Out of the hundreds, maybe thousands, of articles about credit scores, I’d bet that 70% or more are about increasing your credit score. Everyone has the magic formula for raising your FICO number, but fail to realize one fundamental aspect: most of the time, your credit score doesn’t even matter. People hope and they pray to the credit bureau gods to increase their credit score, but for what? For 99% of a person’s life, credit score is entirely useless.
History of Credit Score
The idea of the credit has been around since Abraham first loaned his prize sheep to Ezekiel (probably?). A person’s trustworthiness is an important part of doing business together. The only difference is that there was no exact method or number associated with someone’s credit. The method most often used reminds me of Philip Fisher’s “scuttlebutt method” from Common Stocks and Uncommon Profits. If a bank had any question about someone’s credit worthiness, they would call people from the debtor’s previous business dealings. And these methods were… how do I put this lightly… less than exact.
Enter Bill Fair and Earl Isaac, an engineer and a mathematician, respectively. They set out to create a company that uses data to make better business decisions. In 1956, they created Fair, Isaac, & Company (FICO) to do just that. Their first credit scoring system came in 1958, and the world of finance and banking would change forever. After the Fair Credit Reporting Act of 1970 made clear what and how information would be used in these credit scoring calculations, credit bureaus emerged.
Most of these credit bureaus were already incorporated at the time. TransUnion, once a railroad company, bought a credit bureau to become what they are today. Equifax, originally named the Retail Credit Company, started in 1899 by two brothers who went door-to-door to inquire about their customers. And Experian might be the newest of the big credit bureaus, but it can trace its lineage back to London shipping merchants in the 1820s.
While Bill and Earl were creating a scoring system, the world’s first credit cards also appeared. Diner’s Club and American Express were first out the gate followed swiftly by banks, MasterCard, and Visa. Combined with the power of the newly developed FICO score, credit cards would soon be available to consumers across the globe. With credit cards available to everyone who wanted them (and some who didn’t), credit card debt would follow closely behind. Which leads me to my next point…
Why the Credit Card Companies Say Credit Score Matters
This one’s pretty simple. Credit card companies want you to care about your credit score so you will use credit cards more. The more you use credit cards, the more likely you are to overreach your spending capacity. They sell you on the “increase your credit score to increase your well-being” narrative in order to make your finances more stressed. They tell you not to worry as long as you pay the minimum. What they don’t tell you is they will be charging interest on the unpaid balance. See the below scenario.
If you spend $1,000 on your credit card in one month and only make the minimum payment of $25, you will owe interest on the $975 that you didn’t pay. At a 20% APR rate and a $975 unpaid balance, you will owe an additional $15 dollars next month in interest alone. Say you continue to only pay the minimum for an entire year and then pay off the whole balance. Sure, your owed balance decreases with each passing month, but your total payment becomes much larger. $155.31 larger to be precise. Compound interest is powerful, and in this case, it goes directly into the pockets of the credit card companies. In order to reach financial stability, avoiding these interest payments is essential.
When Credit Score Actually Matters
For your credit score to actually matter, you have to be taking on debt. And there are only two reasons someone should take on debt: student loans and buying a home. Since many student loans don’t even take your credit score into account, buying a home should be the only time you need to think about your credit score.
If you do decide to buy a house, credit score will definitely play a factor. It’s just not as big of a factor as you might think. Options exist for applicants with scores under 500 if you have someone willing to help you out, and an applicant with a credit score above 500 can qualify for FHA loans. Even with a low credit score, options are out there to help you buy a home.
For many, renting a home is a preferable option to buying anyway. Buying a house comes with many unforeseen costs like replacing a water heater, repairing a roof, and paying for broken windows caused by your jerk neighbor’s kid who refuses to take responsibility for it. Renting provides a lot more expense certainty and flexibility to move that buying just can’t provide.
How much time do you waste worrying about your credit score? Seeing how it should only come into play once, maybe twice, in your life, I’d say you have much bigger fish to fry. Not to mention, 96% of all debtors have a credit score greater than or equal to 500. This means that 96% of all people have access to these funds to buy a home right now. Instead of focusing on increasing your credit score, focus on making a better financial future for yourself. Your credit score will naturally follow.
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