Psalms 49 13 says this their way is their folly yet. Their posterity approved their sayings say law.
Samuel White said in relation to the credit score, the greatest capitalistic scam of the century. That’s what you’re referred to as the credit score for. You say, why does he say that? Well, that’s exactly what I want to unpack today. I want to discuss the credit score and why I believe it to be a fool’s game.
But first, Let’s transition away a little bit from credit score because there’s a lot of emotions, a lot of embedded history with that, like a lot of psychological behavior associated with it. And let’s go to a different field altogether. Let’s say you go to the mall, and you go into the Apple store. And when you walk into the Apple store, you say, yeah, I think I would like to buy a new iPad.
And the lady or the guy who’s helping you says, okay, great. By, by chance, do you happen to know your Apple score? And you say your Apple score, what do you mean? What’s that? Well, we have a thing called an Apple score and everybody has one. And so, we were wondering what yours were because if your Apple score is too low, we might not allow you to buy a product.
You might have to, you know, kind of come back and, and you know change some things that raise your score. But you know, let me just check your score quick and we can see where it is. And so, she’s like, Oh, I’m sorry. You know, you don’t have a good Apple score. And he’s like, well, how do I get my Apple score better?
Oh, well, that’s easy. So, the more devices that you buy from us, the higher your Apple score is. And the more time you spend on those devices, that’s why we have that screen time, it’s not really to track you know, you it’s really to help us kind of track you. And so, the more you’re on your devices, the better your app score.
Now, if you use like a Motorola or a Samsung or something like that, you’re You don’t get credit for those Android. You don’t get any credit for those, but if you’re on an Apple device with time your Apple score goes up and the more apps that you download and you use the multiple of apps, every time you download apps, your Apple score goes up.
Anytime you delete an app of unfortunately, you know, your score would go down a little bit. And yeah, so we need you to have at least a seven 50 Apple score for you to buy a device and, and you go into like, wait a minute. I, I want to buy an iPad. Can I buy an iPad? Sorry sir. Your, your Apple score is just not quite good enough.
Do you have some Apple devices? Yeah. Okay. So go home and use those for like the next month or so. A lot like 12, 14, 16 hours a day and your Apple score go up and we can come back in and see, we’ll see if you qualify to, to buy one of our products. Right? If you. When in the Apple store and that really happened, you’d be like, you people have lost your ever-loving mind.
You’d be like, you guys are crazy. And yet this is exactly what banks have done with the credit score. And we, the suckers are playing the game. It’s a win-win for them and a lose-lose for us. I’m going to show you why. But first, let’s go back a little bit. So, let’s talk about the origin of what is now known as the credit score, where it wasn’t known that until like the last 25, 30 years or so.
But in 1950s, really banks started using computerized credit scorings, right? They did. They use statistical analysis to create an abstract risk assessment to determine credit worthiness around. They’re trying to wrap their heads around underwriting, right? Prior to that, everything was kind of standardized, right?
So, you go in with an application for a loan and Sally would review it and it would go one way and Bob would review another person’s and it could go simply opposite. There was no standardization. And so, to solve that, the fair Isaac corporation started by William fair and Earl Isaac. It’s a corporation.
FICO F I C O. Co. Fair Isaac Corporation, and the idea was to try to create systematic ways of resolving whether someone should get a loan or not. And the idea of that is the organization would kind of give them this standardized way of doing it, this process, this algorithm, if you will. But then in return, they would take that information, share with other banks, because what would happen prior to that was I could apply for a loan here.
That could be an underwriting. I can go to a different bank over here That would also be an underwriting. And the one bank wouldn’t know that I was applying for other credit, the other ones I could walk away with potentially two different loans. And the other loan banks didn’t know that I had that loan.
And so, the idea is that they would share the information kind of around. FICO didn’t go public as a company until 1987. And Fannie Mae and Freddie Mac didn’t start using FICOs until 1995. So, you know, little over 30 years ago. Prior to 1980, the advice to go build your credit was seldomly rehearsed by anyone.
And so, the credit score, as we know it, it’s a relatively new phenomenon. It didn’t exist forever. Like your grandparents were never told to go build their credit, right? Maybe your parents were depending on your age, but your grandparents certainly weren’t. And so, the question then is what composes of the credit score.
Now the actual algorithms and how it’s calculated stuff, we don’t really know. It’s kind of like secret sauce, right? It’s like Chick fil A’s breading or Carl Sanders recipe, right? We, we don’t really know the actual ingredients of it per se and the quantities of it, but we know the composition of it. So, on FICO’s website, they tell you the percentage.
And the components of what the score is. Most people think it just has to do with their payments. If I pay my payments on time, I have a good score, but that’s not truly the entire picture. It’s really based upon five different categories, right? So, payment history is one for sure. So is the amount of debt you have, the length of debt you have, the type of debt you have, and how much new debt you have, right?
And so, let’s break those down a little bit. and compare kind of each one and determine maybe who would have the better score, me, or you, right? So, let’s say for example, the first one, payment history, right? This has to do with paying your payments on time. So, if I have paid all my payments on time, I’ve never been late, but you have some 30 days, a couple of 60 days, maybe one 90 days late in the last couple of years, right?
My score would be better than yours, which makes sense because I’m more reliable Right? I’m more trustworthy. I’m paying my payments on time, whereas maybe you’ve been late on a couple, right? So that, that’s kind of a no brainer, but let’s think about length of debt. Let’s say for example I am almost 47 years old.
Let’s say I’ve been in debt since I was 18. 18 which I probably wasn’t dead at 18. And so, if I would have been debt from the age 18 all the way until now, that’s almost 30 years of debt. I have a history of debt of being in debt for 30 years, but maybe you’re only in your late twenties or early thirties and you’ve only been in debt for 20 years or 15 years.
Well, I would have a length, longer period of being in debt. So, my score of that portion will be better than yours because I have 30 years and you only maybe have 20 or 15, right? Which is kind of interesting, you know, so my score would be better because I’ve been in debt longer. Huh, that’s kind of interesting.
Alright, what about debt types? Right, so the number of types that you have, the better. So, for example, let’s just say you just have a mortgage. That’s all you have. You have a mortgage, and that’s it. Well, I have a mortgage, but I have a second mortgage, a HELOC loan. Maybe I have a car loan, maybe I have some student loans, and I have credit card loans, and I have a boat loan, and I have a signature loan, and I have a consolidation loan, and I have three other credit cards, right?
I have more types. More types of debt than you do. You only have one. You have a mortgage. Maybe I have ten. Well, my score would be better than your score because I have more types of debt than you do. Interesting. So, the more types of debt you have, the higher the score. Interesting. Who would want you to have more types of debt?
Huh. That’s interesting. Okay. What about new debt, right? So new debt. Debt is the idea that you’ve recently gone into debt. So, let’s say for example, you only have a mortgage, and you got your mortgage, you know, 10 years ago. That’s all you’ve had. You haven’t gotten any new debt in the last 10 years, but I love debt and so therefore I get debt every year.
Every year I’m getting a new loan, right? And so, I got a loan this year, I got a loan last year, I got a year loan before that. And every year, because I have all these debts, I have some sort of new loan every year. Whose score will be better? Yours or mine? Well, it would be mine because I have more recent debt.
So again, who would want you to have more recent debt? And reward you with a score for it. Maybe the banks, maybe, and this one is the best one. So, when it comes to the amount of debt, this is great. So, I want to kind of transition to a PowerPoint that I’ll show you exactly how that works.
Okay. So, when it comes to the amount of debt, this is how I understand it to be. And so, let’s say for example, you go get yourself a credit card. And for example, this credit card has a 10, 000 limit and you’re thinking yourself, you know, I’m never going to have 10, 000 of credit. I’m just going to have it for emergencies.
I get some free points, you know, I’ll just go ahead and get one. And so, something happens to you. And for some reason Christmas sneaks up on you. You forget that it’s in December and you go out and you buy a whole bunch of stuff, and you charge up 2, 500 worth of stuff, right?
You figure I’ll just pay it off next year. Not a big deal. What happens to your credit score? Well, your credit score will go up because You know, you, while you have this credit card, you’re far away from it being maxed out you know, you’re demonstrating, you know, that you’re responsible, you’re, you’re doing good with things, you know, and so your credit score goes up, you get rewarded.
Okay, and you’re like, man, this is great. Like, I got some stuff. I didn’t really pay anything. The payment’s only like 50 a month. My score went up. Man, America is a great place. What a place to live, right? And so, you go out and let, hey, let’s charge some more up. And so, you go on a vacation, and you spend a nice time, and you end up charging 2, 500 more on your credit card.
And now you, your balance is 5, 000. Well, what happens to your score? It again goes up. You’re like, man, what a place, you know, this is awesome. I had Christmas, I had a great vacation. And so, you know, you go out and your score is going up and you’re like, man, this is awesome. And so, you, now you have a car repair and it’s like, oh man, I didn’t really expect to have a car repair.
Who knew cars broke down? This is an emergency. I got to have the car to go to work. And so, you charge up the credit card again, and now you’re at 7, 500 of recurring balance. And your score goes down. You’re like, wait a minute. I don’t understand. I went from zero to 25 and 25 to 50 and it went up both times.
How comes now I went up another 2, 500. It goes down because while they gave you a card worth 10, 000 limit, they didn’t expect you to use it. And it’s like, wait a minute, this is kind of getting close to being full. And you know, we’re not sure what’s happening here. You’re not being very responsible with your credit.
Suddenly, it’s like the game changes. That’s the thing that always kind of kills me. You see, you know, you run into another snag, and it runs, you charge it up again and your score goes down again. Yeah. Like, man, this is ridiculous. I have this card. It’s maxed out. I’m paying payments every month now, 400.
And look at this 22 percent interest. This is dumb. My score is going down. This is silly. We’re going to pay this thing off. And so, you start paying it off. And so, you pay it off and you pay it down the study 500. What happens? Your score, where your score goes up from where it was because the max out and now you pay it back down and you’re like, okay, this is better.
And so, you keep paying it down and you pay down again. What happens to your score? It goes up again. You’re all right. Now we’re kind of back on track. This makes sense. I’m paying this sucker off. I learned my lesson. These aren’t good for people. They’re kind of like cigarettes of the financial services world don’t want these things.
And so, you pay it down again, 2, 500. What happens to your score? Wait a minute. My score goes down. Yeah, your score goes down and if you pay it all the way off Your score will go down again, and you’ve probably heard this one before
Don’t ever close a credit card because your credit score will go down but if you close it.
Yeah.
Your score will go down again. Why is that? Because this part, the amount of the credit score is designed to optimal score. Again, if that’s what you’re trying to solve for, the optimal score is to keep somewhere between 25 to 50 percent of the value of your credit continually. Well, who would want you to continually have credit?
A revolving balance. Maybe the banks, because now you’re continually in debt, you’re continually paying payments, you’re continually paying interest, and that interest that you pay is revenue for them. And so that is how the credit score works in terms of that section. Crazy, huh?
So, isn’t that amazing, right?
So. So here’s the credit score in a nutshell. You must go into debt often with many different types, continue to go in debt so you build your history, pay the payments on time, and have the right amount of debt. Not too much, not too little, but just right like a Goldilocks porridge.
How ironic is that? And so, when you think about this, you think about the impact of it. Answer me this if your boss were to come to you. And increase your salary by 200, 000 a year. So, whatever it is, increase it by 200, 000 a year. What effect would that have on your credit score? The answer is none. What if you inherited a million dollars?
What if I just said, hey, you’re a nice person, I’m going to write you a check for a million dollars, go ahead and cash it. What would be the impact on your credit score? Sadly, again, the answer would be none because here’s the truth of the matter. The credit score is not an indicator of winning financially.
It’s an indicator of you’re going into debt. A lot, often staying in debt, paying payments on time, paying interest on time, and repeating the cycle over and over and repeatedly. The only thing that changes your credit score is, is your interaction with debt. So, when someone says, I have a great credit score.
I kind of feel bad for him. I kind of like look at him like, Oh, you, you poor thing. Because that means you’ve gone into debt a lot and pay payments a lot and paid interest a lot. The only reason you would have a high credit score. Why would you want one is to go into debt? Why would you go on to go into debt to raise my credit score?
Why to go into debt? Why to raise my credit? It’s like a dog chasing his tail and calling it progress. It is silly. The only way to truly maximize your score, if that is your goal for some reason, is to go into debt repeatedly, often with many different types, optimizing the right number of balances and paying payments with interest every month.
That, my friends, is why the credit score is a fool’s game. which really shouldn’t be played by anyone. Now, what is important? What is important is your credit report. Your credit report shows all your history, right? And so that is a good thing to check frequently. The government allows three different all three bureaus.
This allows you to get a free report of them every, you know, every year. So, you can get essentially three a year if you want to. That is a good thing to check for a couple of reasons. One for accuracy, two for identity theft. And so that is a good thing to do is go in and check your credit report, not the score.
Don’t pay for a score, but to go in and check your credit report off and I’ll have your whole list of all the years. When you first went into debt, you’ll have your information where you lived, how, you know, the balances of them, whether they’re closed or they’re open. And a good thing to do is go through this.
Once I help get my clients on down, I’d tell them to go through the credit report, pull everything out, make sure everything is closed and that way you have no open accounts. And the other thing too is identity theft occurs, right? So, somebody gets someone. Alone in your name and you don’t even know about it.
The mail doesn’t come to you. It goes somewhere else Well, it’ll show up on the credit report where you can then challenge it as fraudulent activity So that is a good thing to do if you haven’t checked your credit report recently I’d recommend you do that If you don’t know how to do that You can send an email to Mike at true out that show put the word credit in subject C R E D I T, and I will send you a step by step some instructions of how to get a free credit card.
For those of you who are on our mailing list, you will get a link of those instructions on Friday as well. Your micro action for the week is to do that. Check your credit report for accuracy and or fraud. Today, we talked about the credit score, the origins of it, the compositions of it, the impact of it, the folly of it associated with an Apple score, and how to check your credit score.
actual annual credit report. I hope this information is helpful for you on your financial journey. If you have any questions or comments, you can leave them below or send an email to Mike at true out that show. And until next time, I hope you have a great day.
