R.I.P. to the FICO Score
I believe that within a few years, the FICO Score will be dead, or at least dramatically changed from its current form. This mis-measurement of financial success known more commonly as your “credit score” is a terrible way to determine one’s financial well-being, and more and more people (and companies) are recognizing its flaws. A really good FICO Score only indicates you’re able to obtain lots of debt and pay payments on it.
I don’t know about you, but a physical fitness test that measures my ability to gain a lot of weight and successfully carry it around throughout my day doesn’t seem like a very good measure of health. However, that’s essentially what the FICO Score looks at – how much financial baggage you can carry around without floundering.
Many financial experts have argued that the current FICO measurement system is much to blame for the financial crisis that came to a head in 2008. If you think back to that time and a few years before it, creditors were advertising mortgage loans with zero down and allowing borrowers to get as much as 110-120% (or more) of a home’s market value on their mortgages. All that was needed was a good credit score. Hmmm…does that sound smart to you?
Why is the FICO Score Destined to Die?
The details of FICO Scoring method is a secret, but Fair Isaac & Company (FICO’s namesake) has shared the basic categories it looks at to determine your score. Check out this image, directly from the FICO website:
Do you see that? Every one of those categories is associated with debt (borrowing). In other words, if you never borrow money, you can’t have a good FICO Score. Let’s also look at something FICO proudly proclaims in a recent infographic:
I’m all about equal opportunity and non-discrimination, but take a closer look. FICO doesn’t consider your income or your job status?! So what they’re saying (without saying it) is that you could have an awesome FICO score with no job and no income. Hmmm. No wonder many dogs, some small children and numerous dead people have awesome FICO scores.
What Does This Mean?
Simply put, I believe this means FICO is confused. To me, the measure of financial success is outlined in Romans 13:8, “Owe no man any thing, but to love one another: for he that loveth another hath fulfilled the law.” For me, financial success is being completely debt-free, saving for the future, enjoying the present and being generous to those around me. FICO wouldn’t understand. Poor FICO.
Sadly, I know I’m in the minority when I claim FICO is dying because FICO has been working hard since 1956 to ingrain in us that having a good credit score is akin to being a good person. May I be so bold to say that having a bad credit score has nothing to do with your moral uprightness and having a good credit score simply tells me you’re a faithful slave to the lender (see Proverbs 22:7)? Before you get angry at me for saying that, think it through…then send me all the hate mail you want. 😉
What About Insurance, Employers, Landlords, Etc. Who Use FICO?
It is true that insurance companies, potential employers, landlords and many others who are trying to gauge you in some manner or another will often use your credit score as that gauge. If your goal is to borrow money, a good FICO score is important. But if you’re trying to avoid borrowing money, your FICO Score should matter to you about as much as the person voted off the island or out of the mansion in a reality show that aired five years ago. WHO CARES?! That said, insurers and the like will look at you negatively if you have a poor FICO score (or none at all). Until they change their attitude that some number (your FICO Score) can explain your entire financial picture and moral character, there’s not much you or I can do to change their minds.
The advice I give everyone who is concerned about their credit score is this: take care of your finances and let your score take care of itself. Would you rather have a bad credit score but absolutely no payments or would you rather have a good credit score and write dozens of checks every month to creditors? Your credit score is not a measure of your worth as a human being. Don’t let the dying FICO Score take you with it. Let it die and rest in peace.
One Last Thought
I have beat up on FICO pretty badly, but I don’t want you to think your credit score is the same thing as your credit report. They are two dramatically different animals. It is VERY important your credit report is accurate and up to date. Why? Because your credit report is a great way to find out if someone is committing fraud in your name or if there are other issues that could negatively impact you. The good news is the federal government actually helped out a little bit a few years ago with the Fair and Accurate Credit Transactions Act (FACT Act), which allows you to obtain your credit report for free so you can review it for accuracy and file disputes on anything out of sorts.
Without going into too much detail on that here, let me encourage you, if you haven’t done so recently, to visit http://www.annualcreditreport.com and get a free copy of your report from each of the credit reporting agencies (there are three). Don’t pay for your score or any of the add on stuff – just get your report. Go through it and verify everything, then dispute anything that isn’t correct.