The Two Hats of Financial and Credit Decision Making

The correct answer to any good question about credit issues is almost always "it depends" followed by 2 or more often conflicting answers. The fact which the answer inevitably depends on is what the consumer is trying to accomplish.

The first "hat" one wears is the logical, money saving, "common sense" hat. It´s the way of thinking people use most of the time. Wearing this hat, day to day thinking is simple and can be summed up as "save money so that you don´t have to work as hard and can keep some for yourself". This hat is helpful when one wishes to accomplish these basic goals.

The second "hat" one must wear is the seemingly illogical FICO hat. This is the hat one should wear when he/she is trying to buy a house or car, get a job (especially government job), get a business loan, rent a property, etc. Often this second hat causes the consumer to go directly against the everyday decisions made when wearing the first hat! The reason for this is simple, when thinking this way we are not trying to better our own lives but rather trying to please a credit score "judge" of our lives, and this judge is effectively huge financial companies who give favorable marks to those who make them the most money.

Let´s look at some examples.

Thousands of people go bankrupt each year due to having taken on too much credit card debt. After the bankruptcy discharges consumers are often understandably afraid of credit cards- they are thinking with their first hat. Also, the only cards which will approve these people are the most useless and fee-ridden cards. They come with high upfront fees, very small available balances, high interest rates and the like making it all too easy to default again and put the consumer right back where he started. When the consumer wears the first hat he is outraged by these cards, but mortgage brokers and others will explain the "need" to wear the second hat. So when the consumer now wants to buy a home he/she must jump through these dangerous and expensive "hoops" in order to increase credit score and get qualified for the home loan.

People often need to finance a vehicle. First hat logic tells people that they should buy a car they can afford to pay off rapidly as to avoid paying years of interest on a car which rapidly depreciates in most cases. If a person owes $2000 on the car and can afford to pay it off all at once rather than over a year first hat logic states to pay it off to have less bills each month. But let´s say the person wants to buy a home. Now that person wants to get their bills reduced and so wishes to pay off the car before buying the home. However, they are wearing the wrong hat. Paying off the loan closes the longstanding line of credit and their scores are likely to drop dramatically. Therefore, the act of trying to drop one's debt-to-income ratio (by paying off the loan) is likely to lead them to a higher interest rate on their mortgage due to the now lower credit score!

In order to succeed in America it is necessary to wear two types of hats, one for everyday decisions and one for decisions that involve credit scoring. Thinking with one hat all te time can easily lead to disaster. It is best tha consumers understad both hats and best understand how to take actions that allow them to keep the besst credit score possible as well as not to be mired in debt. People must take time to understand both ways of thinking for maximum success.With knowlege comes the power to use both hats to maximum effectiveness.