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Over the past few weeks I’ve taken to task some of the more stubborn credit myths that simply won’t go away, in part because their authors refuse to acknowledge their mistakes. The most recent blatant inaccuracy being circulated is that cash flow is a factor in your credit scores. However, once you start dissecting the issue of cash flow and other wealth metrics it becomes pretty clear that not only is it not a factor in your credit scores but it’s impossible for it to even be considered in a credit bureau based scoring system. Read on…
In order for anything to be considered in a credit bureau risk score, like those being given away for free on the Internet, it first must be on a credit report. That’s why they’re called credit bureau risk scores…because they’re based exclusively on information in your consumer credit report. Anything that is not on your credit report has no direct influence on your credit scores. Sure, you could argue that your ability to make payments gives you the tools needed to pay your bills in time and, thus, earn a great credit score. But now we’re talking about capacity as it relates to credit worthiness. Apples to Oranges.
Having a solid income, impressive net worth, equity in your home, lots of cash in the bank, a large retirement nest eggs…all of those things are great. But, not one of them is on your credit reports. Why not? They’re not on your credit reports because, well, they’re not credit obligations.
Even if your income was a part of your credit file, which is hasn’t been for well over 20 years, it would be entirely unreliable. Tell me, how much are you going to make this year? Please consider your salary, bonuses, raises, promotions, demotions, the possibility of you getting a different job or getting laid off, etc. It’s not that you don’t know how much you make right now but more so not knowing how much you’re going to make this year.
This is why lenders ask for your income on credit applications. It’s an entirely different risk assessment measurement…capacity. Remember the 3 C’s of lending; credit, collateral, capacity? They’re all considered separate metrics.
So, back to the issue of cash flow. It’s impossible to determine your cash flow from looking at your credit report. In addition to the lack of any sort of income figure there’s also a lack of many of your monthly obligations, all of which you need to calculate personal cash flow. Are your utility obligations on your credit reports? No. Are your insurance obligations on your credit reports? No. Are ALL of your loans and credit cards on your credit reports? Maybe, maybe not.
So please, let’s end this discussion of cash flow and credit scores. Let’s instead focus on the items on our credit report that we know actually DO influence our credit scores, like our favorite color and favorite movie.
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Credit Reporting Expert, John Ulzheimer, is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, founder of www.creditexpertwitness.com and a Contributor for the National Foundation for Credit Counseling. He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. You can follow John on Twitter here.
