The Myth of Establishing Your Good Credit

One of the standard maxims mouthed by personal financial advisors is the need to establish your good credit. Young people are advised to get a credit card and use it, being careful to pay off the balances regularly, with the goal of creating a good credit record. The person who fails to do this is said to risk not being able to get a house in the future or achieve any number of other goals.

This has always struck me as crazy advice. First, it puts young people at risk of doing the opposite—getting into trouble with credit cards—in the name of a rather abstract goal. Second—and most importantly—for many years now there has been little problem getting credit. Indeed the problem has been the availability of too much credit. At the end of the housing boom, people were able to get home mortgages without having any assets or income, and anybody can get a credit card with a shockingly high credit limit. When I interviewed debtors for Going Broke, many told people me they continued to receive credit card offers after declaring bankruptcy and had little trouble getting credit. So why is it so important to establish good credit? Perhaps this was a valuable goal in the bygone era when lenders actually cared about the credit worthiness of their customers, but a loan is no longer a social bond. It is merely a product to be sold for a short-term gain.

Given the recent credit crisis and Wall Street tumble, one might assume this picture had changed. Not so. The latest installment in the New York Times debt series documents the continuing—and perhaps increasing—practice of preying upon people who have recently declared bankruptcy. Using sophisticated data mining techniques, banks are targeting people who have experienced recent debt problems with credit card offers. If there is a credit freeze, it has not hit individual consumers. Consumer debt is still a profitable engine for many banks, and the industry is discovering ever more innovative methods of finding vulnerable potential customers.