Is 300 A Perfect FICO Score?

The FICO score ranges from 850 to 300 – exceptional to very poor. Of course, if you tried to get a loan from a bank with a credit score of 300, you’d be laughed out of the lobby. So why is 300 a perfect credit score? Let’s look at some data to answer this question.

First, this is how your credit score is calculated.[1]

  • 35% = Your debt history.
  • 30% = Your debt level.
  • 15% = The numbers of years you’ve been in debt.
  • 10% = Your new debt.
  • 10% = Your debt type.

Do you notice a theme? A key word? Debt! Your debt drives your credit score. It has nothing to do with your income, savings rate, asset level, or net worth.

Consumer debt is staggering and growing.[2] Banks, credit card companies, and other lenders have little incentive for you to pay off your debt because the more you owe, the more they make. According to Credit Karma the average credit card rate is 15.96%![3] With an interest nearing 16%, why would they want you to stop borrowing money?

  • Total Household Debt = $13.5 Trillion.
  • Mortgage Debt = $9.14 Trillion.
  • Auto Debt = $1.65 Trillion.
  • Student Loan Debt = $1.44 Trillion.
  • Credit Card Debt = $844 Billion.

Debt is a four-letter word and it will hold you back from reaching your dreams. The Bible taught us this centuries ago: The borrow is slave to the lender. ~ Proverbs 22:7.

Rather than trying to increase your credit score by going into debt, why not use your resources to eliminate it? Reducing or eliminating your debt will be freeing. A monthly payment for a $30,000 auto loan with a rate of 4.5% is $684. If you invested this same amount at 5%, your balance would be worth $46,516 after five years.

Here are a few suggestions to help you reduce your debt:

  • Use your debit card instead of a credit card. Your payment will be deducted directly from your checking account. If your checking account balance is $500, then your spending limit is $500.
  • Buy a used car, with cash. The moment you drive your new car off the dealer’s lot it starts depreciating. A new Land Rover Range Rover Sport costs about $67,000. A 2015 model costs about $40,000 – a difference of 40%!
  • Attend a community college for two years and then transfer to a state school. The annual tuition to attend SMU is $52,500, so two years of study will cost you, before room and board, $105,000.[4] Attending Austin Community College costs $5,100 – a difference of 95%!
  • Buying a home with 100% cash is challenging. If you buy a home with debt, limit your mortgage payment to 28% of your income. For example, if your monthly pay is $10,000, then your payment should be $2,800, or less. Of course, if you have resources to pay cash, then pay cash. Who’s going to lend you money if you don’t have a credit score? Dave Ramsey says you can request a manual underwriting from your bank.[5]

Once you stop using credit cards and other debt tools your credit score will start to disappear. It will take about six months for this process to occur. No debt. No FICO.

If you can’t afford it, don’t buy it. However, we, as a nation, no longer adhere to this philosophy. If we want it, we buy it – regardless of the cost. Before you decide to buy, calculate the cost. If you have the money, then buy it. If you fall short, save until you have the resources to do so.

Good luck and happy saving!

Suppose one of you wants to build a tower. Won’t you first sit down and estimate the cost to see if you have enough money to complete it? ~ Luke 14:28

January 11, 2019

Bill Parrott is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.

 

[1] https://www.daveramsey.com/blog/the-truth-about-your-credit-score, website accessed 1/11/19.

[2] YCharts

[3] https://www.creditkarma.com/credit-cards/i/average-apr-on-credit-card/, Janet Berry- Johnson, 1/2/2019

[4] Money Guide Pro

[5] https://www.daveramsey.com/blog/the-truth-about-your-credit-score

Not A Good Toy Story.

Toys “R” Us has filed for bankruptcy protection due to its crushing debt load.  Toys “R” Us was taken private in 2005 by KKR & CO, Bain Capital and Vornado Realty Trust in a massive $6.6 billion leveraged buyout and this mountain of debt has finally caught up with this famous retailer of toys.[1]  Toys “R” Us has been trying to payoff $5 billion in debt with annual payments of $400 million in interest each year.[2]

As a kid, I went to Toys “R” Us on special occasions and it was awesome.   When I walked into the store I was met with sensory overload because the enormous store had thousands of toys piled high from floor to ceiling.   I usually had enough money to buy one toy so trying to decide between a board game, a Lego set or a frisbee was a challenge and almost too much to bear.  After spending an eternity, or what felt like it, in the store my mom would take me to Farrell’s to devour some much-needed ice cream.

Debt is a four-letter word when it comes to financial planning.  Too much debt can deliver a blow to your financial dreams.   How much debt is too much?  I’d recommend keeping your total debt payments to 38% of your monthly gross income.  If your monthly gross income is $10,000, then your total debt payments should be less than $3,800.

What does total debt payments include?  Everything!  Your mortgage payment, car payment, credit card payment and so on.   I’ve completed many financial plans for clients and I’m always amazed when people tell me they don’t have any debt except for their home and car.  I remind them their mortgage and car payments are debt and they must be paid.

What should you do if you have too much debt?  Here are a few suggestions.

  1. Take an inventory of your spending habits. Review your last three to four months of bank and credit card statements to identify where your money is being spent.   After you’ve highlighted a few problem areas, try to remove them from your circle of spending.
  2. Turn off automatic payments. I helped a client with her budget and she wasn’t aware of all the items she was paying for because of the automatic drafts.  She had set up the payments when her children were young and she forgot to turn them off when her kids were no longer using the services.  The payments were out of sight and out of mind.
  3. Sign up for a service like Mint.com to help you with your spending and budgeting. Mint is a great resource and it can help you make better spending decisions.
  4. If possible, refinance your high interest rate debt. Interest rates are at historical lows so take advantage of these rates to reduce your interest payments.
  5. If you have a high level of cash, use this money to pay off your debt obligations. Cash is still earning close to 0% interest so you can use this money to pay off high interest rate debt.
  6. If your debt level is too much of a burden and you don’t have any other options, contact a credit counselor who can possibly help you with your budget and spending habits.

Toys “R” Us was founded by Charles Lazarus in 1957 and maybe this bankruptcy protection will help this once great retail chain rise from the dead.

“Lazarus, come out!” ~ John 11:43

Bill Parrott is the President and CEO of Parrott Wealth Management, LLC.  For more information on financial planning and investment management, please visit www.parrottwealth.com

September 20, 2017

Photo Credit LPETTET, stock photo ID = 458677325.

[1] https://www.reuters.com/article/us-toys-r-us-bankruptcy-timeline/how-5-billion-of-debt-caught-up-with-toys-r-us-idUSKCN1BV0FQ, Jessica DiNapoli and Tracy Rucinski, 9/20/2017.

[2] Ibid.