Many people rely on banks to tell them whether or not they deserve a loan to buy anything from a house to a TV. What people don’t realize is that credit scores are designed to tell banks how much money they can make off of someone.
From a bank’s perspective, credit scores tell the following.
- Someone with a high credit score is a good guarantee of consistent profits
- A medium score is potential for high profits through fees but with some risk
- A low credit score is too risky to consider
We need a system for us to know when to get a loan or when to sign up for that credit card. A true Personal Credit Score will tell us (and not the banks) when a credit decision is best for us. I have started a score sheet below to help everyone out. Let me know if you think this works for you or if something is missing.
Rules of Credit
My Personal Credit Score tool is based on some well known rules of money.
- Managing money takes time and time is our most limited currency (not money or gold)
- When you give money as charity, money loses its grip on your life
- Spend less than you make (auto saving)
- Don’t use a loan to buy something that depreciates
- You earn the right to use a credit card
- Credit makes it easier for people to spend beyond their means
Personal Credit Quiz
Now choose the answers below that best describes you and keep track of your points. At the end you’ll have a better idea of your true Personal Credit Score and when you should be using credit.
Do you consider managing money a fun hobby?
- Yes, I love it and could spend hours each week! – 100 points
- No, but I still spend a few hours monthly doing a budget – 60 points
- No, I don’t look at bank statements ever or commonly miss bill payments – 0 points
How much money do you donate annually?
- Greater than 10% of my salary – 100 points
- Between 5-10% of my salary – 75 points
- A little bit when something bad happens – 20 points
- Sorry, I’ve got my own things to buy – 0 points
Do you spend less than you make?
- Yes! I even have an emergency fund with 3-6 months expenses – 100 points
- Yes. I have an automatic savings account – 60 points
- Sometimes – 10 points
- No, I’m living paycheck to paycheck or off my parents – 0 points
Do you currently have debts (including credit card bills not paid off monthly) ?
- No, I don’t have any debt – 100 points
- No, except for a house, student loans, or another appreciating asset – 50 points
- Yes, I’m sorry but I just had to buy the car or TV via a loan/credit – 0 points
Do you have an income producing job?
- Yes, it’s a full time job – 100 points
- Yes, part of the time – 30 points
- No, but I’m looking or volunteering – 5 points
Great job! Now here are your results.
- 500 – Congrats you financial all star! Feel free to use a credit card, but I’d be surprised if you really wanted one. Also, take some time to write a guest blog on Obsessed Analytic.
- 420-499 – You’re financially sound. If you have the time, you’re allowed to get a rewards credit card, but keep looking for ways to improve.
- 350-419 – Still hanging in there, but be careful you don’t lose track. Don’t get a credit card until your score improves.
- 280-349 – Things are getting tense so make some time to get things in order. Don’t use any credit cards.
- 150-279 – You’re good in some areas, but other areas can bring you down. Find the problems and do something. Obviously stay far away from any credit cards or loans.
- 50-149 – Don’t panic. Just breathe. It could be worse, but time to sound the alarm. Start fixing one thing at a time and find someone to hold you accountable.
- 0-49 – I’m not sure how you found this blog. Send me an email and I’ll help you get going, but this may take a while.
This post is featured on the Festival of Frugality: Time Passes Edition.