If you haven’t noticed yet, I author a fast growing personal finance blog called Money Crashers. I’ve been writing about personal finance for two years now, and I’ve developed a strong opinion about the FICO score, most commonly referred to as your “credit score”. My opinion is that I hate it. It’s just another standardized way of misrepresenting an individual. Just because you score a 1000 on your SAT score doesn’t mean that you won’t succeed in college. Just because you have a 100 IQ doesn’t mean that you’ll be average your entire life. And just because you have a less than perfect credit score, it doesn’t mean that you’re irresponsible with money. In fact, a credit score has NOTHING to do with how much money you actually have. It has to do with how good you are at paying back debt and maintaining a suitable amount of debt load to keep the score active. Therein lies my huge frustration with the credit score. It assumes that you will ALWAYS be in debt or that you will ALWAYS be borrowing money. I don’t know about you, but I want to work my ass off so that someday I don’t have to borrow money anymore. For those of you who do not know, here are the factors that go into calculating a credit score:
- 35% — punctuality of payment in the past (only includes payments later than 30 days past due)
- 30% — the amount of debt, expressed as the ratio of current revolving debt (credit card balances, etc.) to total available revolving credit (credit limits)
- 15% — length of credit history
- 10% — types of credit used (installment, revolving, consumer finance)
- 10% — recent search for credit and/or amount of credit obtained recently
You can see that the credit score could care less how much money you have in the bank or that you decided never to borrow money again. A few years back, some genius company out there decided to start considering job applicants’ credit score as part of their evaluation of job candidates. I agree that it’s a good idea to check out an applicant’s credit score for jobs that require a fiduciary responsibility (i.e. handling or distributing money in any way). However, if companies are passing up a job applicant just because his or her credit score didn’t match their criteria, that seems silly to me. There are so many factors that go into a credit score. For instance, I have a paid collection item on my credit reports that will show up for the next 4 years, all because I did not properly destroy an old car. The title to the car was never transferred properly out of my name. So, somebody fixed the car, resold it, and then it was found abandoned on the side of the road. I was charged with the towing and impounding costs, because my name was still on the title. I never knew about the charge until it showed up on my credit report, so I was stuck. I paid the collection, but it put a huge ding on my credit. My credit score is incredibly inaccurate for gauging my financial responsibility.
Having said that, there’s nothing we can do about the fact that some employers will pull your credit report and credit score to get a better idea of how you manage your money and your life. Here are some tips for making sure you keep your credit score good without having to get into debt.
- Open a credit card, and use it once a month for gas or dinner. Simply use it once, and pay off the balance immediately. Do this once a month, and you’ll help build and maintain a decent score without going crazy with credit cards.
- Buy a house. Most people can’t buy a house with cash, so having a mortgage is a great way to build your score with an appreciating asset. (yes, it’s still an appreciating asset even though the housing market sucks right now).
- Pay off debt. Having open credit accounts with a $0 balance is great for your credit score.
- Don’t apply for credit often.
Let me stress that I don’t think you should stress out about your credit score. It is NOT an accurate indicator of your success in life or financial situation. However, you should still be mindful of it, because it could make or break whether or not you get the jobs you are applying for.
I Recommend The Thesis Wordpress Theme
Thesis theme gives my blog a professional look with clean, easy-to-read layout and SEO friendly design. Thesis makes it simple to setup, customize and make your own blog unique, so get your own copy today.
