What’s the difference between “credit rating” (credit score) and “credit worthiness?”

How do these two different aspects of your credit affect you? How much money is your debt  costing you right now?

Many people are overly concerned with their credit score.  Many don’t really know how credit works.  Even fewer really understand “credit worthiness.”

To most it’s a mystery…

Now that you know “How Credit Works,” let’s go to up to 30,000 feet for just a moment and look down at this situation to get a clear perspective…

We have to realize what’s actually going on here, because most people think making payments on time is all there is to having “good credit,”  so they make their payments on time month after month, year after year, paying insane amounts of interest along the way…

Most mistakenly think their credit score is the most important thing.

Why is this happening?

It’s happening because the credit bureaus and the credit card companies are in cahoots. Working together they make billions and billions of dollars a year through this system of credit, designed to prey upon human nature.  The industry capitalizes on financial hardship, something you may have experienced yourself firsthand.

What am I talking about here?

I’m talking about the credit card industry having the deepest pockets and the tallest buildings in the land.  They do lots of advertising and sell their ideals well to the public through mass propaganda. This is what’s caused people to mistakenly think making your payments on time is the holy grail of credit.

Payment history and credit score are important, but they are not everything, or even the ultimate thing…

Remember “the big idea” is to earn interest, not pay interest.  The credit card companies know this.  They’ve built their business around this idea, but here’s the catch: “they” depend ON YOU to pay them interest!

The reason your payment history has been made to seem like it’s the most important aspect of your credit is because the credit card companies want you to simply make your minimum payments every month, paying the highest interest rate possible, for the rest of your life!

This little secret was exposed in 2004 by the award winning investigative journalism of the PBS Frontline/NY Times Special Report “Secret History of the Credit Card.”  I encourage you to watch this special some time if you haven’t already.  You can watch it all for free online through the link above.

It turns out credit card companies actually label you as a “deadbeat” if you pay your cards off every month. The credit card industries want you to pay the minimum monthly payment every month, so that’s what they promote because it’s how they make their money. That’s okay; you just need to understand the difference between propaganda and reality.

Credit isn’t made up of just your payment history. There are the other two factors, each almost equally as important.  Either can ruin your credit worthiness, even if you have a “perfect payment history”.

Here’s an example:

You may have a credit score greater than 700. If you walk into a mortgage broker they’re going to be happy to see you, rubbing their hands together and smiling, because they can get you any loan you want!  Or so it might appear at first…

However, if they pull your credit report and see you are enrolled in credit counseling (which the credit card companies, the credit bureaus, and the whole credit industry promote), your credit worthiness (your actual ability to get a loan) will be crippled.  You are not likely to get a loan at all these days, and if by chance you do, you will pay higher fees and interest despite your high credit score because your credit worthiness is poor.

Credit counseling, non-profit counseling, debt consolidation, and debt management programs are all different names for the same thing.  These programs are heavily promoted by the credit industry. The credit bureaus themselves, along with most credit counselors will tell you credit counseling does not affect your credit score and that’s true.  “They” have made it this way, and so, if you’re in credit counseling, it’s no longer going to negatively affect your credit “score.” You may be able to keep that 700 credit score.  But it’s only a “half-truth,” or in other words, in light of your credit worthiness, it’s a lie.

It’s a “half-truth” (lie) that credit counseling doesn’t affect your credit score.

(Hint: credit worthiness)

When your mortgage broker pulls your credit report, each account included in a credit counseling program is listed as “THIS ACCOUNT IS INCLUDED IN CONSUMER CREDIT COUNSELING SERVICES” (or similar).  The industry term for what this looks like to a lender is a “walking bankruptcy.”

It’s like having a BIG RED “X” on top of your three-legged stool!

Here’s why credit counseling hurts (even cripples) your credit worthiness:

Statistics came out a few years back showing the average failure rate for credit counseling is around 70%.  Roughly seventy percent of the people that enroll fail to finish the program and will not get out of debt. It’s no secret most of those people who fail end up filing bankruptcy. This makes you a much bigger risk to the lender.  Therefore, lenders see you as mush less credit worthy than your credit score would make you appear.

As you can see, it isn’t just about your credit score; your “credit worthiness” ultimately affects your ability to get a loan.

Someone with the 700 credit score enrolled in credit counseling may not get as good of a loan as someone else who filed bankruptcy two years ago and now has rebuilt a good payment history with zero debt and cash flow freed up to commit towards monthly payments on new debt.

The person who filed bankruptcy may have a lower credit score but may be much more credit-worthy than the person with the good credit score who’s enrolled in credit counseling and strapped for cash every month trying to keep up with payments.  Statistics say the person in credit counseling will fail.  How would you feel about lending money to such a person?

A/B Example:

Problems in either of the second or third legs (too high of a debt-to-income ratio or balances over 50% of your limit, maxed out or over the limit) can also hurt or cripple your credit worthiness, despite having a perfect payment history or a good credit score.

A = Perfect payment history, maxed out utilization, high/maxed out debt-to-income ratio

B = Bad payment history, but NO DEBT = low debt-to-income ratio and low / no utilization

Go ask any mortgage broker…

• Who are they going to lend to?
• Which one looks like a bigger risk for Bankruptcy?
• Which one would YOU lend to?

2009 WAKE UP CALL: “These days”… very few people are left with “perfect credit.”  With the collapse of sub-prime lending, it’s very difficult to get financing today if you have “less-than-perfect” credit.  So if your credit is not stellar, then you may not be able to get financing at all, and it’s time to look at solving the underlying problem of debt now, while your credit takes a back seat.

What’s more important to you, your short term credit rating or long term credit worthiness?

Where is your credit score right now? ___________

How is your credit worthiness?  GOOD?  BAD?  CRIPPLED?

Keep in mind the difference between credit rating (credit score) and credit worthiness as you evaluate your options to be debt free.

Here To Be An Asset To You,

Jesse Niesen
DebtGoToGuy.com