Okay so here's something nobody told you (or me) as a kid.
At some point in your adult life, a three-digit number is going to determine whether you can buy a house, rent an apartment, get a car loan, and in some cases whether you get a job.
You didn't pick the number, you didn't really agree to be evaluated by it, and for a long time, you weren't even allowed to SEE it.
You just had it.
Like a GPA, except it follows you forever and a bank in Ohio uses it to decide if you're a trustworthy human being.
Welcome to your credit score.
Here's the thing that always blows my mind: the FICO score, the one that 90% of top lenders use to judge you, was invented in 1989 by two math nerds named Bill Fair and Earl Isaac who met at Stanford and thought they could automate the way banks made lending decisions.
Which, fine, actually useful. Before that, whether you got a loan basically came down to whether the banker liked your face.
(That was worse.)
But here's where it gets interesting. Fair and Isaac launched this score in 1989, and the formula hasn't changed significantly since.
Then, in 1995 Fannie Mae and Freddie Mac decided every mortgage in America would require it. Just like that, a thirty-seven year old algorithm that two guys invented in California became the single most important number in your financial life.
Nobody voted on this. It just happened.
And it gets even more insane...
See, seventy-nine percent of credit reports contain errors, and nearly one in four has errors serious enough to justify an outright denial of credit.
Meaning there's a better than one in four chance the number that's been controlling your access to housing and loans for your entire adult life isn't even accurate.
It's just the number they have on file.
And before 2001, you couldn't even request your own report for to check. In fact, it wasn't until two years later an act was passed that allowed you to check it for "a reasonable fee."
WTF!
The score existed and banks could see it. But you couldn't.
(That's the system.)
See, the FICO score wasn't built for you. It was built for lenders. It's a product Fair Isaac sells to banks so they can process applications faster, and you aren't the customer here. You're the subject.
And the five factors it uses to judge you, payment history, amounts owed, length of credit history, types of credit, and new inquiries, were set in 1989 and have barely moved since.
Why?
Because changing the formula would mean re-selling it to every lender in the country.
There's no financial incentive to make it better.
But it still matters. Regardless of how unfair it is.
So what do you actually do about it? Here's the boring honest answer:
- Check your report for errors first. Go to AnnualCreditReport.com, pull all three bureaus, and actually look at them. This is free. One in four of you will find something wrong.
- Pay on time, every time. Payment history is thirty-five percent of your score. It's the biggest lever. Set up autopay for at least the minimum on everything so you never miss a date.
- Get your utilization under 30%. Amounts owed is thirty percent of your score. If your credit limit is $1,000 and you're carrying $800 on it, that's hurting you even if you pay on time.
- Don't close old accounts. Length of credit history matters. The old card you never use is actually helping you just by existing.
- Stop applying for new credit you don't need. Every hard inquiry dings your score. The Target card at checkout is not worth it.
That's basically the whole game.
The FICO score is flawed, it's old, and it was never designed with you in mind.
And it also isn't worth obsessing about constantly.
Good habits and a healthy history will get you where you need to go.
But it's also the number that determines your mortgage rate, which over a thirty-year loan can mean the difference between tens of thousands of dollars in interest paid or saved.
So you might as well learn how to work it.
And if you need help figuring out where to start building the habits that help your credit, CLICK HERE to take my financial health quiz.
It's free, takes 2 minutes, and it'll help show you where you're at financially.
Taquitos,
Caleb "Credit Score Madness" Hammer
Unsubscribe · Preferences
