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Does bad credit make you a bad person?

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http://articles.moneycentral.msn.com/Banking/YourCreditRating/does-bad-credit-make-you-a-bad-person.aspx

More and more, your credit score is being used to determine whether you deserve a job or an apartment. Critics say the practice is unfair. Here's what you should know.

By Karen Aho

The ads keep coming: Let your credit history slip and so, too, will your lifestyle. Once you're branded with a poor score, it's off to the bad job, the bad apartment, the bad insurance, the bad life.

It is the scarlet letter of the information age.

But the credit-rating mega-industry makes some big assumptions when it sells credit as an indicator of character.

After all, what does poor credit really have to do with a person's ability to be a good worker or a safe driver? And given that credit can be so easily savaged by job loss, illness or divorce -- events we're all susceptible to -- what can it actually say about a person's propensity to steal or to lie?

The answer, critics say, is nothing. The evidence is slim to none that credit history accurately predicts any behavior outside of borrowing.

"The credit bureaus have basically said we've got this data and we should use it for more than just loans," says Birny Birnbaum, executive director of the Center for Economic Justice, a nonprofit consumer-advocacy group that opposes credit scoring. "They've pitched the product to every possible business, and now they pitch it to the consumers for protection."

"It's hugely overused," he says.

In the end, critics say, the practice unfairly punishes people who've hit hard times and broadly discriminates against minorities and the poor, whose scores tend to be lower. Consumers are left with little recourse other than to keep an eye on their credit reports, often by paying the same bureaus that are peddling the data (the reports are available once a year for free.)

"The only thing people can do is complain to their representatives to change the laws to not allow it," says Wendy Harrison, an Arizona civil-rights lawyer who represents clients adversely affected by credit scoring.

In the beginning, a good tool for lending

Few people would argue that the use of credit scores for its original intent -- to assess risk in lending -- is not a good thing. It wasn't too long ago that bank officers decided whom to trust based merely on a file folder and an opinion.

"The people giving loans wanted to give loans to people who looked like them," says Liz Pulliam Weston, a personal-finance columnist for MSN Money and the author of "Your Credit Score: How to Fix, Protect and Improve the 3-Digit Number That Shapes Your Financial Future." "We have progressed beyond that, thank God."

By contrast, the credit score predicts future behavior based on actual past behavior, which is considered a reliable model. It is blind to factors such as race, gender and marital status. As a result, more people can gain access to credit, while lenders are better able to price risk.

As the credit bureaus consolidated into the big three (despite the title, they are all for-profit companies) and information management dropped in price, the bureaus started tailoring their credit data to outside industries and making sales calls.

"Now it's becoming increasingly common because a credit report is becoming a cheap form of a background check," says Evan Hendricks, the publisher of the Privacy Times and the author of "Credit Scores & Credit Reports: How the System Really Works, What You Can Do."

From the perspective of insurers, employers and others, "it's legal, it's not expensive to do it, so heck, the balance tips in favor of using it," Hendricks says. "Everything I see means it's going to become more and more used by more and more entities."

(continued in next post)

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Expect your credit to be checked

It's unclear exactly how frequently companies rely on credit information, because they don't disclose the information, citing reasons related to competition. (While credit bureaus and private companies may see, and profit from, consumers' private information, they're not about to let consumers see theirs.)

In general, though, credit histories are fast becoming standard for people to meet these necessities:

Employment: In 2006, 42% of employers conducted credit histories as part of background checks for new employees, according to the Society for Human Resource Management. That's up from 35% in 2003 and 19% in 1996.

Interest continues to grow, for a wide spectrum of jobs, says Susie Henson, a spokeswoman for Experian, one of the big three credit bureaus, along with TransUnion and Equifax.

The credit bureaus defend their use of credit reports, saying they're a valuable fraud-prevention tool when used in conjunction with other information. Credit reports can verify past jobs and cities of residence. They show whether bills are paid on time and whether an applicant owes money. They can even reflect spending sprees.

"This can be a way to really have a second check to ensure that that truly is the person that you talked to," Henson says. "It's not just about assessing financial health. . . . It's really to look at how somebody has been rooted in their environment."

Employers also worry that a high debt load might make an employee likely to steal or accept bribes. Bankruptcy lawyer Carl Starrett frequently hears from members of the military, even at the enlisted level, who need to declare bankruptcy in order to begin improving their credit scores for their security clearance and, hence, their jobs. The same is true in several other licensed occupations.

Housing: Unless you're renting from a friend, expect to produce a credit history. Apartment managers not only check for previous defaults but can look for prior addresses to compare with criminal background checks.

Auto and homeowners insurance: Almost all insurance companies incorporate credit history into their underwriting, despite the objections of insurance-agent associations, which say the practice unfairly and illogically raises rates for struggling customers.

The credit bureaus and insurance companies say there's a correlation, backed by independent studies, between poor credit scores and an increased number of claims. But they admit that they have no idea why the pattern exists and can't prove that one causes the other. They say it's an added risk-management tool that ultimately allows insurers to reduce prices for other drivers.

"Our belief is that people who are careful and prudent in managing their finances are also careful and prudent in other areas of their lives," says Michael Gaughan, a vice president at TransUnion. "They're prudent and careful in how they manage one of the largest assets in their lives, their home, and in how they lock up and care for their vehicle."

It's not logical, and it doesn't work

Not everybody buys this argument, or the others.

"Credit scoring was bad for people in the beginning, and it is bad for people now," says Ralph Buchanan, director of legal activities for the United Farmers Agents Association, which opposes using credit history to price insurance. "Where is it fair if this husband and wife are making $10 an hour and scraping by to pay the bills and miss a couple bills? Why do they have to pay more for their auto insurance?"

It amounts to charging people for being poor, agrees Jim Fish, executive director of the National Association of Professional Allstate Agents. "It's a strange and crazy deal that these insurance companies have got going on."

"The question I have is: How do people ever get out of that cycle? If you're making it so expensive for them, how can they ever rise above that?" he says. "It's no wonder there are so many uninsured drivers out there."

Legislators in 20 states have introduced bills to prohibit the use of credit history in insurance underwriting. But very few states -- including Hawaii, California and Massachusetts -- currently prohibit the practice.

(continued in next post)

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Credit scoring may have benefited insurers to the tune of $67 billion from 2003 to 2006, according to a 2007 study by the National Consumer Law Center.

In 11 states, legislators have restricted the use of credit history for employment. Many would like to see it banned altogether.

Credit scores are famously riddled with errors, with discrepancies of as much as 100 points among the bureaus. The reports don't reflect on-time payments to utility companies. Credit histories are routinely damaged when bad things happen to good people. And, most importantly, there simply isn't any evidence that people with heavy debt loads make bad employees or greater insurance risks.

Piper Hoffman, a partner at Outten & Golden, an employment law firm in New York, gets calls every month from workers at all income levels who have lost job offers after a credit check. Some had already been working on a temporary basis and were well-liked.

One man, an executive, had damaged his credit after taking out a second mortgage to pay his mother-in-law's medical bills. "And he found the job offer being withdrawn because essentially he was being a good son-in-law and taking care of his family," Hoffman says.

The assumption, she thinks, is that people with debt will embezzle funds, "which is another way of saying 'we don't trust poor people.' And there's no evidence of that."

In what appears to be the only definitive study on credit history and job performance -- it's difficult to get access to personnel data -- an Eastern Kentucky University professor found no correlation between the two. In fact, the only finding of any statistical significance was the opposite: The workers with poor credit history were more likely to work hard.

"I would be really worried if companies were making judgments about a person's character based on their credit report," says a study co-author, Jerry Palmer, an associate professor of industrial psychology. "I would not use them."

What can you do?

You have to consent to a credit check, but a company can legally reject you for employment or housing if you refuse.

"I don't know that there's a lot we peons can do to fight back, other than make sure your credit is in the best position. You get your credit report every year. You dispute any major items," says Weston, the personal-finance expert. "You want to create your credit file in as good a position as you can. And you want to build your score by using credit."

If there is a problem, add the permitted 100-word explanation to your credit report, and be upfront with people. Human-resources managers say they are sensitive to the fact that circumstances don't define a person in full.

If you believe a job denial based on credit qualifies as discrimination, file a complaint with the U.S. Equal Opportunity Employment Opportunity Commission or contact an attorney. Across the country, lawyers are trying to ban the practice.

It hasn't gotten into court yet, Hoffman says, "but I believe that once we get to that point, we will win."

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IMO....I don't think that your credit scores should be a major factor when you apply for insurance, or rent, or buy a home. I think that the insurance should be based on how your driving record is and how many claims you have filed instead of your scores.

Example..I have a flawless driving record, no tickets past 10 years , no accidents ever, and I have had a DL since I was 15.. (Knock on my Head) but I pay high payments because I don't have a good credit score.

With Rent....well we all have to have a place to live...Geesh...I always pay my rent before ANYTHING!!!!, then utility bills etc. Although most land lords do look at your rental history they always want you to pay more if you don't have a good score...

With mortgages I think that the lender should take into consideration heavily your payment history with your rent, especially if you are paying just about as much rent as a mortgage...Doesn't that prove you can handle the freaking payment?

I mean if you are willing to pay rent of 950-1200 PM and you have never been late ever(which is my scenerio) why couldn't I handle a House payment? And rent up here for a 3 Bedroom apt in Ct in my area ranges from 950-on up.

I might have bitten off more than I could chew with credit cards but I have always had a steady job, paid my rent and utilities, car insurance on time. I am thinking it is an ethical/moral decision that these creditors all do by having each others back so they can get more $ out of the consumers.

I am not saying that I shouldnt be punished but I think they take things to far with judging scores instead of seeing what the person is really like.:)

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IMO....I don't think that your credit scores should be a major factor when you apply for insurance, or rent, or buy a home. I think that the insurance should be based on how your driving record is and how many claims you have filed instead of your scores.

Example..I have a flawless driving record, no tickets past 10 years , no accidents ever, and I have had a DL since I was 15.. (Knock on my Head) but I pay high payments because I don't have a good credit score.

With Rent....well we all have to have a place to live...Geesh...I always pay my rent before ANYTHING!!!!, then utility bills etc. Although most land lords do look at your rental history they always want you to pay more if you don't have a good score...

With mortgages I think that the lender should take into consideration heavily your payment history with your rent, especially if you are paying just about as much rent as a mortgage...Doesn't that prove you can handle the freaking payment?

I mean if you are willing to pay rent of 950-1200 PM and you have never been late ever(which is my scenerio) why couldn't I handle a House payment? And rent up here for a 3 Bedroom apt in Ct in my area ranges from 950-on up.

I might have bitten off more than I could chew with credit cards but I have always had a steady job, paid my rent and utilities, car insurance on time. I am thinking it is an ethical/moral decision that these creditors all do by having each others back so they can get more $ out of the consumers.

I am not saying that I shouldnt be punished but I think they take things to far with judging scores instead of seeing what the person is really like.:)

Is that too many words to put as a personal statement on your CRs? Edit: nvm, I just saw that the limit is 100 words.

I agree. I was nearly denied a place to live due to bad credit, but they got to know me a little and let me stay here anyway.

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IMO....I don't think that your credit scores should be a major factor when you apply for insurance, or rent, or buy a home. I think that the insurance should be based on how your driving record is and how many claims you have filed instead of your scores.

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Insurance companies claim there is a risk-correlation between those with poor credit (payment history problems) and their ability to pay their insurance premiums. I think that is a crock because if you don't pay the premium then the policy is cancelled...simple enough.

They also claim a correlation between poor credit scores and both the frequency of claims and the risk of fraudulent claims. Now there could be something to that. People who have problems paying their bills also tend to not have ready reserves to pay deductables and may also file claims for minor damages they otherwise would pay out of pocket. Also, people who are desperately short on cash may be inclined to inflate claims or try to get a cash-out for property by claiming it stolen or by deliberately destroying it.

Property managers have a similar risk issue. A person with a payment history problem may leave a rental unit damaged and not pay for those damages. *I can speak from experience there -- $20k in damages and another $6k in lost rent I will never be able to collect!* Property managers have extra issues because it's not just the potential risk. Laws and courts make it very hard to quickly get a bad tenant out. In most places it takes 90-180 days to evict a delinquent tenant. During that time you're generally not getting any rent (they stop paying 99% of the time as soon as a FE&D is served on them) and they stop caring even moreso about the damages they do to the property...sometimes they even do deliberate damage like stopping up the toilets just out of spite.

As for mortgage lenders, they do take your rental payment history into account heavily when they are underwriting in full documentation loans. My mother spent three decades in the mortgage underwriting business. And a lot of times people with good rental history will be approved even with credit blemishes. Unpaid charge-offs must be paid off though because it can turn into a lien against the property if you get sued...so don't confuse that issue with scoring. They are simply protecting their lending interests.

Hope that explains some of it.

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Insurance companies claim there is a risk-correlation between those with poor credit (payment history problems) and their ability to pay their insurance premiums. I think that is a crock because if you don't pay the premium then the policy is cancelled...simple enough.

I am not agreeing on the insurance 100 percent because I think that they should go strictly by your record. If you have not ever filed a claim (which I haven't) and do not have any moving violations(I haven't had any in 10 or so years) then they should give you a good rate. I sorta of understand where they are coming from about bogus/inflated claims but if you are a B.S.er they can tell by your record of filed claims through your previous insurers. I think it is just another excuse to rake in extra $ specific with someone like me who never ever files claims, I pay my bill every month on time, so they are basically getting free money every month.

Same with renting..I never have been late, and always pay my rent every month on time. I have never moved out and left an Apt. or home with damages, and always got my security deposit back. They should take that into serious concideration, instead of just looking at your credit score. They should call your old land lords and ask them how you paid, and did you wreck the place. If the tenent has nothing to hide then they will allow them to do that.

That is good about the mortgage lenders taking your rental history into concideration. I understand that charge-offs can cause leins too. I don't blame them because the last thing that a lender wants is to have a debtor with a lein right away when they make them a loan. Thanks for your opinion Meth...:-)

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Scortch you can write a 10K word essay on your report if they let you and it don't make a difference. I understand where you are coming from though. It is to bad things are like that..it is like we are preyed upon for easy extra money by insurance companys, and land-lords, and mortgage lenders.

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When it comes to rent, I dealt with private landlords because they usually never checked credit scores. The flip-side to that, of course, is that they are slumlords when it comes to just basic things such as mowing the lawn. But that's the tradeoff I guess.

Auto Insurance is another scam. In NJ, there are some insurers like NJ Cure that will not base you rate on the score...but when compared to Geico, it comes about the same for me. I've been driving since I was 17 and knock on head-for-wood, never got into an accident, and hardly ever got moving violations.

My credit has dramatically improved, so maybe that's why it's not hurting as much but because my insurance is toward they beginning of the month and not the end, I always have to put it on the card. Insurance is definitely one bill I am never late on....rent I can kinda play with but I tend not to. Gas/Electric same deal and cable as well. But if it relates to credit/insurance...that gets priority #1 always.

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Same with renting..I never have been late, and always pay my rent every month on time. I have never moved out and left an Apt. or home with damages, and always got my security deposit back. They should take that into serious concideration, instead of just looking at your credit score. They should call your old land lords and ask them how you paid, and did you wreck the place. If the tenent has nothing to hide then they will allow them to do that.

It would be nice if rentals would actually report a positive payment history, instead of only reporting if you default them.

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Many landlords do take previous rental history into consideration. I ALWAYS call the previous landlord. And I am now starting to call the prospective tenant's landlord prior to any current landlord (reason being that if a current landlord wants to get rid of a bad tenant they actually have a vested interest in telling me that they are a wonderful tenant when they are not).

My advertisement on Craigslist stated that blemished credit was acceptable with good reason as long as there was no eviction. I received 18 tenant applications within 72 hours and had a lease signed with 96 hours. I also waive their application fee if they want to go to annualfreecreditreport.com and pull all three reports and give them to me for free.

I think that's fair to myself as landlord and to them as tenant. All I want is someone who will pay their rent.

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It would be nice if rentals would actually report a positive payment history, instead of only reporting if you default them.

I know it is a shame that they don't. I think that the Land Lords should have to though.:)They DAMN sure report Negative items when they can....:)

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I know it is a shame that they don't. I think that the Land Lords should have to though.:)They DAMN sure report Negative items when they can....:)

It costs $14 to report good payment info each month, per person, for a landlord to do it on a small scale (less than 100 batched per month). It costs nothing for a landlord to report bad information. Two people on the lease and it's $28 a month for that one lease. Got five units with two leasees per unit?...$140 a month...$1680 a year. The cost doesn't start dropping until you have 50 units with two leasees per unit. I wonder why they don't report it (sarc)?

Still don't think the credit reporting system is deliberately rigged against the consumer?

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It costs $14 to report good payment info each month, per person, for a landlord to do it on a small scale (less than 100 batched per month). It costs nothing for a landlord to report bad information. Two people on the lease and it's $28 a month for that one lease. Got five units with two leasees per unit?...$140 a month...$1680 a year. The cost doesn't start dropping until you have 50 units with two leasees per unit. I wonder why they don't report it (sarc)?

Still don't think the credit reporting system is deliberately rigged against the consumer?

Is this the same for all accounts?

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Still don't think the credit reporting system is deliberately rigged against the consumer?

Rigged? No. It is what it is. The CRAs are set up as for profit ventures who track the bad acts of consumers. That's their marketing hook.

No, I don't think that credit reports can purely determine claims for insurance, payment of rent, job performance, etc. But let's not fool ourselves to think that everyone with a bad credit history is completely innocent, honest or trustworthy.

I say, if we've made mistakes in the past, do what you can (honestly) to clear up your credit report and then keep your nose clean in the future. If we do that, we should be okay.

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At which point does it become baseless discrimination and an invasion of privacy? The line will be long crossed before the government gets involved.

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It costs $14 to report good payment info each month, per person, for a landlord to do it on a small scale (less than 100 batched per month). It costs nothing for a landlord to report bad information. Two people on the lease and it's $28 a month for that one lease. Got five units with two leasees per unit?...$140 a month...$1680 a year. The cost doesn't start dropping until you have 50 units with two leasees per unit. I wonder why they don't report it (sarc)?

Still don't think the credit reporting system is deliberately rigged against the consumer?

Oh I strongly believe that the credit system is made for the bussinesses to profit and the consumers to suffer. They are there to make as much money as possible with out regard to peoples feeling, family, etc. They really could care less about your credit situation, or if you pay your bills on time PULEASE!!!! the CRA's are in it for the money, nothing more and nothing less. To me it is a big game of who can decieve who the best and get away with it...I have NO MORALS with big bussiness at all!!!:-) May the best consumer win...LOL:)

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At which point does it become baseless discrimination and an invasion of privacy? The line will be long crossed before the government gets involved.

Good point....by the time the government gets involved this will have gotten way out of control. I remember when you could get car insurance with out them oulling your CR, they went by your driving record!!! So some Dumb azz soccer mom in a big suv texting on the phone while driving is BETTER than me because she has good credit??????????????????? I don't think so!!!!:)

Furthermore IMO most people with bad credit have had to make choices....I.E......Pay credit card/or Put food on the table....Well In my case I would rather EAT than pay a CC bill and not be able to go to work because I am passing out from not eating right...BUT I have good credit!!!(sarc) I think it really depends on the individuals situation at the time on how they should be judged/not just pull a report and say they are a POS because they have low scores. Most of the time the lenders can tell if you had a significant life change by viewing your credit..For example if you paid abc cc company on time for 6 years then went 120 days late well wouldn't that be a indicator of a possible illness, family crisis?

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Rigged? No. It is what it is. The CRAs are set up as for profit ventures who track the bad acts of consumers. That's their marketing hook.

No, I don't think that credit reports can purely determine claims for insurance, payment of rent, job performance, etc. But let's not fool ourselves to think that everyone with a bad credit history is completely innocent, honest or trustworthy.

I say, if we've made mistakes in the past, do what you can (honestly) to clear up your credit report and then keep your nose clean in the future. If we do that, we should be okay.

Well lets look a little deeper. The CRAs charge more to provide good information than bad when batched in small quantities. (Incidentally the dollars I quoted are the cheapest I could find when I was landlording myself) The end effect is that this reduces consumer scores which in turn allows lenders to charge more interest for the consumer to take out a loan.

As you pointed out the CRAs are a for-profit business. To add to that statement, they compete with each other. Since lenders get more money from lower scores, a CRA that encourages good information being reported as easily as bad would be thought of as a loosing deal by lenders looking to maximize their profits. Remember, they care about profits, not fairness. Why do you think most subprime lenders use Equifax when they are the hardest one to reason with to get erroneous negative information removed from? Why don't lenders use the highest score of the three instead of the middle score? The three models are significantly different and even have different min/max ranges so saying it's an "average" is bull-chips.

Think about it...hmmmm... yeah...it'll come to you...

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Meth, I'm not disputing your facts. I just don't believe that the CRAs are purposely conspiring against me as a consumer. If you don't want the CRAs to have any ammunition against you as a consumer, then don't get credit you can't afford and pay your bills on time and in full. Yes, negative information sells better than positive. So, I choose to not create any negative information.

If there is erroneous information on your CR and the CRAs won't remove it, then as a consumer we can exercise our right to seek redress via the courts. This is the same right as with a dispute with any other company. The problem is most consumers can't back up their claims. If a consumer has proof of their assertions, then they should just walk down to the courthouse and file. That's why we have civil court.

I've messed up before, I've cleaned up my mess and now, I don't have any problems with how the CRAs run their business. I've moved on.

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The CRAs are not exactly conspiring against the consumer...except when it comes to the bumpage myth...but, they are not our friend. They are in the business of predicting for creditors which debtors they can make money from. Its a bonus for them that they can collect additional money from consumers via the "do you know what your credit score is?" scam.

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Just another way to keep the poor man poor.
Not at all! Even the rich have credit scores and when they apply for a loan, their scores are checked. Sometimes the agency involved is Dunn & Bradstreet, but the process is the same.

There are some lenders who are looking for debtors that will pay them back in full with interest. There are other who are more interested in collecting the interest.

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Meth, I'm not disputing your facts. I just don't believe that the CRAs are purposely conspiring against me as a consumer.....

The question at hand was over why landlords and, by extension, other small creditors only report bad information. All I did was answer why. You're generalizing a question that had specific focus.

The fact that 98% of businesses in the US are too small to get batch reporting discounts is just fuel for the fire.

If you want to throw the personal towel in, I'm done with borrowing myself. I could care less what my score is anymore. I've found it is unnecessary with proper planning, saving, and patience. I'm off that hamster wheel. I'd like to see a lot more people get off it as well because I'll tell you it's nice not having any debt.

I don't have to work in a bad job...I don't have to worry about who is getting paid...I don't have to keep a watchful eye on some card lender changing the payment due date, jacking the rate, or cutting limits to cause a default...I don't have to worry that car insurance will leave me with no car and no money if a vehicle gets totalled and the lien exceeds the value. Now I can pay attention to what's important, my wife and daughter and enjoying time with family. I can afford to do nice things just about any time because I'm not borrowing to do it. I had to go through some pain to get there, but by being mature then, it gave me the money to be immature now....I can still impulse buy but I find myself not doing so anymore when I have to pay cash. I gotta tell you it was nice to pay cash for a car last week; and I don't have any buyer's remorse over it.

So I gotta say it. Life without the CRAs is just fine with me. They can take a long walk off a short dock into a deep, cold lake for all I care. I'll still help people "fix their credit" becuase it's really their choice to be a slave to the lender. But moreso, I will help people get out of it if that is what they want.

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Thats my plan Methuss. Only thing I plan on using credit for is a mortgage other than that I dont want CC,s or any thing else. My truck will be paid off in a year and will never get another car loan.

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