What Is A Good Credit Score Good For?

Few things strike up a debate faster than asking what good is a credit score these days?  There are those who totally spurn the idea of some 3rd party determining their credit worthiness.  There are others who worship the mighty FICO, well aware of its ability to save them money on future loans, insurance, and even affect their job hunt.  I fall somewhere in the middle. Still can’t help but wonder, what good is a good credit score?

I would not suggest someone go out of their way to wreck their FICO score, but I also wouldn’t recommend people be too concerned with their credit scores, either.  For far too long we have been beholden to this score, and taken on unnecessary debt in the name of improving our standing.  If you manage money wisely, make smart decisions when it comes to debt – including the type of debt you take on, and how well you repay it – you should have no trouble securing a high FICO score.  And here are a few benefits…

Higher FICO, Lower Mortgage Payment

According to the research at Information Research Services (infomars.com), as MyFICO.com, the difference in a 620 credit score and a 760 credit score means a $197 lower mortgage payment (on a 30-year, fixed rate mortgage of $200,000).  This is based on rates as of March 27, 2009, and may fluctuate some, but you get the idea.  Having an upper-tier FICO score can lead to significant savings in interest on real estate purchases.

Not only will optimal rates be available only to those with higher credit scores, but it could mean the difference in qualifying for a mortgage loan, or having to pay additional points to secure a decent interest rate.  The mortgage industry is probably the biggest supplier of FICO worries because most of us cannot afford to pay cash for a house, so financing is our only option.

Drive Cheaper

Besides saving money on car insurance, those who opt to finance a new car purchase on shorter terms (36 months) with a FICO score greater than 719 save about $119 a month over those with credit scores below a 590.  Personally, I don’t plan to ever finance a car again, but if I did I would obviously want to qualify for the lowest rates possible.  Bad enough car payments are as high as they are these days, but toss on another $100 due to high interest charges and it becomes downright ridiculous.

Higher Scores Lead Better Employment?

This is an area where there just isn’t much hard evidence to support FICO’s (and much of the financial press) claim that low credit scores can affect employment.  I’m sure employers in certain industries would be interested to know your FICO score as one piece of determining your overall employment potential, but using FICO as a screening tool has so many limitations.

Credit scores don’t tell employers a thing about the level of education someone has achieved, their savings and other assets, their work ethic, their trustworthiness, etc.  For instance, I used to work with someone who had trouble finding a job in her degree field (accounting) because she had gone through a nasty divorce and her ex-husband destroyed both their credit through running up unpaid credit cards, gambling, and a host of other financial problems.

It was only when she discovered this was going on behind her back that she ultimately asked for divorce, but the damage to her credit was done, as a couple of the accounts were in both their names (her husband forged her signature as a co-applicant).  Even though what he did was a crime, it was a nightmare to get accounts removed from her report, and things continued to “pop up” for months.

Potential employers looking for someone to handle their company’s money may incorrectly toss her resume based on a low credit score, when in fact she was probably more qualified than many other candidates in terms of education, work history, etc.

I’m sure you could dig up an employer or two to own up to using FICO scores for screening purposes, but most won’t.  I’m also sure you’d be hard pressed to find anyone in the banking industry that believes is not true. Again, we’ve been oversold on FICO and its importance in our society.

Don’t get me wrong, I think there is a place for credit scoring in helping insurers and potential lenders determine the risk of a potential customer.  However, I don’t think it is fair to label people with low (or non-existent) scores as bad, as if they deserve to walk around with some type of “Scarlet Letter” reading FICO=607 on their forehead.  Credit scores are but a small piece of the overall picture of someone’s creditworthiness, and to allow it to be the lone determining factor is just plain lazy on the part of lenders.

As consumers, the onus is on us to manage our credit wisely, check our credit reports periodically, and don’t go out of our way to damage, or enhance, our FICO score.  If you find yourself in my friend’s situation, dealing with a low FICO, there are plenty of ways to improve your credit score on your own.  Do not let desperation lead you to one of these “credit repair” places who charge fees for things that you can do yourself.  The number one thing that improves your credit score is time.  Yes, it heals credit wounds, too.

Get your updated FICO score today at MyFICO.com

Comments

  1. A few years ago, we were surprised to find that our insurance company gave us a break on our auto premiums just because we had a good credit score. While we don’t go out of our way to stress about it, we like to make sure our credit score is good, so that we can take advantage of opportunities as they come along.

  2. Great article. I’m a huge advocate of not stressing over your FICO score. Making your financial situations based solely on how it will affect you score is often a prelude to disaster.

    A very low percentage of employers look at credit score. And those high paying financial sector jobs more often look at the credit report as a whole rather than just the score.

    Great post, keep it up!

  3. You also drive cheaper with a good FICO score because many, if not most, insurance companies are now using that score in determining your rate, according to my insurance agent. My score was high enough that when the company I use switched to their new rate determination calculation that includes the FICO, my rate dropped nearly $200 a year.

  4. What bothers me most is that some computer algorithm in a mainframe somewhere determines whether we’re “credit worthy.” As if.

    Now, with credit issuers lowering limits, consumers are faced with having their scores lowered through no fault of their own and that just isn’t right. Make your payments on time for years on end and when Citibank decides to lower your available credit by 75% your score takes a massive hit.

  5. One wonders what the FICO scores were for those Wall STreet miscreants and thieves, for Bernie Madoff, for the CEOs of companies that have been run into the ground and bankruptcy????

    In the meantime, many companies are indeed eliminating well-qualified and honest people due to their credit information.

    The theory: If you can’t manage your own money, you’ll screw up for someone else. Or worse, you’ll steal.

    The irony? The real thieves, the ones who steal from stockholders, employees and now, we citizens, have high scores.

    Scores mean nada when it comes to true integrity and trustworthiness.

    People trying to do better, work harder (to make up for past debt–theirs or a partners) are STILL penalized.

    The hiring personnel needs to wise up and not rely on FICO and credit reports to make hiring decisions–or eliminate people.

    Reminds me of a few years ago when a friend, a performer who is self-employed. Wanted to get his own apartment in a building where he had shared an apartment for years with another stable, on-time paying tenant.

    The owner was vehemently opposed to considering anyone who was self-employed (We won’t go into the legalities of this. IT’s pure discrimination, but how to prove?)

    About a dozen of my friends friends, people who had hired him over the years and others with whom he had a business relationship wrote glowing letters to the landlord. The guy was amazed.

    The irony of all of it? My friend had fabulous credit, was one of the most financially responsible people on the planet and and incredibly frugal. He was in far better shape than most of the people who were already renting in the building.

    People simply cannot really know what they need about someone from a FICO score and/or a credit report, many of which are not even accurate.

    This is particularly true for married people, divorced folks and those who have had problems with identity theft and other compromises to their record.

    not to mention that many people have problems with credit due to medical debts.

    It’s a sick world we live in where the more you try to stay or get out of a hole, the more you are penalized.

    Yet, these big-shot thieves in white collar crime get away, literally, with embezzlement.

    Very sick world of double standards. If you can afford good lawyers, you get “justice.” If you have good lawyers, you can get the IRS off your back. Meanwhile, minimum-wage hourly workers are constantly harrased by the IRS and have their wages garnished.

  6. The part I never understood is the drivers insurance. I have a low FICO score but a decent driving record how does that equate? It upsets me greatly.

  7. With the current economy, unless you have a stellar credit score, you probably won’t get any credit anyway!

    I haven’t checked my score in awhile, if it was free I would!

  8. The looking at FICO score as a hiring decission just does not make sense to me, particularly in our current economic environment. Thousands of people are being laid off each month. I am sure a large number of them will quickly start to fall behind on their monthly payments. Accordingly their FICO will drop. And now they will will not be able to get a job because they have a low FICO score? Which will of course lead to more missed payments which will lead to an even lower FICO score…… Vicious cycle!

  9. My husband applied to be a government security officer. Made it through all the rounds until the credit check – we had too many student loans.

    That’s the only employer I know that’s ever checked our credit score.

    FD, what do you think of the “new” credit score they’re talking about in the news. Its supposed to bee a “better” predicator of repayability on the part of the consumer. I don’t know if I’m buying it yet.

  10. @Concetta: I don’t know much about it yet, but I have little faith in any type of scoring system that rewards people for having debt in order to help them get more debt.

  11. Yes, you drive a little cheaper if you have a good FICO score. But, I would rather have money and no payments than save a few hundered bucks a year on my car insurance. I am comletely debt free and have no credit cards. I use a debit card. I was recently notified by my insurance company that I did not qualify for the best rates because my credit report lacked sufficient information to make a determination of my creditworthiness. I actually felt like I had achieved a milestone of financial accomplishment. Do you realize how much money you have if you pay no interest payments whatsoever? Every dime I make (after taxes) is mine to keep. Woohoo! Your goal should be to get out of debt and have no credit score as soon as possible.

  12. FICO is a just a big scam. I and my husband have always had stellar credit and still do, yet our credit score has been declining over the past 3 years. We started preparing for retirement 3 years ago by paying cash for everything, paying off any remaining debts, and eliminating our mortgage so we would be financially set for retirement, yet our score declines. No one will ever convince us that there is a rhyme or reason behind the FICO score. If we can manage our bills for 30 years without so much as a late payment or overdraft, who is there to say we are a bad risk? I’m positive we have a far better track record than the 21-year old customer service rep who informed us two days ago that the interest on our line of credit is 2% higher because we have a low FICO score — so I went in and paid it off. How’s that for being able to manage our debt? Maybe that will increase our score? No, because last month when I checked our credit report, it included a list of suggestions to raise our score, including the suggestion to increase the amount of our outstanding debt so we could show a track record of good credit — what?!!! 30 years of perfection isn’t good enough? That FICO score is a nothing more than a scam used by creditors to increase rates. Isn’t the point of business to keep good customers? No wonder our banks and financial system is in such a mess if this is the twisted thinking they are basing their decisions on.

  13. In the immortal words of Bob Seger
    “I feel like a number!”
    I’m so torn about my feelings about FICO scoring or any sort of credit scoring. I love Debt Free in Indiana’s closing remarks
    “Your goal should be to get out of debt and have no credit score as soon as possible.”
    I thought I would fall off my chair laughing!

    FD you always do a great job!

  14. For government jobs or government contractor jobs that require a security clearance, a good credit score is a must.

    Since re-investigation every few years is part of holding a clearance, if someone steals your identity (even due to a slip-up on the part of the government because, say, a laptop from HR gets lost) or if your ex-spouse trashes your credit, you can and will lose your clearance. That in turn causes you to lose your job and probably your home as well.

    You can also have your clearance suspended or taken away for having the wrong religious practices or sexual orientation.

  15. I have an issue right now. I am wondering if I should try to keep maintaining my credit score. I have tried really hard over a long period of time to pay bills on time and to get my FICO score as high as possible.Things are really getting tight around here! I was hoping that somebody could check out my last post on my blog and give me their thoughts. http://www.moneylifedebt.blogspot.com

  16. My FICO score is 807. I have zero debt and pay everything on time. To be honest, I have done nothing in support history of credit. I pay my bills on time and that’s it.

    Frugal Dad, you seem to me to be unusually pre-occupied and obsessed with your credit score, and very very much in favor in taking on loads of debt in order to improve your FICO score. May I ask why? Are you planning to take on more debt in the future? It does not seem healthy to me to get so much in debt like you advocate. I do not advocate getting in debt like you do just to improve credit score like you are saying, for no other purpose besides getting more in debt like you advocate.

  17. There have actually been studies done about the relationship between a FICO score and how likely the scoreholder is to file a claim (and how large that claim will be). The results were convincing enough that pretty much all insurance companies look at FICO now to determine how much they’ll gouge you for. I guess the logic would be that if you’re willing to take risks with your money, you probably also take risks with your driving and with home safety and so on. Key word being “probably,” but we’re talking millions or billions of dollars in losses for the insurance companies, so there you go.

    My FICOs (there are three of them, or were until Experian pulled out recently) are low, partly because I’ve been late on several bills, but some of it is because I don’t have an active credit card account. In fact I would say that probably weighs at least as heavily as the late bills. Meanwhile a credit card I had during my marriage, which ended 10 years ago in all but legality, wound up being charged off but because aspects of that transaction have dropped off my credit report, it parses on the report as “paid on time.” It’s bizarre. Real-life logic says I should be dinged for the charged-off credit card and should be applauded for being sensible enough not to get another one. FICO, unfortunately, doesn’t seem to operate on real-life logic, at least not completely.

    FYI, there is a way to establish a payment history on a credit report without racking up debt. Try prbc.com. They started in 2002 or so and they help you track things like rent and utility payments, and will work with you to establish a payment history that lets you get a mortgage later on. FICO has set up a score with them too, although you can’t get that through FICO’s site. On the other hand this is the one credit bureau I know if that will give you a free report any time you ask because they already get paid by potential creditors to look at your info. I wish the Big Three saw things that way.

  18. The title should be, “Why I Personally Don’t Think FICO Scores Should Be Important, But THEY ARE.”

    Be as “mad” as you want, but the only thing to do is to make sure you have a high score. There are ways to do that. And make sure that the score is correct. Challenge anything that is the least bit wrong, with certified letters and affidavits if necessary. Don’t tell yourself it doesn’t matter. If it’s wrong, and against your best interests (it always seems to be, doesn’t it?), then get it corrected.

    As for companies on the verge of insolvency that cut your line of credit despite a perfect payment history (yeah, that one is ironic, isn’t it — you are in better financial health than they are, but they can ding you), see about getting another card you already have to increase your credit limit modestly. Don’t use it, just keep it, so that your percentage of available credit being used doesn’t go up. This may cause a small, temporary dip in your score (if it is counted as an “inquiry”), but it will go right up again very soon.

    Seek out other sound strategies, and play the game to get your score up. It’s only numbers. Sucking up to an incompetent boss is much harder than this.

  19. I just received a copy of my credit score (740). On the report from Trans Union there were reasons why my score is lowered. One of the reasons is “insufficient length of credit history”. At the top of their report it shows my credit history started in 1971. Another reason was “Too many recent credit checks (or recent applications). I had 3 inquiries in 2008: 1 from Equifax, probably when I asked for my free credit report, one from “MDA” (I don’t know who that is) and 1 from an insurance company (maybe when I got a quote to see if another company would lower my premiums) OR maybe it counts against you when companies check your credit rating before they send you mass mailing.

  20. Last year I helped my father by cosigning a auto loan for him that he swore he’d pay off and on time… Well he didn’t and now I’m almost $9,000 in debt… I’m tryin to get a loan for school but even though the “repo” wasn’t my fault I’m being punished for it…
    My husband was killed by a roadside bomb in iraq on 6/25/09 and shortly after his death I found out I was pregnant and had our son 1-19-09… After my husband died I was left with his credit debt as well as mine and I jus dnt know what to do… Ya $8 isn’t a lot to spend on a credit score for some people, but it is to me… I need some advice!!

  21. I never had a creedit score at all until I was in my mid 30′s. I decided I probably should buy some credit so I could buy a house. I bought my credit with a secured loan. You know, I paid a bank to borrow my own money (strange concept isn’t it?)

    I now have 6-8 credit cards. I only use 1 of them. I use the sears card that charges about 24% interest instead of another card that charged about 10% interest. You wonder why I do that? I can walk into a sears store pay it off and never be told I made a late payment with the associated late payment fee.

    My credit score is lower than it should be. I deal with everything paying cash except for online. I almost never remember I have a credit card. If I thought to use it more often I am sure my credit score would be a bit higher than a 740.

    As of this date I have yet to need credit. I needed a car. I flew 1,500 miles to buy one as it was cheap and rust free. I drove it back home. My shiney new 1999 (in late 2009)car was bought with cash at about $1,500 under book after expenses.

    If you can’t afford it do not buy it. Credit is for suckers and paying interest is a fast way to lose money. I wonder how much I have saved a year driving my $1,000 and under cars (except for the last one) for 20 years with no financing compared to those who financed nice new cars.

    p.s. never having had a real loan and saving my pennies I am now worth 6 figures 2 times over. Define available credit. I have it in my back pocket.

  22. Ditch the credit cards and give the proverbial finger to these banks people. They are controlling you with this FICO bull crap. Credit has been the bane of this country for decades and now Americans are more debt than any other time in history. The banks want you to borrow. They want you in debt. They want to make as much money off of you as possible. It is time to fight back and not have some arbitrary figure like a FICO score determine your worth and trustworthiness as a individual. It is nothing but control and we play right into their hands. When the banks got all of these bail-outs from “We the people…” for making bad business decisions, it showed me that we are nothing but cattle to these people and that the same rules that apply to us if we go into don’t apply to the super-rich, i.e. bankers. It is time to fight back if you ask me.

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