AYF 5 | Credit Myths

 

In life, so many people presume to know something that is absolutely false. The same goes for credit. In this episode, host Merrill Chandler talks about the most prevalent credit myths that plague our entire society. He takes a deep dive into seventeen of these myths so that you understand why it’s a myth and how you can create your fundability by believing the truth.

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Credit Myths

In this episode, we’re going to be talking about the most prevalent credit myth that plague our entire society. Things that are absolutely not true and yet you’ve been raised to believe they are.  

We’re going to start from the top and these are not in any particular order. These credit myths are a bane to my existence because many people in all my public appearances, the conferences that I speak at and even on our Facebook groups, they will comment and presume to know something that is absolutely false. There are probably dozens more, but we’re going to review seventeen of these and we’re going to barely skim a rock across the top of this 700-foot lake because each one of these is going to become its own episode. We will mine all of the data that we possibly can out of each one of these myths so that you understand why it’s a myth and how you can create your fundability by believing the truth. The foundation principles of my life is that only the truth is actionable. Let’s start talking about and find out what the truth is for each one of these.  

You Have A Credit Score

Myth number one, “You have a credit score. You do not have a credit score. Your consumer-facing scores alone, there are 28. There are not just credit scores. There are versions of credit scores depending on the different software that is being used. When somebody says, “What’s your credit score?” You know that individual has not been reading these episodes. They’ve not been to our boot camps. They have not studied what is available out there to understand the truth of credit scoring. There are FAKO scores and FICO scores. There is not a credit score. That is a myth. That’s a land mine.  

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Credit Approvals Are Based On Credit Scores

Number two, “Credit approvals are based on credit scores. That is not so. Credited approvals are based on a series of measured borrower behaviors over the course of 24 months or for as long as the data is available, months, months, 12 months and 24 months. There is no single use of a credit score to make a lending decision. They look at the quality of your profile. They look at how long that profile has been in operation and how long these borrower behaviors have been effectuated. Your credit score is the third or fourth lending metric, not the first three. More importantly, the 24-month lookback period is far deeper and far more powerful of a lending metric if you had to pick one. Credit approvals are based on underwriting guidelines and automatic underwriting software where the third or fourth metric is the actual credit score. 

Becoming An Authorized User Will Help Your Credit Score

Number three, “Becoming an authorized user will help your credit score. My note here says, “See myth number two.” Scores aren’t approvals. We don’t care if your score goes up, we care if your fundability goes up. Everyone of these myths is based on faults premises. None of them are based on the fundability of your borrower profile. Authorized users, when they’re counted positively, are only worth 40% of the value that the individual owner has. If you’re not the owner, the owner gets 100% of the possible points. You, the authorized user, gets 40% of the possible points. 

Here’s the ugly part of that. If the owner of the account goes negative, you get 100% of the negative points. We don’t care about your score going up, we care about your fundability improving. That fundability is based on other things and not your credit score and least important to your credit score itself. We don’t care if your score goes up by being an authorized user. Therefore, we do not want you to be an authorized user except in very rare and very narrowly defined circumstances that require an entire analysis. 

AYF 5 | Credit Myths

Credit Myths: Credit is not black or white. It’s not bad, but it’s not good either.

 

Credit Scoring Is A Very Simple Process

Number four, “Credit scoring is a very simple process. It’s not. If you go to Credit Karma and look at their credit estimation software, they give you five or six questions to ask and it estimates your score. That’s all bunk. FICO measures 40 characteristics of your credit profile in thirteen different scoring models called scorecards. Do you know what 40 is to the thirteenth power? That is billions of versions of underwriting possibilities. When it comes to credit scoring being simple, it is not a thing that is simple. We have to know what the underwriting guidelines are in order to be fundable.  

Bad Credit Is Bad, Good Credit Is Good

Number five, “There’s good credit and there’s bad credit. Bad credit is bad and good credit is good. It’s black and white. It’s not even close. Fundability, credit modeling and approval models are all spectrums of gray from the darkest possible gray that isn’t black, to the possible lightest gray that isn’t white. It’s not black and white ever. Credit is not bad. Credit is not good. It is, “Are you fundable or are you not fundable? If you’re fundable, to what degree? Does someone give you a $5,000 credit line or credit card or do they give you a $50,000 credit line or credit card? What interest rate do you get when you get your mortgage? Fundable is also gray but you are not fundable or you are fundable at small, medium or large amounts. The thing that we have to remember is it is not black and white. My credit is good or credit is bad, credit scoring is different than reporting. 

Paying Your Bills On Time Is All You Need To Do To Have Credit

Let’s look at number six, Paying your bills on time is all you need to do to have great credit. That’s where we go back to see number two. If I use the metaphor of a game, let’s say basketball. If you are paying your bills on time, you get to be on the team. That doesn’t mean you get to play. It doesn’t mean you get the ball because you’re playing. It means you’re on the team. If you don’t pay your bills on time, you get derogatory accounts. Those fresh derogatory accounts, you don’t even get to walk onto the court. You are not part of the team. You don’t get to play. Paying the bills on time just gets you on the team. 

Your personal credit profile, your borrower profile, is the single most important asset you have. Click To Tweet

There’s a whole slew of things that you need to do and need to know in order to not just make it on the team, but then get off the bench, get the ball and be that five-second clock player. You get the ball every time because you score and you know how to play this game. I have people coming up to me at events and they’re like, “Why do I need you? I have an 820 credit score.” I go, “Why do you have that 820 credit score?” They’re like, “Because I pay my bills on time.” I’m like, “What about the 39 other FICO metrics? Paying your bills on time is not the reason why you have an 820 credit score.” They’re like, “I don’t know. I know I have an 820 credit score.” 

I ask you, “Where are the million dollars in business lines of credit? Where are the lowest possible interest rates? Where are the best auto loans? Where is the result of having that 800-plus credit score?” You’ve got to ask yourself, do you have the business credit lines so you can write a check and do a deal out there in the world as an entrepreneur, investor, etc.? The score is not as important as the other factors. Your credit is, “Are you fundable or not fundable? As we said on number six, paying the bills just gets you on the team. It doesn’t put you on the game. 

All Credits Are Created Equal

Let’s go to number seven, “All credit cards are created equal. No, in fact, some of them are so bad, they have what’s called a negative indicator. FICO downgrades your credit profile, the value of your profile, the quality of your profile because a consumer account is detected. There are sixteen valuations of revolving accounts and installment loans. You can have tier one to tier four. Tier one is the best, tier four is the worst, and then you can have an account that is 100% value to your profile or 40% to your profile. The worst are consumer cards. They are tier four, 40% and they get docked by FICO. FICO hammers the quality of your profile and your fundability by having consumer cards on your profile. Those are all the mall store cards, PayPals, Amazons and the online cards. If you’re bingeing this, we’re going to be discussing how to have a quality account and what is a quality profile, especially for your revolving accounts. Credit cards are not created equal. We’ll get rid of that myth.  

AYF 5 | Credit Myths

Credit Myths: Paying interest is actually an investment in your fundability and in your financial reputation.

 

It’s Best To Pay Off Your Balance Every Month

Number eight, “It’s best to pay off your balance off every month. Here’s the myth. I do want you to pay your balance off every month if you can on the due date, but the problem is that there’s this suspicious, sneaky lender protocol, procedure, process that what you pay off is not what’s reported on your credit report. When I tell my students to get their FICO credit report, especially the ones who pay their credit card balances off every month, they are totally stunned to find out that the vast majority of those credit cards are reporting a balance. There is a difference between the due date and the reporting date. The balance on that reporting date is the amount that gets reported to the bureaus.  

Paying your balance off every month doesn’t even matter if you don’t have the appropriate balance at your reporting date. Here’s straight from the FICO development team that we met with at FICO World. Ethan from the score development team said, “Less is better than more. Some is better than none.” That’s what it needs to be reported. The due date to save interest, if you can pay it off on the due date, awesome. That’s not what’s being measured. That’s not what’s being reported to the bureaus. What’s being reported to the bureaus and then scored negatively by FICO is what balance you carry on the reporting date. Number eight, it’s best to payoff your balance every month is a nonstarter. That’s a nonsensical question because the balance after you pay it is not what’s being reported. Get that one straight.  

Debt Is Bad

Myth number nine, “Debt is bad. If you are an entrepreneur, a real estate investor, note buyer, business owner or anybody who is looking to not be 1099 and strike out on your own and build your own legacy and/or empire, then that is utterly false. I don’t want you to be in debt for debt sake because you’re an undisciplined consumer. I want you to be in strategic debt. I want you to be in debt that reports perfectly from the creditors to the bureaus and scored by FICO. FICO sends that data to the lender underwriting software and the lender underwriting software through automatic underwriting says, “Perfect usage of debt.” Is debt bad? No. Strategic debt is good, but you have to be conscientious about how you do this process. You do not want to just have willy-nilly debt because as I told you with the credit cards being equal section, you can have the wrong type of credit instrument, the wrong type of card, the wrong lender, the wrong loan type and those are all going to hurt your fundability. 

Credit repair cannot make you credit worthy. Click To Tweet

Paying Interest Is Bad

Here’s another one. Paying interest is bad. Your personal credit profile, your borrower profile is the single most important asset you have. It’s your financial reputation. Most of you have been trained to use, misuse and abuse your credit profile. We call it killing the goose that lays the golden egg in other episodes. Let’s say you have $1 billion in gold bullion, would you invest in some security measures to protect it? The thing is you’re trying to protect your gold bullion, so you’re spending money to protect an asset. When you say paying interest is bad, what you’re saying is interest is a bad thing but if I have strategic debt, paying interest is in building and protecting my greatest financial asset. I’m building and protecting my fundability, my financial reputation as measured by the underwriting software of lenders and by FICO. You have to understand that some of these myths don’t even make sense when you know the principles of fundability. Interest is an investment in your financial reputation, but you have to be careful of what kind of debt you get so that it’s contributing to your profile. 

It’s Best To Pay Off Your Loans Early

Myth number eleven says, “It’s best to pay off all your loans early. See number nine, “Debt is bad. Debt is not bad, but the idea here is to pay off your loans early. The highest yields on any of your loans come with at least 24 months of those payments. At FICO, of the 100 questions that we asked, we were told that after 24 months, the contribution to your credit profile value planes out, it flatlines. Any loan below 50% flatlines. We recommend that you refinance, renew, release so that your loans are active and contributing to your profile. Paying them off early in this instance is where people buy a car and they get a new fixer flip return. They cash out and they pay off their car because debt is bad. No, if you pay that off before 24 months, you’re missing out on valuable points. Keep it at least that far, but you’re missing out on extremely valuable points. To even have a mature file, open or close, you need twenty-plus listings on your credit report or you don’t even have a mature file. We don’t want to open up revolving accounts, credit cards and close them. That’s the worst activity you could do. 

You want to open up, age perfectly the installment loans, refinance, renew, release and then come back and do it again. That’s how you build a true foundation, a structurally sound fundable credit profile. Other than that, loans don’t even register on your credit score for six months’ worth of payments. Anything you do, you’re going to harm your profile if you pay those loans off quickly. That is not a thing. It does not help your fundability paying them off early unless it’s after the 24-month lookback period.  

Credit Scores In The 700s Represents Great Credit

Number twelve, “Credit scores in the 700 represents great credit. When you know the rules of the funding game, that’s nonsensical. People say that all the time, “I’ve got a 700-plus credit score. I’ve got 720 credit score.” The score doesn’t matter. See number two, approvals are based on credit score. It’s nonsensical. The only thing that matters is“Is your 720 fundable? There are 820s that are not fundable. There are 720s that are not fundable, but there are 680s that are fundable. It doesn’t have anything to do with your score. It is whether or not a lender is going to lend you money based on your profile and that profile will have a score. The score is not the indicator. The fundability metrics, what I call the FICO 40, the underwriting guidelines in the AUS, the Automatic Underwriting System, those are what matter. A 700 score can be awesome and it can be horrible if no one’s willing to give you money. I don’t care if you have an 800 score, it doesn’t even matter.  

AYF 5 | Credit Myths

Credit Myths: You cannot make somebody fundable by deleting a few negative items.

 

To Have An 800+ Score, You Can’t Have Negative Accounts

That’s myth number thirteen, “You can’t have an 800-plus credit score and still have negative accounts on your score. Here’s a true story. We have clients who still have negative derogatory accounts on their credit reports and they are fundable and they have 800-plus credit scores. You can have derogatory accounts and be fundable and have an 800-plus credit score. It doesn’t matter what your score is. It’s whether or not the lenders are willing to give you money. Number thirteen, the cousin question to this, “To have an 800-plus score, you can’t have any negative accounts.” That’s not true at all. Fundability, 800-plus and the ability to be approved, all can happen at the same time.  

Negative Credit Counts Stays On Your Credit Report For 7 Years

Let’s look at number fourteen, “Negative credit accounts must stay on your credit report for seven years, ten years in the case of bankruptcy. It’s not true. In fact, the language is specific in the Fair Credit Reporting Act, FCRA. It says that a derogatory account shall not remain on the credit report for longer than seven years or ten years in case of bankruptcy. That means it can’t stay on longer. It can stay on until it is proven that it doesn’t fit the legal ramifications or dictums of the Fair Credit Reporting Act. It can come off if it’s not accurate, not verifiable and if there’s an error. All three don’t have to be true. Only one of them has to be true. There’s an error in reporting. There’s inaccuracy in the account or it’s not verifiable.  

In any one of those cases, a negative item can come off in the first month that it’s reported. You have to do what we call an accuracy audit. Ultimately for us, through our software, it becomes what’s called a fundability audit. We run everything through accuracy. It’s a data point check. If there are errors or if it’s inaccurately reported or it’s not verifiable, then that particular item has to be removed. It does not have to stay on the credit report. It just can’t stay on your report for more than seven years, ten years in the case of a Chapter 7 Bankruptcy. That myth is completely false.  

There is no such thing as a guarantee. Click To Tweet

Credit Repair Can Make You Fundable

Let’s go to number fifteen, Credit repair can make you creditworthy or fundable. No, it can’t. Remember my background. I cofounded Lexington Law Firm in 1992. I was there for five years. I even tried more advanced strategies on credit report for another two or three years after that. What you know is that every attempt I did at credit repair for my clients resulted in maybe a clean credit profile, but not a fundable profile. That’s why when I was in prison, I developed the whole idea of fundability optimization. I learned it, got out of prison, practiced it and discovered that it was true. I could optimize a profile. 

We could make somebody fundable by doing all of the right tasks but credit repair, as I learned before I was inside, you cannot make somebody fundable by deleting a few negative items. That’s what credit repair is, the process of disputing negative items and hoping something comes up. Credit repair cannot make you creditworthy. The only instance where that may be true is if you have a fully fundable profile and you get a 30-day late or a collection. You get it removed and you return to a fully fundable profile. I’m not talking scores. I don’t care if you have an 800-plus score, get a collection account and get it removed. If you are fundable before, you’re not going to be fundable after that credit repair strategy. It’s not going to happen. The vast majority of you do not have a fundable profile. That’s why we’re bingeing together and making sure that you know the rules of these games so we can implement them, practice the game and then play to win. 

Credit Repair Is Fast

Number sixteen, “Credit repair is fast. This is important and for any of you who are using credit repair firms out there, I’m going to tell you the facts. Remember, before we started Lexington, it was the Wild Wild West. To a significant degree, it’s still the Wild Wild West when it comes to credit repair because to follow the law in credit repair, you can’t charge in advance. You have to charge after you’ve performed services. If you’re being charged in advanced for credit repair, you need to talk to your service provider because they can’t do that. The only way they make money from you is by continuing to dispute. Let’s say, anybody that you’re using, $99. Every month you get a $99 and then they report to you all the things they did from the previous month. There’s what’s called a coated period at the credit bureaus. This is where this myth falls apart.  

In this coated period, there are only two opportunities to dispute a negative listing on your credit profile. Remember, I said there are three conditions that can exist for you to try and dispute. If they return it and they say verified as accurate, then you only have one shot left. That’s to send new information to the credit bureau substantiating the accuracy or the erroneous nature of it or the unverifiability. Credit repair companies continue to charge your account because you don’t know the rules of the game and they bill you $79, $99, $129 a month forever. 

AYF 5 | Credit Myths

Credit Myths: If somebody promises you a result, especially if they promise you a deletion, run as far and as fast away from that outfit as possible.

 

For some of you, if it’s been verified more than twice, then you’re done. If you’re using a credit repair company, the max you can use them is to clean up whatever it might be cleanupable. The max you should use them is for six months because that’s six times and they’re disputing every single month. Even if they’re alternating the accounts within six months, they’re going to have covered everything. Whatever is coming off will have come off by then 99% of the time. I cofounded what has become the single largest credit repair law firm in the country. No more than six months, you’re wasting money after that. It’s been verified and if you haven’t gotten new data to send to them, they’re going to keep spitting back to you. You get automatic returns and you’re paying every month. You’re getting automatic letters saying, “It’s been verified.” They’ll start accusing you of working with a credit repair firm and then they red flag your file. Credit repair is not fast and it’s certainly not guaranteed.  

Credit Repair Is Guaranteed

That’s number seventeen, “Credit repair is guaranteed. First of all, credit repair firms do not have any power over what comes off your credit report. They may have all the strategies in order to get the letters submitted to them, but they cannot guarantee the result. If they can’t guarantee the result, but they’re guaranteeing results to you, then you need to read the fine print. You’ve got to make sure that whatever they are saying, you hold them to that and question them thoroughly. I believe in the right to have an accurate credit profile reported from the creditors to the bureaus and the bureaus to future lenders. It’s on the Fair Credit Reporting Act.  

We will be doing a deeper dive in the Fair Credit Reporting Act as time goes on. What you’ve got to know is that credit repair is very limited in what it can do. The final thing about credit repair can make you worthy, myth number sixteen and number seventeen, is that the results are not consistent. If you have more than a twenty-point difference between your highest score and your lower score, you get kicked out into manual underwriting. Let’s say it’s a fresh collection or a 30-day late, if you deleted off of one bureau and it’s not off of the other bureau, you’re going to have larger than a twenty-point difference and you’re going to go into manual underwriting if they care enough to want to approve you. 

If you’re trying to go for an American Express credit card, they’re not going to go into manual underwriting, they’re going to reject you. Here’s the problem. When you delete a negative item from one report and not the other, not only do you have the extra difference in score, but the data points don’t sync up. When the data points don’t sync up, then the underwriting software doesn’t trust the listing. If it doesn’t trust the listing, it doesn’t trust you because the perfect profile reports the same data across all three bureaus.  

Paying off a debt before 24 months is making you miss out on valuable points. Click To Tweet

This is anecdotal, so I do not have proof for this, but it is my assertion that a perfectly reported negative account is more fundable than where it’s only reported on one or two bureaus. It’s less damaging to have it across all three than to have it on two out of the three or one out of the three. I do not have facts to assert that. I was in prison on my cell wall working out the models for this entire process. Everything started at questions, suppositions and hypotheses. We proved the hypothesis and one hypothesis is this. It may be better to have all three negative than to have it off one or the other. Here’s the other thing that happens and you guys don’t even know it’s happening. If you have a fundable profile, most lenders will pull one bureau. Mortgages require all three, but most will review one bureau. 

If it doesn’t make sense, that’s when they pull the second one and/or the third one. If your data isn’t matching, they need more data to approve you. Capital One is infamous for pulling multiple credit reports because they don’t do any manual underwriting. You’re either approved or denied, high or low based on what it is. The whole point is they will pull multiple credit reports to get as much data as possible and they’ll deny you if they see that twenty point-plus range or they see any inconsistent data. That’s why we are about sinking up our data points. If somebody promises you a result, especially if they promise you a deletion, you run as far and fast away from that outfit as possible because there is no such thing as a guarantee. That myth is complete BS. 

Those are our seventeen myths. I went through these seventeen because these are the ones that come up the most in our training and our student questionnaires. There are dozens and dozens more landmines. We’re going to be going through every one of these and dedicating an episode to because we’ve got the time to do it. I want you to know what’s definitely not true and what’s taught out there in financial education. Financial literacy courses suck. They do not tell you the truth that I’ve told you because they don’t know it. For whatever reason, I have had the opportunity to meet with the FICO score development team. I’ve met with lending underwriters. I have seen how lender underwriting software works. I’ve developed my own software that evaluates and does fundability index. Be careful out there. I can’t wait for you guys to keep bingeing and we will see you on the next episode. You better well get there if we’re going to do this together. Are you F*able or just F*ed? I will see you at our next opportunity.

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