|With all of this new house buying and car replacement action going on, I’ve been getting some questions about credit scores, so, as the phrase goes, let’s talk….|
Right off the bat, let’s clarify some terminology, which means we are back to the whole daffodil/narcissus adage—a FICO score is a credit score but not all credit scores are FICO scores. A FICO score is only one of several available scores. There’s the VantageScore, the Beacon, and Empirica, as well as a more tailored “mortgage FICO.” There are also some regional organizations that provide scores for more tailored uses. These days, some form of this score is a main factor in how we secure mortgages, credit cards, car loans, car insurance, life insurance, even job opportunities. This is an interesting state of affairs given that the flaws in the calculation are vast and prejudicial.
What goes into these scores? Let’s look at the factors FICO uses:
Your payment history (35% of your score): Are you paying your accounts as agreed, do you have any delinquent accounts or accounts in collections, is there a bankruptcy on public record?
The balances on the credit you have available (30% of your score): How do your balances relate to your available credit? Note, this isn’t as it relates to your income, rather it’s as it relates to the total amount of your available credit. This category also includes installment loans and mortgage loans.
The length of your credit (15% of your score): How long have you had the account(s) open and what is the average account age? This factor is one of the reasons we close cards slowly.
New credit you’ve put in place, (10% of your score): Have there been recent inquiries or new accounts opened, changes to public records, or has something gone to collections?
The types of credit you have in your name (10% of your score): What types of debt are you carrying? Credit cards, auto loans, student loans, mortgages, lines of credit, etc….
Now, if you are reading between the lines, I’m sure you can see a few flaws with this process….
The most obvious flaw is that to have a strong FICO score, you have to be carrying some debt. If they are rating you based on your payment history and you don’t carry any debt then you don’t have a payment history to rate. How can that happen, you ask? Let’s say you are recently divorced and renting an apartment until you decide on your next steps, you are using your debit card so that you are spending your cash wisely, and drive a paid for car (or don’t have a car and are using Uber/Lyft to get around as many of our big city brethren now do). These are all very fiscally responsible things to do, right? Zing….none of that is helping your credit score and it could be hurting it.
If your payment history experiences one late payment, even though all of your other factors are stellar, that single bad payment can take six months (or more) to cycle through for your score to improve.
Curiously, unlike the theory our judicial system aspires to, with a credit score, you are guilty until proven innocent and you better plan on setting aside a decent chunk of time to sort out an error. This is why we check our credit reports on a regular basis.
Something larger than a late payment, like bankruptcy, stays on your credit for seven years or longer. Many criminal felons spend less time than that in jail (with no ding on their score…). Also, considering that one of the main reasons for bankruptcy in the US is due to medical debt, you can start to see how this scoring system has a flaw or two.
Finally, let’s talk about monopolies and conflicts of interest. We’re hearing all about how “Big Tech” is creating monopolies and that they should be broken up but no one (except perhaps Senator Warren) has spent much news time talking about how one single company now influences more than 10 billion credit/underwriting decisions every year or that to obtain and secure a high score inherently means maintaining multiple credit cards (which, if not handled efficiently means annual fees and additional risks of fraud and theft).
I know, I know…what the heck got in Kitty’s organically grown, responsibly harvested, and processed shredded wheat this morning caused this she’s on a tear? The gist of the situation is this: It drives me nuts that we have very little overall control over the situation. That being said, if we [grudgingly] accept that this score is going to impact our lives and no one else is going to sort out the inherent flaws, it’s up to us to put a strategy in place to make the most of the situation just to spite the powers that be (one of my favourite activities!). If your score, or the score of a loved one, isn’t strong, let’s talk about a strategy to get it back.