I certainly won’t worship at the alter of the FICO!

  • Steve MoneyPlanSOS Stewart
    Posted at 11:06h, 03 November

    Ugh! This kind of marketing ploy angers me to no end. Your experience is another example of how important it is for us to teach solid financial principles and not the “build your credit score in order to borrow more money at the best rates until you are so strapped to make the minimum payments that we own you”!

    When making financial decisions, keep in mind who is giving the advice: someone with your best interests in mind or someone trying to sell you something.

    Aaaaaaaarrrrregggggghhhhh!

    • Matt Wegner
      Posted at 17:59h, 03 November

      Don’t worry Steve. I had a funny conversation with the banker on this situation. I could see his eyes light up when he understood the irony of the situation. Even he agreed the automated letter they sent was silly.

  • Caleb Villarreal
    Posted at 13:11h, 03 November

    Hi, Matt. I’m a banker with Wells Fargo, and I have found that credit scores can be an interesting game. When I say, “game”, I am honestly saying you have to play a 3 on one battle with the 3 credit agencies. For your situation, you do not have the “credit history” on your record.
    There are five main things you can look at when thinking about your credit score. 1. The score itself. Obviously, the higher the score, the better the rates on loans, mortgages, etc. 2. Delinquencies. If you have missed payments (3 months in a row to put you in a delinquent status on your report) it will make your credit history negative, limiting your ability to borrow from institutions. 3. Debt to income ratio. You want your debt to income ratio to be under 20%, meaning you pay bills/loans back at 20% less than what your monthly income is. For example, if you make 5,000$ a month, you would want your monthly bills/loan payments to be under 1,000$, leaving you with more capability to take on more debt. 4. Credit availability to usage ratio. This is figured by the amount of credit you have available to you in comparison to how much you have used. You typically want to keep it under 70%. For example, if you have a 6,000$ limit on a credit card, you never want to spend more than 4200$. This shows up on your credit history that you use too much of your availible credit, making you seem “risky” in that you might get in too deep with the habit of using too much of your line. 5. The final, and very important part of your credit score, is your credit history. The more depth you have, the better, at a reasonable standpoint. When you use your credit score for inquiries, credit cards, etc., it’s not a bad thing. The reason we have a credit score is so we can borrow, so it’s a good idea to use it! Maintaning a line of credit with your banking institution along with a credit card that you use once or twice a month and pay off shows that you can have the availability of credit, and manage the funds successfuly. For example, if you’re a football coach, and you have someone come to you telling you they’ve played three games in their life and won all three, that’s great, but you don’t have the depth to truly know what kind of football player he is. If this person has played 50 games in their life, and won 95% of them, even though there are a few losses in the history of his football career, I still feel more comfortable with the amount of games played and won vs 100% victory in three games. You need to show you can have credit, use it, and manage it consistently. This is where the game comes in, however, because you need to have the history and availability of credit in your history, but you can’t have too much. It’s almost comical the way they interpret someone’s credit worthiness, but it’s a game that we all have to play.

    • Matt Wegner
      Posted at 17:57h, 03 November

      Thanks, Caleb. I’m actually quite well versed in how the game works. I typically choose not to play the game because it’s so ridiculous. The football analogy is a good one, but it misses the main flaw of the FICO system. The credit score doesn’t measure how well you handle money as a whole.The system is based solely on your performance with making debt payments. I personally feel I’m a darn good player but I’m not trying out for teams that only look at the number of games I’ve won. There’s a lot more to it than my win-loss record. It’s the fundamentals of how I play the game. 🙂

  • Brent Pittman
    Posted at 13:16h, 03 November

    Great story! No way stay away from credit cards! I would have loved to see the bankers faces when you told them you have $0 debt.

  • W @ Off-Road Finance
    Posted at 22:46h, 04 November

    The whole credit score system is vaguely ridiculous for those who rarely borrow money and have no current debts. Honestly the whole thing could be scrapped in favor of a simple debt-income-expenses ratio calculation and an annotation about whether you’ve declared bankruptcy.

    • Matt Wegner
      Posted at 21:18h, 05 November

      I like that idea. I think there’s still value in reviewing your payment history for utilities and debts (if you have them), but I definitely think there should be some form of reviewing your income and your assets too.

  • Thomas S. Moore
    Posted at 07:06h, 05 November

    Some banks and the people who work there are just to funny. I had a person that I knew who worked in banking and he told me his job was to put people in debt! That was how he made money if he couldn’t get them to borrow then no commission for him. Sad really even though I know he was telling me the truth. Mid 700’s I cant wait to get back to that range. How much are the homes going for in Iowa? Are you doing a 15 year mortgage?

    • Matt Wegner
      Posted at 21:16h, 05 November

      Yes, Sir! 15-mortgage for us. Homes in central Iowa are a little more than in Wisconsin – Iowa hasn’t been hit as hard by the recession. We did get a great house, though. 3600 s.f. for $225k. More than we wanted to pay but a fraction of what it would have cost on either coast. The Midwest has a really low cost of living so I’m not complaining about the price of the house.

      • Thomas S. Moore
        Posted at 07:21h, 14 November

        Thats a large home and a very small price when I compare it to where I live here in South Florida. 3600sq ft and you looking well above $500k for a descent neighborhood and schools.

        • Matt Wegner
          Posted at 12:10h, 14 November

          yeah, we try to keep that in mind every time we start to complain about the price. It’s a lot higher than what we paid for our last two homes so it’s hard to keep it in perspective. If we were on either coast, we’d be buying a lot less house for a lot more money.

  • James Dibben
    Posted at 13:30h, 06 November

    I wish I knew what to do!

    I’m 2.5 years past a short sale. We live in a rental. I have credit cards still in default and in collections. They haven’t seen payments in 3 years.

    I’ve been told by Dave Ramsey advisers, who will remain nameless, that I need to get at least one credit card so I can build up my credit score high enough to qualify for a mortgage.

    Yesterday I tried to get a small-limit credit card from Walmart. Guess what? My credit is so bad Walmart won’t even give me a line of credit…..Walmart!

    I actually thought it was kind of funny. I’m not really in a big hurry to get a credit card again. I’ve been living quite happily for the last 4 years without credit cards.

    I do want to get us into a house again eventually. I don’t want to be required to have 70% down to do so.

    • Brad Chaffee
      Posted at 21:32h, 06 November

      I’d love to know what Dave Ramsey adviser suggested you get a credit card so you can build credit so you can get a mortgage. I’m sure Dave would like to know too.

      Before someone starts a Total Money Makeover Dave suggests to get caught up first and I know for a fact that Dave would not recommend (or agree with any Dave Ramsey adviser) that you get a mortgage when you just short sold a house and are 3 years behind with your current creditors.

      Dave does not believe in building a credit score so you got some really REALLY bad advice. I would contact Dave Ramsey’s organization personally and share the name of the adviser and get some real advice.

      • James Dibben
        Posted at 14:12h, 07 November

        Thanks for the input, Brad!

  • Matt Wegner
    Posted at 21:29h, 06 November

    I don’t think another credit card would do you any good at this point, James. Not until your defaulted cards are paid off or settled. I think you’ve got the discipline now to handle one, but I just don’t think it’ll help.

    I’d focus on making your rent and utility payments on time. When you’re ready to buy a home again, look at ecredable.com. They’ll produce an alternative credit rating that’s focused on your payments, not just your debt. With a small bank that actually manually underwrites or looks at the big picture, you’ll be able to buy a house (without the 70% down). BTW, we did the large down payment because we could, not because we had to. 🙂

    • James Dibben
      Posted at 14:23h, 07 November

      Thanks, Matt!

    • Jon White
      Posted at 20:50h, 07 November

      James, I agree with what Matt said. Getting another credit card won’t help your credit score as long as you have old outstanding credit cards. If you take care of those then focus on making your other payments on time like rent and utilities you’ll be able to get a mortgage sooner than later.

  • Derek - Freeat33
    Posted at 18:13h, 08 November

    Don’t do it! I won’t dare reference the bridge that everyone is jumping off.

    Be bad for the economy!

    • Matt Wegner
      Posted at 08:27h, 10 November

      I’m afraid we already did it, Derek. Meaning we got a mortgage. We intentionally got a small mortgage and it’s a good thing we did because the taxes and utilities on the new house were a lot higher than we expected. So our actual payments are higher than expected, but still well within our budget because we got a small mortgage in the first place.

  • Rob
    Posted at 13:50h, 09 November

    awesome post! I made the decision a long while ago that I was not going to play in these games anymore. I am in the best financial shape of my life BECAUSE of NOT using debt. Thanks for sharing this, you are definitely an inspiration 🙂

    • Matt Wegner
      Posted at 08:16h, 10 November

      Thanks for the kind words, Rob. And congrats on saying no to debt so you could say yes to financial fitness!

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