Ron Rule: How and why the banks give you a 'sucker score'

Banks have made up this system so they can bleed you dry, writes Ron Rule. Photo / 123RF

Your credit score should really be called a "sucker score".

Why? Because it's a number that exists for only one reason: to tell banks how much money they're going to be able to make off of you. The higher it is, the more of your money goes to them.

That's not how they sell it, of course. They sell it as a metric for determining "credit worthiness". But if you really break down what makes a credit score higher or lower, you'll see that they aren't being honest about what it actually is.

For example, if you're the type of person who doesn't use credit all that much, but can make large purchases and pay them off in a matter of days or weeks, that should be an indicator that you're the most "credit worthy" person on the planet.

Right? Shouldn't the people who do that have the highest credit scores?

Nope. You're actually penalised for that, and your credit score goes down. Banks hate you, because you don't carry debt long enough for them to make anything off of you.

You know who banks like? The people who take a long time to pay things off.

That's why they tell you to carry a balance on your credit cards, to finance things you could easily pay cash for and take your time paying it off, to refinance your house and start the loan over for another 30 years instead of paying it down, and so on.

And when you do these things, they "reward you" with a higher credit score - so you can keep borrowing more, keep juggling as much as you can afford, and keep your money flowing to them.

That's why they give you "bonuses" like the ability to skip payments, reward points, airline miles, limit increases, and the like.

That's why they send you offers in the mail for retailers who give you discounts when you use their card.

THE DEBT TRAP

Want to trade up a car you're already upside down on? No problem, just roll the negative equity into the loan for the new one. Go pick out a boat while you're at it.

Banks win when you stay in debt.

And that's the trap people fall into - perpetual debt. Most people don't even realise they're being played, they've been taught how to be good little customers and focus on their credit score.

You purposely stay in debt when you don't need to, so you have the option of using debt when you want to.

Eventually, all of your money is going out the door to monthly payments, and then you need to use a credit card at the grocery store just to manage your day to day cash flow. Today, most people couldn't even afford the car they're currently driving if they hadn't financed it. That's sad.

What's more sad is that none of that stuff is even yours. You're just renting it from the bank. All it takes is one little hiccup in your income for the house of cards to come crashing down, the bank takes it all back, and everything you paid along the way was for nothing.

And what happens when you figure the game out, and decide to opt out of it? When you actually pay off everything and have no more debt? Your credit score goes down.

How's that for irony? Actions that should have told banks "Give this guy whatever amount of money he wants, you can trust him." instead became "Screw that guy, he won't play the game and we aren't going to make squat off him."

BEAT THE SYSTEM

But you know what? I'm pretty happy about that. I decided a long time ago that if I couldn't pay cash, I couldn't afford it.

I looked at my pay cheque, then looked at how much of it was going out the door toward monthly payments, and imagined what my savings account would look like if it wasn't.

Buying cars, taking trips, all of it gets really easy when your pay cheque goes into your bank account and stays there instead of going right back out to bills.

You can get out of the trap - you just have to commit to staying out of debt. Pay off your credit cards and close them. Ignore the interest rates, just start with the one with the smallest balance, focus all of your extra cash on paying it off, then close it and work your way up to the next one.

Pay off your car and keep driving it instead of running out and financing another one. You could write a check for your next car if your car payment was going into your savings account for a year or two.

Break the cycle, live on what you make, and your credit score won't matter.