Last week I wrote about the personal credit score, used by virtually all lenders in this country, known as FICO.
But I know there are some of you who you can and should ignore your FICO score.
I also want to mention the risk of paying too much for your score, the benefits of boosting your score, and a reason why I think FICO is kind of awesome.
Maybe disregard all this?
I made the case that everybody should spend up to $20 to buy their FICO score (and credit report).
But personal finance guru Dave Ramsey makes the following fine point about FICO scores: Ignore them.
That’s fine for his larger lesson, which is to urge people to live entirely debt-free. If you live a cash-only, debt-free financial life, you don’t need a FICO score because you don’t ever need to ask a bank for a loan.
For people at the extreme ends of the financial spectrum, I endorse Ramsey’s hard-core approach to FICO scores and borrowing.
If you can always pay cash because you’ve got unlimited amounts of it, by all means ignore your FICO score. And if you’ve been in distress because of a debt problem that needed curing through bankruptcy or by going cold turkey on borrowing, again I think Ramsey’s right. Ignore your FICO score.
But for the 90 percent of us in the middle, we need to pay attention to our score.
When you know your score before you walk into a bank, you know whether the loan you got offered by the bank is at the lowest rate possible.
If you don’t know your own FICO score, you’re entirely at the mercy of your lender.
Call me crazy, but maybe you don’t want to do that?
What else NOT to do
While I do think we should spend a small amount of money to learn our FICO score, I want to caution people about the FICO-purchasing process.
Do not spend too much money on this. Achieving the right balance of FICO knowledge means not overdoing it. Each of the three credit bureaus, plus the Fair Isaac Corp., will try to encourage you (“trick you” is maybe too strong a word, but that’s basically what they’re doing in my opinion) to sign up for “monthly credit monitoring,” for something like $25 per month or $120 a year.
Don’t do this.
Also, all these folks will offer a “free” credit report and score, as long as you make a long-term (read: expensive) commitment to buy more of their services later.
Again, don’t do this.
Having been through the experience a few times, I will warn you that they make it relatively difficult to simply purchase one credit score from one bureau for under $20, but that simple purchase and price should be your goal.
And it is doable.
Benefits of FICO repair
What’s clear from the FICO formula is this: If you have unpaid bills, taxes, judgments or liens weighing down your credit score, you can turn around your credit score.
Not without settling up with creditors on what you owe, and certainly not quickly, but it can be done. Consider it a marathon, not a sprint. And if you can survive the marathon, you’ll reap considerable rewards.
On your car, with a 720 FICO qualifying you for a prime loan, you might lower your loan’s interest rate by 10 percentage points. On a $20,000 loan over seven years, you’d pay about $100 less per month with a prime loan instead of a subprime loan, or about $8,575 less in interest over the life of your auto loan.
On your home, the differences are much more dramatic still. With a 720 minimum FICO, you might lower your mortgage by 5 percentage points, moving from a subprime to a prime mortgage. On a $200,000 mortgage over 30 years, you’d end up paying $655 less per month, or $236,000 less in total interest over the life of your mortgage.
Even more, a low credit score could lock you out of the chance at homeownership entirely, which might have even more dramatic financial results given the advantages of homeownership.
That’s why small changes in solving past credit problems can lead to big financial results in the long run.
Besides the financial advantage of knowing whether you qualify for a prime loan, I’m a big fan of the FICO score because of its essential “fairness.”
In a way, FICO scores are awesome — because they do not discriminate based on anything about us except our own past borrowing behavior.
I’m not certain the George Bailey “It’s a Wonderful Life” world of banking ever existed — where a banker could personally decide to lend, or not, based on judgments about a customer’s reputation and character. If it did exist, we can imagine that discrimination played an important part of lending decisions.
A FICO score however, does not discriminate based on income, wealth, profession, geography, education level, race, class, gender, sexual orientation, physical ability or the three timeless banker’s questions posed by the Zombies back in 1967: “What’s your name? Who’s your daddy? Is he rich like me?”
When you think about it that way, FICO does something amazing that none of us can do, since we are all (hopefully unwillingly) bundles of human discrimination at all waking moments.
Yes, a FICO score reduces our glorious individuality into a dehumanized series of digits, to be fed into a banking conglomerate’s Sylvester McMonkey McBean machine and spit out the other side. But, if you understand this dehumanization as the opposite of discrimination in lending practices, you might decide that’s actually a good thing.
A version of this post ran in San Antonio Express News
Please see related posts
FICO Part I – What goes into the scoring?
Ask an Ex-Banker: Monthly balances and FICO scoring
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