Have Americans been fooled into believing that a three-digit number defines our real success? It is time to dig deeper into the FICO score to understand what that number really tells us.
In 1956, Bill Fair, an engineer, and Earl Isaac, a mathematician, started a business called the Fair, Isaac, and Company (FICO). After only two years of starting the company, they built their first credit scoring system for American investments. In 1981, FICO introduced its first FICO credit bureau risk score, but it did not debut until 1989 and has since become the powerhouse of credit reporting. That’s right; the almighty credit score is just over 30 years old, which means it could be younger than you. Now let’s keep digging to see exactly what makes up this mighty number.
Notice anything odd about the makeup of the credit score everyone so heavily depends on to determine how likely you are to repay? The FICO score does not look at how much savings you have and the trajectory of time it took to save up those savings. It does not look at how successful you are, nor does it gauge how good you are with money. It is merely a score that evaluates:
1. How long you have been borrowing money
2. How much new and old credit you owe
3. How long it took you to pay it back
4. The different types of money you owe (i.e., credit card, mortgage, loans, etc.)
5. How well you pay what you owe
It’s a rat wheel of owing money and paying the money back to banks and lenders.
In a nutshell, your FICO score is a type of credit score that lenders sometimes use to determine creditworthiness and decide whether or not they are willing to:
1. Lend you money
2. How much they will lend you
3. How long they will give you to pay it back
4. How much it will cost you (interest rate)
FICO scores can range from “excellent” to “poor,” the higher the score, the less risk you are to a lender.
WHAT?
Why would a lender assume that you are less likely to default on your payment to them if you have taken out “enough” debt to qualify you for a higher score? I can’t wrap my head around this, can you? Especially now, after we can see how a pandemic can quickly affect the world. How almost overnight, something can drastically change our careers and our finances. I digress; let’s keep moving forward and breakdown the FICO score ranges.
• Excellent 800 - 850
• Very Good 740 – 799
• Good 670 – 739
• Fair 580 – 669
• Poor 300 - 579
BUT WHAT IF YOU HAD NO FICO SCORE? Having no FICO score means that you have an indeterminable credit score because you don’t owe money. This, my friends, means that you are paying cash rather than borrowing. You are paying for things as you buy them. Now, will this affect you if you are applying for a credit card or a car loan? YES! The only people who “need” a credit score for something are those planning to borrow money and take on debt.
But let me take a moment to pause right here and challenge you. Why exactly are you feeling the need to borrow money? Could it be because you don’t have the money for something you want? Save up for it just like our grandparents did.
But the number one question I bet you have right now is, “What if I want to buy a house, don’t I need a credit score to buy a house?” Actually, you don’t. You have to find a lender who will do what is known as manual underwriting. Now, this subject is a whole different blog post. However, manual underwriting is a process of verifying your income, employment, and payment history on things like rent and utilities for the last 12 - 24 months. If you are going to go with manual underwriting, you should aim to put down 20% or more on the property you are buying. This demonstrates to the lender that you are responsible and handle money well. Not every lender will offer manual underwriting, and it is a more arduous process, but it is worth it to keep your finances healthy.
So, folks, I am challenging you to decide today to get out of debt and start living on a budget. Wouldn’t it be great to live a life without always owing money to others? Think about it. A credit score does not reflect your salary, or how well you budget and save; it does not even reveal how well you handle money. Stop allowing banks and lenders to decide how much more debt you can take on based on how much you already have and how well you pay it back. Quit making them wealthy by paying fees and interest, and start focusing on building your wealth and planning for retirement. Wouldn’t it be great to save money and pay cash for the things you need and want? You’ll actually think twice before you buy something, and that, my friends, is not necessarily a bad thing.
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