April is Financial Literacy Month. I don't care so much for the term 'literacy' as it applies to the discussion about Americans and credit. For me, the word 'literate' means the ability to read and understand. The challenge for consumers when it comes to personal finance, as I see it, is not so much an inability to read and understand but rather one of a lack of information and education about financial matters. On no topic is this truer than the one of the establishment and use of personal credit.
Seemingly, the institutions that formulate and utilize credit scores to make decisions prefer to keep the way that credit scores are calculated shrouded in mystery. Indeed, the mathematical formula, or algorithm, that is used to calculate your score is considered a proprietary trade secret. The company that devises that algorithm (FICO) earns its income by selling that mathematical formula to the credit reporting bureaus. Even experts in the credit field are providing you with little more than an educated guess about how your credit score is calculated.
To make things more frustrating, you can only access your credit report once a year at no cost, and if you want to look at it more frequently you have to pay for the privilege. Credit reports are written in such a way that they are difficult to decipher and understand. Little if any time is devoted to the concept of credit in our educational institutions. We are, more or less, left to educate ourselves.
My own "education" about credit is illustrative:
My parents helped me to learn how to walk and how to talk. They taught me right from wrong, to look both ways before crossing the street and that "my word was my bond." They taught me how to swim, how to ride a bike, catch a fish, and throw a baseball. The instruction I received from my parents about personal finance was pretty much limited to going with me to the bank and helping me to set up a "passbook" savings account shortly after I received my first paycheck as a 16-year-old. There was never a conversation about credit, the use of a credit card or how to balance a checkbook.
I was fortunate to attend a private college-preparatory high school. I learned to write essays and term papers, speak French, perform advanced mathematical calculations and even took some courses that earned college credit. No one, during those four years taught me how to balance a checkbook, nor was the concept of a credit score ever mentioned.
I moved on to college, where I participated in a challenging honors program. My professors taught me to think broadly, to question the world around me, and to care about my fellow humans. I took classes in theology, philosophy, and economics. Once again, no one offered me any advice or instruction as to how to handle my personal finances, nor was the concept of a credit score ever mentioned.
Next stop was law school. I learned about constitutional law, property law, wills, and trusts, civil and criminal procedure. I learned to read, think and analyze issues like a lawyer. Once again, no one offered any insight or information about my personal finances, including the concept of a credit score.
I first learned about the concept of credit as a young lawyer. After a short stint working as a prosecutor, I had moved on to private practice at a law firm. I was driving an older model Jeep, a predecessor of today's Jeep Wrangler. One of the partners in that firm pulled me aside a week or two into my employment and said: "Son, you have to get rid of that Jeep, lawyers don't drive cars like that."
I was saddened as I loved driving that old Jeep. My commute to and from work with the top down made the drudgery of answering interrogatories and reviewing piles of documents and medical records more tolerable. Nonetheless, I dutifully headed off to a local car dealer and picked out the type of car that "a lawyer should drive", and that I could afford to pay for on a young lawyer's salary.
I had never financed a car before, nor anything else for that matter. I was dumbstruck when the salesman returned from a meeting with the dealership's finance manager and told me that I didn't have sufficient credit to qualify for the purchase of the boring lawyer car I had selected. "Well," I said, swallowing my pride, "Is there a cheaper car that I can qualify to purchase?" No, said the car salesman, you have NO credit.
My first education about credit took place in a tiny office in an Oldsmobile dealership. (Yep, lawyers used to drive Oldsmobiles). I learned that day that I was "credit invisible." I had never utilized credit, so I had no credit score.
Many people learn about credit like I did, getting turned down for financing, either because they don't have credit or because their credit is damaged. It's an awful way to learn about such an important part of personal finance. You feel like you have been punched in the gut, like you are damaged somehow; at least, that's how it felt for me.
I would like to spend financial literacy month talking to you about credit and credit scores. I would like (and hope) to fill the gaps that exist in your knowledge about this important topic.
In the following weeks, I plan to share information with you that will allow you to build and use credit in an intelligent and educated way. I hope to share with you some ways that you can teach your kids about those topics as well. Should you have a question about credit, feel free to ask it in the comments section below. I will be happy to respond to it.
So, let's have a conversation about credit...