As long as I can remember, most consumers have regarded credit as the destroyer of worlds—a scary black cloud hovering over us all—and the credit reporting agencies as the institutional manifestation of Darth Vader.
I must admit, the concept of busy little gnomes tracking every credit transaction, inscribing each in an individual's discrete financial book of life and then publishing, for good measure, a GPA-like number next to their name—which can determine whether, and at what cost, they will secure a loan for an automobile, a home, tuition and perhaps even a job (without the score)—seems a tad foreboding.
Listen up, people: Credit is not the Anti-Christ. It's not terribly surprising, however, that people have demonized credit in general, given the often unconscionable behavior of many people who sell credit products. But it's important to differentiate between credit itself and those who use it for ill-gotten gains.
Credit can be a real asset, a vehicle for self-enhancement and a wealth-builder. Depending upon your level of financial literacy (which is ultimately the only thing that can protect you from the nefarious actors in the credit industry), credit can have all the positive benefits of a strong resume—or the negative ramifications of a rap sheet.
Too often consumers and creditors view credit as a "crime and punishment" issue. Indeed, it can be that—if you fail to pay your bills or shirk other financial obligations. That's when your credit report can brand you with a scarlet letter for all potential creditors to see.
However, credit can also be a financial resume—a document that reports positive and responsible behavior, just as a career profile highlights professional progress. This is about more than just a catchy metaphor (though I do love it). If Americans hope to have a healthier relationship with credit, then they've got to start owning it. It's not something any of us can afford to hide from or ignore.
Take Rebekah, for example. She's a blogger who tracks her debt reduction at bloggingawaydebt.com Rebekah began rebuilding her credit resume in May 2009, when she was $38,495.86 in debt (a mix of credit cards, car loans and student loans) and paying an interest-only mortgage on her first home, which was all she could qualify for. After some additions, her debt topped out at $40,277.36.
Rebekah could have been branded for life by her excessive debt and low credit score. But rather than giving in to her sentence, she reformed herself by living frugally, aggressively paying down her debt and turning things around—and the implications are huge.
Almost two years down the line, Rebekah and her husband have paid down $31,662.16, bringing their debt load to $8,525.32 in student loans—and clawing their way out of that deep financial pit. Before getting on the right track, her husband's score was just over 500 and her's was 620. Now both of their scores are above 800. But it's not just about numbers, as Rebekah told us.
"Our scores have had two major impacts in our lives," she says. "First, both our jobs ran a credit check as part of our background employment investigations. Bad credit would have hurt our chances at getting good paying jobs. Second, while we have been working to reduce our debt over the last few years, good credit has given us a chance to play hard ball with the lenders while renegotiating interest rates on our remaining debt. If a lender is unwilling to come to the table with a good deal, we move on."
So long as they continue on this path, when Rebekah and her husband want to upgrade to a bigger house or buy a new car, they will find themselves well situated. They'll be rewarded with a nice low interest rate, more money to stash away and no reason to charge other purchases or emergency medical bills and begin the debt cycle all over again.
Whatever our current debt or credit score, a positive credit history—like a resume—is not something that happens to us. It must be built, over time, with the same care, attention to detail and hard work that is used to craft a serious career.
Adam Levin is chairman and cofounder of Credit.com. His experience as former director of the New Jersey Division of Consumer Affairs gives him unique insight into consumer privacy, legislation and financial advocacy. He is a nationally recognized expert on identity theft and credit.