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Around two years before I retired, I found myself giving a piece of advice to one of my most financially responsible younger employees that felt, quite frankly, absurd: “You need to go out and get a credit card that you don’t want, to charge things to, just to prove you can pay for them.”
She was a great employee, diligent, organized, and disciplined with her money. She lived entirely within her means, used a debit card for everything, and had never carried a cent of debt in her life. But as she started preparing for her first mortgage application, she hit a digital brick wall.
In the eyes of the credit system, she didn’t exist.
There’s a strange irony in the housing market. Young professionals are told that “responsible” people avoid debt. Yet, the credit scoring system, the gatekeeper of the home owning dream, is essentially a “debt-management score,” not a “financial responsibility score.”
For years, she has paid her rent on time, every single month. In any logical world, that $2,000 monthly commitment would be proof of her ability to handle a mortgage. But in the system, rent is “invisible” by default. Unless a tenant proactively signs up for a reporting service, those years of consistency never reach the credit bureaus. You can pay $100,000 in rent over five years and have a credit score of zero, but miss one $25 payment on a store credit card, and the system remembers you forever.
To get a mortgage, I had to encourage her to “play the game.” We discussed the “Credit Mix” and the scoring system for revolving credit lines. To the banks, a person with three credit cards and a car loan is a “known quantity.” A person with a healthy savings account and zero debt is an “enigma.”
While credit agencies have recently begun allowing lenders to scan bank statements to verify rent history, it remains a secondary “check.” It’s a manual workaround in a system designed to reward those who load up with debt.
We have a system where the most fiscally conservative individuals are often the most penalized. If she walks into a bank with a folder full of on-time rent receipts and a large savings balance, she would be considered “risky” compared to someone who balances five different lines of credit.
All this came back into my mind when my daughter and future son-in-law recently started talking about buying a house together. For some reason it annoyed me to suggest they start using credit and maybe get a loan for their next car rather than using cash…it’s definitely a strange old financial world out there.. Keep feeding the debt algorithm gods
These credit agencies clearly need to become more transparent. In my case, no mortgage or other debt and pay off all cards on due dates. However, when my son’s tuitions are due every fall and winter, l put them on the credit card to get “points”. The cc bill gets paid off (thank you 529’s). The next week l keep getting notices my normal credit score (800+) goes into mid 700’s even though our bills get paid on-time like clockwork like they have since the mid 90’s. This is really annoying and frustrating as it caught me in the rear end once getting a car loan and ended up paying a higher rate. Silly bunch of squirrels at these agencies.
Once we had, “our great awakening and correction”, regarding debt in our early married days, we’ve had 30+ years of exceptional to truly perfect monthly credit scores (depending on the agency and how they apply their own scoring rules). Indeed, once we paid off the mortgage, we took a major hit on all the scores and it’s slowly recovering. Not sure we’ll ever see “perfect” again. Such a silly game. I find it laughable when one agency tells you that you don’t have enough activity on your cards (we typically use 3-4 of about 10 available within a month, depending on any special offers) while in the same month, another states you have too many cards with a balance. Note that we have never carried a balance forward on any card for those three-plus decades. We did WAY more than our fair share of supporting the economy this year but apparently, the agencies don’t like it when balances are paid off once any of them exceeds a certain threshold we set, even if not due yet.
Anyone else find it interesting that an online purchase (and some retail charges) show up almost immediately on your account (pending) but a refund may take one to two weeks to be applied to your card balance?
Best to all.
The great awakening, I like that turn of phrase. You’ve given me an idea for an article about our “great awakening” during the GFC…I better get typing!
It was really nice that you were concerned about your employee and helped her out.
However, it was my experience that she probably didn’t need to have credit score or credit card first to find a mortgage. Just the opposite, a mortgage first and then a card. The fact that she was free of debt would have actually helped her find a mortgage first.
That was the way it worked when I was younger. I had no debt, and paid cash for everything. When I went shopping for a home loan I discovered the house would be collateral for the loan, (secured debt) unlike a credit card which is unsecured. What was most important to the bank was that I had a secure and steady job, little or low debt, and that the loan payment would not be more than a certain percentage of my income.
After finding a loan and making a few payments, I decided I needed a credit card. I went back to the same bank and had no problem getting a card.
The card started off with a low credit limit, but after paying my bill off every month for a while it started to rise.