I’ve never spent much time trying to understand my FICO score. I guess I’ve always just accepted Dave Ramsey’s sentiment that FICO is evil. However, the truth is that your credit score does matter, and I believe it will become more important in the future.
Bad Advice: Borrow Money To Improve Your FICO Score
This is the type of advice that people like Dave Ramsey hate. And, rightfully so. There are so many people who suggest making bad financial decisions just to increase your score.
One of the worst pieces of financial advice I have ever received was when I was told to get a credit card, buy something, and take several months to pay off the balance. I was told this would help me build credit. This, my friends, is a bad idea. Don’t financially cripple yourself just for the sake of a credit score.
Nevertheless, FICO does matter.
Why Is Your FICO Score Important?
The FICO score is increasingly becoming a gauge of personal responsibility in all areas of life, not just finances. Crazy, I know. But that is a fact.
Thus, to completely ignore your credit score is like a teacher giving you list of things to prepare for on an upcoming test, and you ignore the paper because you don’t want to play by the teacher’s rules.
FICO, like so many other things, helps those who play by the rules and hurts those who don’t.
Dave Ramsey frequently says the FICO score is an I love debt score. However, I only have a house loan, and yet a banker told me I have a ‘good FICO score’. You do not need to have debt to have a good credit score.
It is more accurate to say that it is a measurement of your interaction with debt related products. If you use such products responsibly, then your score increases. If you use those products irresponsibly, your score goes down.
Here is a good article that explains how your FICO score is calculated.
Sorry Dave Ramsey, I think FICO matters.
FICO Score and Insurance: Case and Point
A common criticism on Dave Ramsey’s stance of the credit score is the fact that the FICO score is becoming a major factor in your auto insurance and home owner’s insurance premiums. This is the insurance credit rating or insurance bureau score. Your score is different than your FICO score, but you would improve your insurance credit rating the same way as your FICO score.
Insurance companies can and do use your credit rating for two factors:
- Rating – obviously your rating is the biggest factor for your premiums.
- Underwriting – after evaluating your credit score, a company can decide if they want to underwrite your policy.
Dave Ramsey’s advice? If an insurance company uses a credit score then get a new insurance company and thereby ‘stick it to the man’. However, as this becomes increasingly a more common way to evaluate premiums, finding another company becomes more difficult. In addition, anytime you limit your options (like using insurance companies that don’t rate base on FICO), you increase the chances that you will pay more in premiums. However crazy it is, however unfair it is, however stupid it is, it is a fact – FICO score matters. And, I believe it will matter more and more in the future.
FICO Score and the Mortgage: Dave Says Manual Underwrite
Dave Ramsey does acknowledge that many people will want to get a mortgage or refinance a mortgage. He suggests finding a company that will manually underwrite. This means they evaluate your financial actions manually. This is opposed to the increasingly common way of looking only at your credit score.
Once again, the fact is that when you narrow your market, you are less likely to find a good deal. In addition, hunting for a company that does the manual underwriting can be a hassle.
Is There A Responsible Way to Build Your Credit?
Here’s the kicker. I think most people could improve their financial situation and their credit score at the same time. Do simple things like make your payments and reduce your debt payments. Thus, when you pay off credit card debt your credit score increases. Those are good for your finances and good for your credit score.
Here are some ways to improve your financial situation and your credit score:
- Be clear about your credit intentions. I would never build credit just to borrow money (except for a house). Maintain a good credit score simply so that you have access to perks like low insurance premiums and even the best credit cards.
- Build credit by interacting with debt, not using debt. Pay off your credit card in full every month.
- Never spend more money just to build your credit.
- Always make your payments.
For many people, being responsible with their money will actually result in an increased credit score.
As a final reminder: I would never do anything financially detrimental or costly in order to improve my credit score. The FICO score should always be an added benefit, never the motive for making a financial decision. In other words, don’t obsess about the FICO score.
If you are interested in learning more about your own FICO score, Save 30% on all myFICO credit products with coupon code myFICOis9 (affiliate link).
Personally, I’ve never cared to know what my FICO score is – I don’t know, in fact. However, I do use credit cards and and pay them off in full, so I’m assuming that I have a reasonable credit score. Before buying a house, you will want to be sure that you have a good FICO score to help you get a lower interest rate.
What are you thoughts on Dave Ramsey and his stance on the FICO score? Do you pay any attention to your FICO score?
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{ 25 comments… read them below or add one }
Hi Craig,
Good topic and interesting perspective. To your first question: You have provided great practical applications. Dave is right when he says the FICO score is an I love debt score. I don’t believe the FICO score will matter more and more in the future. We are in the midst of difficult financial times, in part because of easy (way too easy) financial lending practices including score based lending (including FICO scores).
Dave is right that underwriters need to do their job, not just look at a score. His example: Dave doesn’t have a FICO score, so he can’t rent an apartment (to your point of the increasing use of FICO scores for services outside of financial lending). However Dave is wealthy enough that he can buy the building. His example underscores the limitations associated with FICO scores.
Also, if there are enough Daves out there the system will have to change. I suspect our country will trend away from number based lending (including FICO scores) at least for a generation.
To your second question: we pay off our credit card transactions every month (never keep a balance). We have a mortgage which is our only debt (By the way, how is a mortgage not a debt? It is a securitized debt but it is still a debt.). I don’t check my FICO score. My wife and I are committed to never going deeper into debt. We would only check my FICO score if we had to incure more debt (ie. break our commitment).
Thanks for asking.
Cedric
Craig,
Excellent article! I have the utmost respect for people that are patient and diligent enough to save for every purchase and therefore have no credit history and therefore a low score. I don’t think its fair that they are penalized when searching for insurance. Also, I believe some employers look at scores.
Another example of a “broken” system. I don’t like the fact that this number (which I agree does matter) is based on MY information, yet I have to pay for it! We need some legislation that gives us access to our SCORE once a year from the 3 major bureaus….however, I digress!
There’s a part of me that tries very hard to understand the “Credit cards are evil” line of reasoning. I consider it a personal choice rather than an absolute.
When Dave takes it to the next step and suggests what I consider to be an “off the grid” approach, I disagree.
I’ve owned rental property. A credit report is part of the process, and when the realtor tells me the new tenant has a FICO higher than mine, that tenant is in. No score at all? Sorry, I wouldn’t even ask any questions, that’s a reject.
Jobs are tough to come by. (duh) Is it really worth the risk to stand out as the applicant who, for whatever reason, has decided to be invisible from a credit standpoint?
There are many cards out there with no fees at all. Get two cards, and alternate their use for gas purchases only. This seems to me to be the one place that cash isn’t going to have you spend less, you need to fill the tank, right? This small credit card use can ripple into having a decent credit score that may pay back in large savings over the years. I’m sorry, Dave is out of touch with reality on this one.
.-= JoeTaxpayer´s last blog ..Farewell Aunt Sue =-.
it matters in the sense that the banks and perhaps other companies use it for various things… some of which I personally may not agree with.
But If a person is debt free, does not borrow money, plans to never borrow again in their life, and they have a BIG emergency fund set aside to make sure they won’t ever borrow again, then who needs a FICO score?
Personally, I don’t sit around worrying about mine. Could care less. I don’t lose any sleep over it. I don’t even know what mine is and don’t care to know.
“One of the worst pieces of financial advice I have ever received was when I was told to get a credit card, buy something, and take several months to pay off the balance.”
Wow Craig, do you remember who told you that? That’s definitely NOT good advice. However, a good tip is not too far off from that piece of advice. Instead, to build credit, conventional wisdom would say to “get a credit card, buy something, and pay off the full balance when you receive your statement.” This is what I agree with.
I do pay attention to my credit score, but only because if you use credit wisely and have a good score, then you can get some good benefits, such as card offers that give you cash back, airline miles, and other ways that can help your financial situation.
@Lakita – I’m not sure if you’re aware of this site, but you can get a credit score for free from CreditKarma. It’s not just a free trial, and there are no strings attached. However, this isn’t your real FICO score. But they do get your score from TransUnion, one of the three credit bureaus.
I am a landlord, and having talked to many other landlords, I can tell you that FICO scores do matter! Having no FICO score or a low one is limiting. I use a credit card for all my purchases and pay it off each month. No biggie. I have a great FICO score, and it opens doors of opportunity for me.
I’ve see you talk about this before Craig. I hear ya buddy, but I happen to agree with Dave Ramsey on this one. You do make some valid points, but it eventually comes down to what matters to you. I plan to buy our next house 100% cash down, never intend on borrowing another dime, owning a credit card, so I guess you can say I have decided not to play the game. The way I see it is if someone decides not to take my money because i don’t have a 3 digit number attached to it, then they lose out on the sale. If an insurance agent wants to charge me more for insurance because I do not want to partake in a flawed financial system that promotes debt as a way to prove myself, then it’s still worth paying a little bit more to stick to my principles and values. So be it.
I know that’s so weird for someone to say but I just don’t buy into the idea that I need a credit score. You may want one and you can have one if you chose, but just like a new car, I don’t think people need them, they just want them. Enough people think it’s important so it becomes important because of demand increases. More people need request a new system, one that doesn’t require someone to go into debt in order to be seen as financially responsible.
If people needed them then Dave Ramsey would not have been able to live the last 10 or so years without one. Am I right? He is in a better position so he is not affected, So my solution is to put myself in a better position so I don’t “need” a credit score. I like that solution better.
I saw that someone said something about this being a choice. They’re right. A person should also have the right to chose not using debt and still be seen as responsible by society. It’s a flawed system that people accept because it looks like the only way.
I refuse to participate.
God Bless you Craig! I had to comment on this one buddy.
.-= Brad Chaffee´s last blog ..Great Financial Advice From The In-Flight Safety Handbook =-.
Insightful (and inciteful?
) thoughts, Craig, and I agree. My wife and I have no debt other than our mortgage and we pay a substantial amount extra to the principle each month. We use our credit card a lot and pay off the balance each month. Our FICO score is very good and comes in handy, especially with insurance rates. Companies using FICO scores is simply a reality. We may not like it, but that’s the way it is and will probably become more so. I love Dave Ramsey’s advice, but I think he takes the eschewing of having a good FICO score too far.
I was wondering, and maybe you can clear this up, but is one’s FICO score also based upon paying bills such as utilities? I was surprised some time back to check our credit rating and find that our paying such bills was recorded. If that is the case, how does someone not have a FICO score, or am I confusing things?
sorry about the incomplete sentences…I was typing too fast. LOL
.-= Brad Chaffee´s last blog ..The Benefits Of Becoming A Minimalist Are Starting To Sink In =-.
An interesting discussion as always! I agree with Cedric (above) on most of his points. I have been debt free for a couple years and last fall purchased my first home (15 year fixed of course). Although I was in great financial condition I had several lenders try to push me into more expensive products because I didn’t have a credit score. I did my homework and found an excellent local lender that got me a better deal then all of them.
A FICO score matters if you let it matter. I strongly disagree with the FICO system and more so how it’s been used to grade us for all types of things (like most of y’all mentioned). I can either go along with it and complain or I can be different!
.-= Deacon Bradley´s last blog ..My PayPal Digital Envelope =-.
A zero FICO would be marvelous as that means I conquered paying off my house. When I stopped using credit cards people warned I would never rent a car, travel, etc. That wasnt the case and I hope when I get to the point of no mortgage folks will be wrong about the FICO score being important (Sorry Craig, I’m hoping you are incorrect).
What a great experiment to try it for a couple of years of no FICO and see if begets financial ruin.
@Cedric
I’m sticking with my first assumption on this one – FICO is not an I loved debt score. I say this because in they eyes of FICO I have not had any debt all for four years. (I have a home mortgage from individuals – long story – and this does not show up on the grid of any credit scores). However, I’m told I have a good credit score. How, can I have zero debt and a credit score if it is an I love debt score?
It is because I use a credit card and pay it off in full. That is interacting with a debt related product.
Perhaps Dave is right that underwriters “need to do their job”, but the point of this article is that many do not. Like it or not. Sure, Dave can buy the whole building, but I can’t. I probably won’t ever be able to and I don’t think the average person can.
Personally, I think this is the biggest Dave Ramsey teaching that people disagree with. They like to keep a credit card to maintain a good score. The system will not respond, IMO, to a small pocket of people who strictly follow the Ramsey system.
Like you, I also don’t know my credit score. I’m not enamored with it, but I’m still willing to say it does matter.
@JoeTaxpayer
I loved your comment and I think you and I are on the same page with this one. Also, I appreciate your rental perspective on this one.
You are proof of what this article says – the score does matter. What does not matter is how I feel about it.
If I want to have a 0 score then that is fine. But, I still have to admit that it does negatively impact me in some ways.
@Arthur
If I were a multimillionaire and was willing to pay more for items (potentially) like insurance and I was going to pay cash for every house then you are right – it doesn’t matter. I’m not in that position so I guess FICO does impact me.
@Darren
I do remember who gave me the advice. I remember every detail like it was yesterday. I just didn’t want to call him out since he is still a good friend.
I’m with you on paying off the balance in full. That is what I do and I figure if that is all I need to do to maintain a good credit score then I’m all for it.
Thanks for the tip on CreditKarma.
@Lakita
Thanks for your comment. I’ve never heard of employers looking at scores. Is that legal? I hope that is not true.
I’m not a fan of the FICO system, but if using a credit card (paying off the balance in full) makes me a team player then sign me up.
@Pat
Thanks for your personal perspective. Glad to have validation that this is not theory, but reality.
@Brad
Thanks so much for your comment.
I certainly don’t think anyone is off base if they are going to go with the 100% cash for the rest of their lives. In fact it’s an awesome idea. I’m moving in that direction, but I’m probably 10-15 years away from being at a point that I’ll be at a point where every house I buy is with cash. In the meantime, I’ll use a credit card (paying the balance off in full) to maintain a good credit score.
As I mentioned @Cedric you don’t need to have debt to have a FICO score. I don’t think one must “partake in a flawed financial system” to have a good score. In fact, like I mentioned in the article, I think many people would improve their credit score by being financially responsible.
Unfortunately, I’m afraid more and more organization are going to start looking at FICO (and no I don’t like the idea either).
Joe and Pat have both proved that what I like (and you) doesn’t matter. The fact is if I had a bad credit score I couldn’t rent from them. That might mean I pay more for the guy down the road. For me I’d rather have a credit card and a cheaper place to live.
Brad, I don’t think people need a FICO score. I think if they can make minor changes to maintain a FICO score then why not? Personally I think Dave Ramsey is an exception not a rule. I’m guessing he has a higher than average income than the average American. Not everyone can do what Dave has done.
I 100% agree that people should have a CHOICE. But, the reality is that they don’t.
@Bill
Thanks again for showing us an example of being financially responsible and having a good FICO score.
I’m honestly not sure how utilities and such impact your FICO score. Anyone know? If someone doesn’t leave a comment on this I’ll get back after some research.
@Deacon
I guess we could say that not having a credit score as an inconvenience. Some are willing to deal with the inconvenience out of principle. Others, just play by the rules. I don’t think either is a bad plan as long as you do financially smart things and play by the rules.
@All
Thanks for some awesome comments. FYI I sleep during your day since it is an 18 hour time difference between North American and PNG. Sorry, I didn’t reply or approve comments sooner. I loved reading your opinions.
@Gholmes
I hope I’m wrong too.
When you are head deep in debt fico score does not matter. You are already in debt and you have played by their game. My concerns are for people who as you mentioned are debt free and might get into debt just to build credit scores.
Debt is sure painful way to build those scores!
.-= Joseph @ kickdebtoff´s last blog ..Getting Out Of Debt – What Motivates You? =-.
I have a hard time wanting to pay interest just to have a FICO score. Unfortunately, you may pay a little more for insurance if you don’t happen to have a good FICO score. Other than that, live debt free!
@Joseph
If you are debt free and continue to use a credit card (pay off in full) you will have a good credit score. If you are in debt and have been struggling to make your payments and start making your payments you will improve your credit score. While the credit score is not the motive I think in general it does reward those who are responsible with money. The rare exception is those with no credit cards and no debts – very responsible, but poor credit scores.
@BibleDebt
I also don’t think anyone should pay interest just to get a FICO score. Like I said in the post good financial choices come first and FICO implications second. People who are debt free can have a good credit score so it is not a one or the other choice you can have both.
Very true. Dave Ramsey does state to not worry about your FICO score. However, I would say for those that want to become a first time home buyer, it is vital that you have a good store. The odds of someone paying for a house in full are very unlikely. So, in that case, you are going to need a good FICO score.
Great thread–sorry I wasn’t able to weigh in on it sooner!
I have to agree with Brad here, in agreeing with Dave Ramsey on FICO’s as an “I love debt score”. People who see debt as a useful tool tend to fixate on credit scores and obsess on gaming their credit to increase their scores. After two decades working in the credit industry I can’t/won’t be a part of that exercise. We all have far more important things to do with our time, and with our finances.
CREDIT is important–that is as in paying our bills on time and not getting overextended, and it always has been. CREDIT SCORES have turned credit into a “mines’ better than yours” game, which I think is mostly an outgrowth of a hyper competitive culture. None of us need to be wrapped in that any more than we already are.
Now let me step up to the edge of the deep end here…
The book of Revelation says that just before the Second Coming, we will each be assigned a number, imprinted on our hands and/or foreheads. As believers, we tend to look for the literal manifestation of this event, for some Third Reich type of agency to carry this out in diabolical fashion. But isn’t that what’s already happening? We can’t “buy, sell, or trade” without a number, be it a social security number, credit score, account number, whatever.
Often, we’re even unable to speak with an entity we’ve been doing business with for years until we first supply our account number. Is that absurd–your name is less important than a number someone assigns to you!
While we’re busy waiting to be assigned A number, in fact we already have several. Prophesy fulfilled?
As believers, we’ve been warned, and perhaps we shouldn’t be so OK with it all. We can’t avoid it entirely, but shouldn’t we be conciously working to minimize our involvement and dependence?
( I said I was stepping up to the edge…)
.-= Kevin@OutOfY0urRut´s last blog ..Should You Use Retirement Savings to Pay Off Debt? =-.
Kevin, no, it’s really not absurd that you need to provide an account number in order to talk to most entities. There are several reasons for this. The main (and most obvious) reason is that names are not unique. Another reason is that it deters someone from taking action on someone else’s account. It provides a clean, no mistakes method of identification for companies that have thousands or hundreds of thousands of customers.
On another vein, I don’t understand the correlation between working toward a good FICO score and ‘I love debt’, as Dave Ramsey says. I don’t owe a dime to anyone, except for utilities such as power, phone, etc, and I have a great FICO score. Just because someone uses a credit card does not mean that they are in debt. If a person pays off their credit card at the end of each month, there’s no difference between that and paying for power after using the power, water after using the water, etc. So if that few days/weeks of a credit card balance count as ‘debt’, then certainly so does the power bill, water bill, etc.
Kevin,
Sometimes a few thoughts from the ‘deep end’ help stimulate our thinking. Revelation is one wild monkey and untangling all the interpretations can be a hard thing to do.
As for the FICO score comments I feel like my comment replies are simply a broken record so I won’t repeat myself.
As always, thanks for your comment
@Pat
I agree about your statement regarding FICO scores. Those without any debt can have great FICO scores.
@TheDebtDarling
I completely agree.
Craig, I got so caught up dangling on the edge of Revelation that I forgot to address your utility question…
Utilities don’t affect your credit IF you pay on time–ironic I know. However, if you fail to pay, they can put a collection on your credit which will have a negative affect.
.-= Kevin@OutOfY0urRut´s last blog ..Should You Use Retirement Savings to Pay Off Debt? =-.
Kevin,
Thanks for answering this question. I’m glad I didn’t have to do the research.
I agree completely with Pat’s statements and really like his comparison of convenience use of a credit card and utilities. Both are paid off after they have been used.
Dave Ramsey’s belief that credit = debt is an addict’s point of view. For an alcoholic there is no such thing as moderation or control in their use of alcohol. Likewise, for some people the use of credit always leads to debt. But just as not all of us are alcoholics, not all of us are compulsive users of credit. For those of us who aren’t, it’s easier to establish and maintain a good credit score – however inappropriate the use of that score by other entities might seem to be – than to spend the time, energy, and money dealing with not having one.
@Deborah
Your comment is in line with my post on the topic – http://www.moneyhelpforchristians.com/credit-card-fanaticism/
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