Tuesday, May 4, 2010

You Are Not Your Credit Score

"You are your credit score."-Suze Orman on the Oprah Winfrey Show

"Can we please stop using the expression 'identity theft'? Your identity is the one thing that can never be stolen. Your personal information can be, but that is not who you are."-Laura Lee
in Broke is Beautiful

Now that Broke is Beautiful is out I have been surprised and gratified by interest from the business and personal finance press. Until recently, I had thought of my guide to enjoying the broke and beautiful life as the polar opposite of all of the more common guides on how to become rich and I assumed money gurus would not like it.

On further reflection, I came to realize that the personal finance folks and I are saying essentially the same thing. They urge their readers and listeners not to live beyond their means. So do I.

They are speaking to a more affluent audience, or at least an audience that aspires to be more affluent. And they generally promise a pot of gold at the end of the rainbow. I have addressed my book to the broke and promise no pot of gold. (Their marketing scheme-- targeting people with money rather than those without and promising them what they wish for-- is a bit more clever than mine, which probably explains something about my financial status.)

But here is where Suze Orman and I part ways. Orman, and the vast majority of those espousing savings and living within your means, are constantly focused on the magical measure known as the "credit score." Get out of debt and repair your credit.

An article in yesterday's Consumerist by a Bank of America debt collector sums up this point of view: "...use credit wisely, don’t spend more than you can afford, because I will find you and I will collect on you," Ben Popken writes.

After a long and occasionally menacing list of things creditors do that will just make the collections department mad he concludes, "You don’t know when you will need credit, protect it."

All of this focus on protecting your credit score when you are in the middle of financial difficulties strikes me as being, at best, inappropriate. If you're trying to figure out a way to avoid foreclosure or to stop collection calls and keep your sanity, you have something tangible and immediate to deal with. You need to talk to the bank to get things on track, to protect what matters most to you-- your sanity, your relationships, your family, your ability to pursue your goals--not to boost a number in a computer.

At worst, focus on the credit score fuels the problem itself. It is like trying to convince an alcoholic to lay off the drink and nurse his liver back to health by telling him that he can thus protect his ability to drink more whiskey in the future.

The result of this credit focus? You can find it in the Wall Street Journal under the cheery headline "Manufacturing Rose in April."

U.S. consumer spending rose twice as fast as income in March as saving dropped to its lowest level in 18 months and a closely watched indicator of inflation remained stable.

Personal income rose 0.3% in March as a weak labor market continued to keep a lid on wage growth, the Commerce Department said Monday.

Meanwhile, consumer spending -- which accounts for 70% of demand in the U.S. economy -- increased by 0.6% from the prior month, likely lifted by government efforts to spur economic growth.

With income growth sluggish, U.S. consumers slowed their pace of saving in March. Americans in March saved $303.9 billion as the national saving rate slid to 2.7% from 3.0% the previous month. The saving rate is at its lowest level since September 2008.

Good news! Things are back to normal. People are spending again!... On credit. This is fantastic if you are the president of a bank selling debt to make a profit, but it should give the rest of us pause.

The blog EconomPic has some nice charts to illustrate how our spending outpaces our compensation.

Your credit score, being compiled in far-away computers, is nothing more than a tool used by banks to determine whether or not you'd be a good customer for their products (debt). It is not a measure of your worth as a person or a tally of your accomplishments in life. It is not even a measure of your level of personal responsibility.

If you had never borrowed a thing in your life, had saved up every penny you earned, you would not have a great credit score. The best credit score goes not to the most responsible, but to the person most likely to carry enough of a revolving balance to pay a lot of interest to the bank without going under. In fact, in the credit card industry they have a name for people who pay off their credit card balances in full each month. They call them "deadbeats."

Yet the notion that this score is the key to any kind of worthwhile modern existence is so entrenched we rarely stop to question it. (It is only the most important piece of information about you if you consider your main identity to be "consumer" rather than spouse, parent, citizen, etc.)

Instead of spending so much of our mental energy on preserving our ability to borrow, I believe it would be more productive to channel it into finding ways to limit our need and desire to do so.

Portions of this article were excerpted from the book Broke is Beautiful by Running Press.

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