The truth behind the credit score

April 28, 2011 · 16 comments

I’m on my way to the airport to go visit Girl Ninja in San Diego, which means I’ve got a guest post for ya today. I’ll be back and in action next week. Enjoy your weekend suckers. I know I will :)

Hi, I’m Ed and I’d like to punch TWO people in the face with one swing. Just line them up (if they were still alive), and beat some sense into them. I’m referring to the two gentlemen behind the idea of the credit score, Bill Fair and Earl Isaac, collectively known as the Fair Isaac Corporation (FICO), where your credit score originates. These guys purposely sold Americans to the mercy of financial institutions and unless you’re a multi-millionaire that can pay cash for everything, you’re going to have to participate in their insidious game.

FICO was founded in 1956 by a couple of mafia godfather wannabes that were unwilling to be fully transparent in their methodology. It’s not that I necessarily disagree with the ideas of checking a person’s credit history before loaning to them, but more that these scores are based on a fairly secretive formula.

Your credit score is a three digit number ranging from 300-850 that serves as a numerical representation of your credit risk and trustworthiness. If you’ve ever been late on a credit card payment by more than 30 days or applied for “too many” credit cards at once (how many is too many? Your guess is as good as mine!), your score most likely took a hit. Luckily, there are aggressive and passive strategies one can implement to work their score back to a preferable number.

These days, you can’t secure a loan, let alone an apartment without a good credit score. And what’s worse, is the standards of what’s considered “good” are constantly changing. For instance, before the Financial Crisis of 2008, a score of 680 was good enough to get you great rates on credit cards, installment loans and mortgages. These days, lenders are looking for 730 or better to give out the best interest rates. They keep pushing it higher and higher and soon enough, I’m sure you won’t be able to purchase a home without a 95% down payment.

So in short, we are all subjected to this game of cat and mouse because two guys who thought it would be cute to enslave the Western world to a seemingly ambiguous system. We’re all tools getting screwed and abused. So if you’re ever turned down for a credit card, a rental lease or an auto loan, just know that there’s someone in your corner yearning for an after-fight suckerpunch.
Bill Fair and Earl Isaac: I’m calling you out from your graves — Bring it on, ladies.

Ed O’Brien is a writer on personal finance, specializing in credit repair. You can find more of his articles located at CreditRepair.org.

1 Kevin @ Thousandaire.com

While I don’t really like the system as it exists today, it is clear that there needs to be some kind of system in place. Lenders need something to base their decision on aside from your promise that you’ll pay them back. Would you come up with a new system, or would you just make the current one transparent?

2 Laura

Hi Ninja! Welcome back to SD. I will wave at the next plane that flies by and pretend it is you. lol :)

There has to be some sort of system in place but I think that it needs to be more transparent. The only issue there is, once you make it more transparent the system will be gamed more.

3 Sara

Hello, Ed!

I too hate the FICO score. I love how I am dinged for not returning a DVD to Blockbuster on time (I literally got sent to a creditor for owing them $3 that I was unaware of), but I can pay my everything on time for years and barely get any recognition for that. Where’s the forgiveness, FICO?! :P

4 John

Two things piss me off the most:

1. I’ve never had a late payment or any other bad record. Why the F*** should my credit score be low? How did they figured out that since I have a credit report which goes only 3 years back I’m high risk?

2. Now let’s look at my wife’s score… Yes, it’s higher than mine. Her record also goes back the same amount of time. She also has no bad records. But then here’s the huge difference. I feed a family of three while she earns no income! What makes her a safer borrower than me?

I like the idea of such a system IF IT WORKS! This one obviously fails miserably!

I wanna tear these people apart!!!!

5 krantcents

I won’t complain about the score because my score is very high! My true reason is there is nothing I can do about it so why bother complaining. My complaining won’t change a thing. It is what it is! Work on the factors you can change and over time, it should go up.

6 Brent

“These guys purposely sold Americans to the mercy of financial institutions and unless you’re a multi-millionaire that can pay cash for everything, you’re going to have to participate in their insidious game.”

I don’t like this statement and its statements like these that make borrowing money so normal these days. I am not a multi millionaire but I do pay cash for everything. Not everyone chooses to go into debt to buy things, after all, isnt this blog called punch debt in the face?

7 Ninja

I see nothing wrong with that quote. Most people will finance something whether it be cars, tvs, mortgages, or student loans. Truth is most people need to take on some debt at some point.

8 Jenna, Adaptu Community Manager

Gangster wannabes? Really?

9 mylilypad

In Canada, where I live, we do not have FICO, but we have companies that basically follow the same principles. Here is the issue I have with these credit-checking companies:

If you have a strong record (meaning, lots of running credit on monthly payments), and you are paying interest, you have a big number, and therefore you qualify for more. If you pay most or all of your bills in cash, and therefore have little or no credit in which to track, your numbers are lower. A MARKETING tool is being used to assess a persons reliability to pay back a loan, rent an apartment, etc. It’s like having a store be responsible for telling its customers how much to buy.

I’m not saying a credit-checking system is not a good thing – having access to track how people pay back what they owe is a good idea. But the way it is now does not benefit the consumer – and in some cases, can make their situation worse. If the government wants to help people with their debt and how to improve, revamping this system would be a good start.

10 Momninja

FICO is an odd item that basically rules our futures. My favorite is when you have no credit and noone will give you credit because you have none…..

It’s like trying to get a job without experience everybody wants experience but can’t get that first job to give them experience…

Great call out!

11 Brian

Keep your credit card balance under 50% of your total credit line, never be late on a payment, and pay off our car ASAP. That will guarantee a pleasing credit score believe me.

12 The Lost Goat

In 1950, getting a loan meant being known by your local banker. I’d rather have my borrowing ability based on a number than being “the right kind of person to borrow at this bank.” It’s not that hard to get a decent credit score – pay your bills on time, don’t default, and run at least one line of credit. I’m not saying that the system we have is optimum, but I don’t think it deserves this level of hatred.

13 Larry

I would have to agree with all that. On the other hand, not all lenders use FICO, and when I financed part of my latest car with Toyota, they used an entirely different system. Still, they told me I had one of the best credit ratings they’ve seen, so taking the simple steps mentioned above should be sufficient.

14 CreditDonkey

This is a valid protest to a corrupt system. You see, credit score contributed to the great recession of 2008 where the credit score moguls misrepresented the scores of companies like Enron, Carlyle Group, and other Wall Street buddies so that they can continue the process of sub-prime loans. Only the individuals and households are at the mercy of this system. Although the concept is great (so that creditors have a safe assessment of the debtor), the fraud that emerged from it was toxic to the economy until it collapsed. Now is that what Bill and Earl wanted?

15 Gene

The point score was an attempt to quantify the human component of debt payment. It is an excuse for having trained lending officers review the real aspects of a person’s credit worthiness. Then in an attempt to broaden the market for the service, the credit reporting agencies sold the concept to the public. And we bought it hook, line and sinker to the point that we measure our self-worth based on a bogus score. There are many other ways to judge creditworthiness and we need to revolt against the idea of being measured by a number. When is enough, enough?

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