In Debt, For Beginners, Money

Basics about Credit Scores & their Systemic Discrimination

People basically know f*#$ all about credit scores blogged here with ACTUAL COMMENTS from people about the misconception of how credit and credit scores work.

You should really read that post afterwards, because some of what they said, shocked me in how wrong it was.

I don’t talk about credit scores often because I think they’re kind of self-explanatory, but I do want to talk about the soft money side of it after going into the technical details.

I don’t talk about credit because I also don’t really care about what my score is as I don’t plan on going into any kind of debt – mortgage, new renter, buying a car, etc. *shrug* It isn’t on my mind but I’m privileged to be able to say that, thankfully.

But here is my one requisite post on the basics of credit scores:

Payment History 35%

Do you make payments on time before the due date?

Are you consistent?

I can only remember ONE TIME in my life that I didn’t make a payment on a credit card, but it was because I scheduled it / paid another card beside it on my list.

I only found out once I looked at that second card and wondered why I had such a huge credit on it.

I am very zero-balance in my finances, meaning I don’t pay more than I have to, to avoid interest/fees/charges, and I try to maximize every dollar.

Note on maximizing dollars:

Not to the point where I am being ridiculous.

I once heard someone took a dollar she had, and DROVE TO THE BANK to deposit it. O_o

I get the heart and the fervour to make every dollar count and work for you, but she may have very well just wasted the same amount in gas getting there.

Did she win out in the end?

Doubtful.

Now if she had WALKED there, taken a bicycle or did it on the way, I would have applauded that, but not if you drove there for the singular purpose of depositing it.

Balance Outstanding 30%

Do you keep hitting your credit limit? If you do, your score takes a bit because it means you are a risky customer – you make them nervous.

Credit lenders look at your balances every month as well.

If you have a credit limit of $10K and you keep having outstanding balances of $9K (even if you clear them in full), they get leery.

Now that said, if your limit is very low and you keep using it to get points etc, I can see why hitting the limit is a frequent reoccurrence – so why not ask for a credit limit increase?

You may be denied depending on your current score but it is worth an ask if you’ve been dependable for a long time.

Length of History 15%

How long have you been using credit?

Keeping your oldest credit card or line open is a good idea if it doesn’t cost more money (like an annual fee or inactive fee).

They like seeing a long history of being a consumer of credit and consistent payments.

Types of Credit 10%

If you don’t have any credit cards but only loans, or other types of credit, it seems fishy to lenders.

They want to see credit cards.

All loans and no credit means you can’t seem to use credit responsibly.

New Credit 10%

If you constantly open new cards, your score could take a hit.

Lenders see it as alarming when you open a new card every month because it could be a sign of you being reckless with money and getting as much as possible for … a spree?

Each time a new card is opened, it is a HARD enquiry which means you’re asking for credit.

Things like checking your credit score, such as when you’re looking to rent an apartment is a SOFT enquiry – you aren’t asking for more credit, they’re just checking to see if your credit is solid to rent you an apartment.

Credit score ranges

The higher your score, the better your interest rate will be on loans and approvals for credit cards and lines of credit.

  • 800 to 900: Excellent!
  • 720 to 799: Good
  • 650 to 719: Okay
  • 600 to 649: Fair
  • 300 to 599: Bad

Use Credit Karma to check for free

Love this app.

If you’re obsessed about this number (why? Unless you’re buying a house, just keep working on saving, investing and a budget), then you can check daily with Credit Karma with no penalty to your score.

It looks like this:

You can even see your score over time:

And my score went up because I had applied for a few new credit cards before but haven’t done so in a while. I did apply to another one yesterday because I want to take advantage of their promotion.

What if you don’t have a solid credit score?

You could open a department credit card and use that to build your score before getting a real card from a bank.

You could use prepaid credit cards (basically debit cards) to prove to the bank you’re trustworthy and then switch to a real credit card. These cards are basically debt cards and there is no credit assigned to it which makes them useless for your score itself,but useful to establish trust with your bank.

What is some systemic discriminations in credit scores?

Aside from the fact that “rich” people can get more than should be responsibly given based on their salary even if they spend every penny and are therefore less trustworthy than people who earn less but save a lot, there is also racism in these scores.

Many banks will refuse to lend to people of colour, or lend lower amounts at higher interest rates or with stronger terms.

Discrimination is rather high against black people as well – some banks will even look at your name, where you live (your address) and make a blanket judgement about you and your worthiness for credit even if you had the same credit profile as a white person.

Source: 2017 North Carolina Law Review

You’ll end up paying more in interest with terrible terms just because you’re black.

Or, even if you try to integrate into a new society

Prisoners and new immigrants have something in common – they find it hard to get a bank account and/or access to credit!!

When my partner first came to Canada even with $30K in cash, they didn’t give him a credit card (they did a prepaid card instead like a debit card) and only allowed him a limited bank account.

This prepaid credit card is useless because it doesn’t actually have any “credit”, ironically.

Now they’re falling over themselves to loan him money now that he is established. Funny, as he hates credit cards.

Credit and credit scores are important in society

Even for people like us who opt out in a way and just pay cash, if we weren’t able to, we’d need to constantly prove ourselves based on our score.

You use credit scores for everything!

  • Getting a cellphone plan
  • Renting an apartment
  • Buying a car – like in a lease and what interest rate you get
  • Buying a home and what interest rate you get
  • Applying for better credit cards that give you promotions like 10% cashback on $2000 (you get up to $200)!

Having a good score is key.

What are your thoughts about credit scores? Care? Don’t care?

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