Why Everyone Is Wrong About Credit Scores
Today’s 550 credit score may very well have been yesterday’s 780 credit report.
When I look at a credit report, I am amazed that I am struggling to qualify borrowers who once had very high credit scores. Most once had six-figure incomes with a credit report well above 700. These factors place these borrowers in paper A categories.
Take for example Robert, a real estate investor who has borrowed millions of dollars over the years. With a credit score near 800 and a solid history of paying bills on time, lenders lined up for borrowers like Robert. I was personally involved with him for over ten years.
What happened? Like many others, Robert was a victim of the economic times. No, he didn’t overspend and when he called me last week, I learned that he had never taken any equity out of his properties. Robert was conservative. He kept his rents below market to support long-term tenants.
He negotiated a lot with me for long term fixed rates on his mortgages and when faced with an ARM, quite common for commercial properties, he fretted for days before committing.
What do you do when your largest tenant files go bust?
What do you do when they can’t pay but continue to occupy the buildings for months while the courts go through reams of paperwork? Imagine the feeling you would have in the bottom of your stomach… This is what happened to Robert.
With no income, he continued to pay debt service on his properties until his savings ran out. With the promise of a solution just around the corner, he finally tapped into his lines of credit. Credit cards with high interest rates, but also huge limits. After all, Robert needed $25,000 a month just to pay off the mortgages.
When he walked into my office, I noticed that he had lost weight. The kids were still in college, he told me, but they had to take out loans to finish. His wife went back to work and they moved from a custom home on the hill to a house in the city.
He was still playing golf and smiled easily when he talked about his sleepless nights and I could almost see a tear when he talked about the kids.
“I should have stopped paying before I used my savings, but I felt like I had to make the payments.” he said.
Robert, like many of us, wanted to do the right thing. And that meant paying, regardless of personal misfortune. Robert also tried to pay off his other debts, but he was racking up an avalanche of debt trying to do the right thing.
Finally, he couldn’t take the financial onslaught anymore and after relenting, he let go of his estates. One by one, she lost them when the tenants threw in the towel along with her keys. Some major companies, whose names I won’t mention, wiped out a family.
I like Robert, always have, and to me he is still the same man I met ten years ago. He is honest and a good father. Although we don’t travel in the same circles, I imagine he would make an excellent friend. I know his wife loves him and he got me thinking about people and their credit report and the debt they rack up.
Do people like Robert pay their bills just because of a credit rating or because of some deep-seated honor? On the other hand, how much is a credit score really worth? Why didn’t he stop paying earlier? Maybe he could have saved himself a lot of misery.
I deal all the time with people who put their full identity on your credit score. High-income people tell me that they are honorable. That they pay on time and have little debt. Others, with lower scores, tell me their story and, apart from the circumstances they face, I think anyone could be interpreted as honorable. A lender may be influenced to lend to someone with a high credit score, but I would lend Robert money, whatever his score is.
If you’ve lost everything, like Robert, remember what you have and try not to put too much emphasis on your credit score, as it qualifies you as a person. Sure, you can clean up credit. You can work to increase your credit score, but try to remember that a number does not define you.