It is a constant amazement how much we still need to learn, no matter how old we get. Six years ago, as I was disengaging from a highly active political life, I set up a small tour business to keep me busy. For this purpose, I needed a large, comfortable people mover and needed a five-figure sum to secure such a vehicle. I walked into my local RBS branch where I held a four-figure balance in an account I had held there for over 40 years.
After receiving a polite rebuff and a phone number, I found myself talking to a “Business Account Manager’ who appeared to be reading from a script. After printing off the six-page application form she sent me, I realised that I required a credit score to complete it. Further phone conversations established that, because I had none, no loan could be forthcoming. The reason, it appeared was that I had neither mortgage, not credit card history; The careful stewardship of debit cards, prompt punctual payment of bills, nor forty years of healthy balances with the same institution counted for nothing.
Rather miffed by all this, I secured a business loan elsewhere (paid off with punctual instalments in three years) and have been fulminating about personal and small business finance ever since. Having run my finances since my penny-pinching student days as a card-carrying Scot, I had not realised I was such a fiscal outrider.
The most widely used credit scores are FICO Scores, the credit scores created by Fair Isaac Corporation. 90% of top lenders use FICO Scores to help them make billions of credit-related decisions every year. FICO Scores are calculated based solely on information in consumer credit reports maintained at the credit reporting agencies. Here’s how it works.
In order to establish a credit score, you must assume debt. Although this may seem counter-intuitive but more debt is better. The sole proviso is that you must make the agreed payments on your debts. Though any new lender might, FICO doesn’t care if you are in over you head and stealing your grandmother’s pension to make payments. As long as the payments are made, you FICO score will stay robust or even rise. Advice given to young people wanting to buy a home is to get into debt in the fist place but using credit cads or buying major appliances on credit. A fat bank deposit is not enough, as it will do nothing to establish or raise a credit score.
It is, in fact, a hugely profitable collusion among financial institutions. Pay day loans may be usurious but credit card rates between 15 and 30% are hardly bargains, especially when most people do not pay the balance off each month to avoid such interest rates. It is not unusual for a family to be £10,000 in debt on various credit cards and paying £200 each month in interest alone. Because many want a mortgage, they boost their FICO by running up such debts but seldom find the cash to pay them off once they shoulder the mortgage burden. Many fixate, or even boast, about their FICO scores, ignoring the damage their debt burden does to their disposable income. And it is always too easy to make some large purchase with a card as the world is now too impatient to save.
Banks and other lenders love this system. No longer is it necessary to invest huge time and effort to know your customer, your sales staff need little training and PR damage by refusal is minimised by blaming it on a faceless rating agency. But, worst of all, millions are encouraged to get in debt over their heads, with ‘financial advisers’ and a major marketing machine encouraging them to do so.
Is there a way to avoid this? Not unless your dad is rolling in it—or you never want to buy a house. But you need not go n over your head. Use a couple of credit cards each month but pay the balance off immediately. Buy big items you really need (TV; sofa; fridge) on credit and set up direct deposit to ensure payment. Best of all: make yourself so rich (or frugal) that you don’t need credit and you can thumb your node at the money-grubbing pencil=necks who want to FICO you.