Our first candidate is Arthur. Arthur has been working in construction for the last three years. His income is $28,000, and his credit history is good. He can put $20,000 down on a house and has an additional $10,000 in savings, but he owes $16,000 on his credit cards. His outrageous debt dates back to before he got married— when he was a bit of a free spender, if you know what I mean. Since Arthur married, he and his wife have been working hard to pay down that debt, and they’ve done a good job of building up savings.
Our second candidate is Beatrice.For the past five years, Beatrice has worked as the assistant manager at the local supermarket, where she worked her way up from a position at the checkout counter. She makes $34,000 a year. Her credit history is excellent, but she has had a hard time saving money. She has $4,500 in savings. The good news is that she has no debt at all. Her parents taught her that debt is the devil’s tool, and Beatrice believed them.
Our third candidate is Charlie. For the past seven years, Charlie has worked at the telephone company as an installer. He makes $36,000 a year. He has $24,000 in savings, of which he can use $15,000 as a down payment. He owes $8,000 in credit card debt. Charlie’s problem, however, is that his credit history is not very good. Charlie went through a period where he let his bills pile up and ignored threatening letters from creditors. As a result, hisFICO score is about 450—rather low for a home loan.
There you have ’em. Ask your children to rank the candidates in terms of who is the most credit-worthy. Your kids can look at Arthur, Beatrice, and Charlie and decide to give loans to one, two, or all of them—or none of them.
If your kids seem stumped at first, you can prompt themby asking which factors are the most important. Is a steady employment history the most significant? What about credit history? How important is income level? What about the size of the down payment? Does the debt level scare you? There are no absolute right or wrong answers. Letme explain why.
Here’s a quick history lesson. In the bad old days, even just a few years ago, the answer as to which of these three individuals would receive a home loan would be . . . none of the above. That’s right. Neither Arthur nor Beatrice nor Charlie would have gotten a loan. All of them would have been rejected—not so much because of their finances, but because of the neighborhoods in which they wanted to buy. Until 1977, banks routinely practiced something they called redlining. They would literally draw red lines on a map around neighborhoods, usually ones with large populations of people of color, they considered unworthy of home loans. Nearly all the inner cities of America were redlined by banks for decades. Redlining made it extremely difficult—if not impossible—for individuals who lived in inner-city neighborhoods to own their own homes.