In almost anything related to your personal finance, your credit score is one of the biggest indicators of how worthy you are to banks and other lenders. The problem with credit scores is that the FICO scoring system is inherently flawed for consumers. Here’s why.
You Have to Borrow Money to Build Credit
Whether just starting out or working on rebuilding a credit score, the problem is you’ll have to borrow money in some form in order to build a decent credit score. Most companies don’t report to the credit agencies, so paying for your regular, non-debt expenses like utilities or rent on time often doesn’t impact your score, though it does show your willingness and ability to meet financial obligations.
It also seems kind of silly to have to say, “You know what the perfect way to rebuild my credit after taking on too much debt would be? To take on a little more debt but be more responsible this time!”
A Good Credit Score is a Problem For Financial Freedom
In that sense, the problem with credit scores is you have to sacrifice your financial freedom in order to have a good FICO score, and that just doesn’t seem right. If you’ve done the work to become debt-free and no longer reliant on loans, whether they be in the form of installment loans like a mortgage or car payments or in the form of credit cards, it seems like it should follow that banks would see you as financially responsible and therefore you’d have a high credit score.
That’s not necessarily the case, though. It’s true that a good payment history goes a long way. However, paying off debt could jeopardize your credit mix, which is responsible for 10% of your score.
FICO Scores Don’t Take Assets Into Account
One would think that one of the biggest indicators of overall personal financial success would be the assets that a person holds, but that actually has no bearing at all on a FICO score. They don’t care whether you’ve got the finances now to pay back a loan; they only care whether you’ve paid back loans in the past.
This means the problem with credit scores is even if you’ve got money to your name in the form of non-liquid assets, you may have trouble getting access to them. For example, home equity can be tough to get your hands on without either selling your home and uprooting your life or building a positive credit history so that you can take out a HELOC or other equity release loan.
You’ll Pay to Maintain the Appearance of Credit Accounts
Say you’ve paid off all your debt and now you’re financially free. That’s great. The problem is that you may need to leave credit accounts open in order to maintain them on your credit report so that your credit score doesn’t suffer. More than that, you may have to pay fees to keep those accounts open. The problem with credit scores is the banks that report credit scores could potentially profit off the FICO scoring system.
Credit scores are a huge part of our financial lives. It works better in some situations than others, and with the problems with credit scores, sometimes it’s easy to imagine a world without them. If you want to learn more about your credit score and improve your financial standing, talk to a financial expert and find out more about your options.