Lately, I’ve stopped caring too much about my credit score. It’s pretty low on my priority list. Now, forgive me for saying this, but… I’ve realized this score isn’t as important as I’ve thought it was for many years. I know me saying that may seem strange or nonsensical at the moment. But I’m hoping that if I explain why I’ve done a complete 180 on this concept, you’ll begin to understand where I’m coming from.
The FICO Score The credit score I’m talking about is called the Fair Isaac Corporation (FICO) score. Many of you recognize the name. It was first introduced in 1989, according to Investopedia. Typically, lenders depend on your FICO score to tell them whether or not they should grant you a loan and for how much. There are actually many different versions of the FICO score. But the most commonly used version is what’s called “FICO 8.” Later, I’ll go into the details about which factors Fair Isaac uses to determine your credit score (typically ranging between 300 and 850), but let me first just explain my rationale for what I said earlier… So remember, our FICO score is what lenders look at to determine if we’re a “good” person to loan their money to. But notice who I mentioned depend on this score: Lenders. Yes, lenders—the ones who let us borrow from them… aka, those we’ll have to pay back—and at a cost, too. (According to Experian, interest rates on personal loans can range anywhere from 6-36%.) This brings me to my point that our credit score isn’t as important as a lot of financial experts have made it out to be. Think about it this way: If you always have enough money to pay for the things you need (I’ve talked about our basic needs before), would you need a good FICO score to show lenders how trustworthy (or creditworthy) you are… how “risky” you are as a borrower… or how likely you are to pay them back? Nope.
Financial Wellness, Not Creditworthiness I don’t think any of us like depending on someone to buy the things we need—or want. So, with that being said, we want to strive to become financially independent. We want to focus not so much on our credit score but on what I like to call our “financial wellness score,” instead. Because, when we have the finances to pay for any and everything… we can support ourselves, right? When you have the means to buy something small or something big… or something in between, you’re not relying on anyone. Not your friends, not your family, and certainly not lenders. There’s something to be said about not focusing on the FICO score but on your financial wellness score, instead. We don’t want to pour all our energy into demonstrating how good we are at paying somebody back on an “IOU.” We want to pour our energy into becoming financially well enough to support ourselves. So, don’t let your credit score distract you from what’s really important: your financial wellness.
Protect Your Score for the Right Reasons Don’t get me wrong. I’m not saying to just stop paying down your debts on time (if you have debt) and let everything fall to the wayside. It’s important to pay others what you owe them and not leave any debt outstanding. The only thing we should “owe” anyone in this life is the love and kindness each and every single one of us deserves. Here’s the thing, too… Many of us want to become homeowners; and if you’re anything like the rest of us, you don’t have the funds just sitting around, waiting to be spent on buying a home. So, although I don’t believe “good debt” exists, I do believe borrowing to buy your home—which typically becomes more valuable over time—is a debt you can turn into an asset. So, you’ll want a lender to help you get your foot in the door (no pun intended). The FICO score is used in 90% of lending decisions in the U.S. This means getting an approval on a home loan will be much easier if you’re paying your bills—on time, of course—and fulfilling the other factors that impact your score. Now, as I mentioned earlier, Fair Isaac judges several areas to “calculate” your FICO score. They include:
- Payment history
- Amount owed
- Credit history
- Types of credit
- New accounts opened
Basically, these factors show whether the bills are paid on time; how much you owe lenders versus how much credit you still have available to borrow; how long you’ve had credit; the types of credit accounts you have (credit cards, student loans, mortgage, car note, etc.); and how many accounts you’ve opened recently. If one of your goals is to become a homeowner, I say: Absolutely, yes! Protect that score. But also remember what’s more important: Your financial wellness. Ultimately, that’s getting in the position to never have to depend on borrowed money, but your own money, instead. Focusing on your “financial wellness score” means you’re choosing to put an emphasis on truly owning. Focusing on your credit score, on the other hand, means you’re choosing to put an emphasis on owing. So, let’s choose the former. It can be done. It just takes sacrifice, perseverance, and time.
With gratitude,
Melody C. Kerr
Certified Financial Coach
