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 5 Ways to Improve Your Credit Score Fast.
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, visit myFICO (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. Learn more about credit scores and credit reports.
What are you thoughts on Dave Ramsey and his stance on the FICO score? Do you pay any attention to your FICO score?