Is It Fair For You To Be Judged By Your FICO Score?

PinExt Is It Fair For You To Be Judged By Your FICO Score?

Your FICO score is your credit score.  According to the Fair Isaac Corporation that computes your score, "FICO® risk scores rank-order consumers according to the likelihood that their credit obligations will be paid as expected."  FICO scores are recognized almost universally as the standard in judging a person’s credit worthiness.  However, these scores are not without their issues.  For instance, if you live a debt-free lifestyle, you are likely to have a low FICO score which may have a negative impact on you in certain situations.  In addition, many claim that the FICO score has dumb-downed the lending industry. 

Why does any of this matter?  Well, your credit score is being used for a wide variety of things besides just lending decisions.  Is this fair? 

Is your credit score holding you back from living life to the fullest?

How your FICO score is determined.

There are a number of factors used to determine your FICO score (the chart below came from CML).  The exact formula used to compute it is a closely guarded Fair Isaac Corporation secret.  However, many have said that it is roughly comprised of the factors shown in the chart below:

credit score factors Is It Fair For You To Be Judged By Your FICO Score?

It is wise to understand as much as possible about your FICO score.  One of the absolute best resources I have found on this subject can be found at the Wisdom Journal.  I highly recommend reading Ron’s article The Truth About Your Credit Score (from an expert) for detailed information.

How your FICO score is used (you might be surprised).

There are a number of ways that your credit score is being used to judge you.  In fact, you might even be surprised by some of them.  If you have a low credit score, this can have a far-reaching impact on your life.  However, a low FICO score can result from simply not borrowing money.  Therefore, is it truly the best indicator of the kind of person you are?  Companies are certainly using it to determine a lot about you.

Your FICO score might be effecting your ability to get a job, a home, certain types of insurance, or even a cell phone! 

Here are just some of the ways that your FICO score is used to discriminate against you:

1.  Mortgage lending and other types of loans.

Okay, this one might seem obvious, but did you know that certain lenders make lending decisions based almost entirely on your FICO score?  It is true!  This means that in certain situations, even though you have plenty of financial means, you may not be able to borrow money to buy your dream house because your FICO score fails to measure up.  For instance, you may have trouble if one or more of the following is true for you:

  • Your credit report contains inaccurate or misleading information
  • You made some financial mistakes in the past, but have since cleaned up your act
  • You have stopped borrowing money

All these things will make your FICO score lower.  What is also concerning is that another person may have a higher FICO score and therefore be preferred over you for the loan when they are out of a job, broke, and without any assets!  The FICO score does not include any of these factors in it’s formula!  With your lower FICO score, even if you do qualify for the mortgage, you will likely pay a higher interest rate.

Dave Ramsey recently went on a rant on his radio show about this very issue.  You should give it a listen.

2.  Getting a job.

That’s right!  Hiring managers often look at your FICO score when considering you for a job.  You could get disqualified or at least edged out simply because your credit score was lower than someone else’s.  Your FICO score is an indicator that organizations use to assess your integrity and whether or not you live up to your obligations. 

Is a person that doesn’t pay their bills a good hire?  Probably not, but is your FICO score the best indicator of your financial success and therefore your worthiness for employment?  Should it be used to disqualify you for a job you really want simply because it is lower than a pre-determined standard?

3.  Renting a house or an apartment.

Sometimes it is advantageous to rent a place to live.  For instance, when you are new to an area and want to learn a little more before jumping into buying a home.  However, if your FICO score isn’t up to snuff, then you may find this a difficult process.

Landlords regularly pull credit scores on applicants.  They want to know if they can count on you to pay your rent.  Your credit history is certainly an apt indicator of future financial behavior, but the FICO score alone does not tell the whole story. 

4.  Purchasing various types of insurance.

Insurers want insight into your personality and behavior.  They want to know if you are the type of person that is likely to file a claim.  They know that people who are financially strapped are more likely to make a claim to try to get their insurance company to pay, even in an iffy situation.  The time it takes to evaluate and fight such claims cost the insurance company money.

Insurance companies regularly use your FICO score to help make this determination.  This means that if you have a low credit score, you may be denied coverage or at the very least, you will pay a higher premium for your coverage.

5.  Signing up for a cell phone.

Again, this is another example of how corporations are using your FICO score to size you up and determine whether or not you qualify for certain products they offer.  If you have a credit score that is lower than an arbitrary figure, the cell phone companies may decide you are too big a financial risk and therefore deny you a contract.

Again, what kicks me in the teeth about this is that the FICO score doesn’t even take into account whether or not you are currently employed!  However, many companies are misusing it by making it one of the only discriminating factors they consider when evaluating your financial history.

What can you do to protect yourself?

Obviously, your FICO score is used in a wide-range of ways.  Again, I pose the question, "Is this fair?"  Is this the right way for you and I to be evaluated?  I don’t think so, but it is going to take time for change to occur.  In the meantime, what do we do?

1.  Don’t use credit to bolster your FICO score.

First, I want to make it clear that I don’t advocate borrowing money simply to maintain a good FICO score.  That doesn’t make sense.  If you have a lower FICO score because you do not borrow money, which is different than having a low score because of bad credit, then you need to seek out companies that will take the time to investigate your situation more closely.  Do you really want to do business with a company that is judging people this way?

2.  Educate others.

I think it is our responsibility to use every opportunity we have to make as many people as possible aware of how their FICO score is being used and abused.  We need to decide as a society if this is really a fair way to judge people and their financial prowess.  Awareness is always the first step in being able to defend yourself.

3.  Monitor your credit history.

Even if you do not borrow money or use credit, you should still occasionally check your credit report to verify it is accurate.  Your credit history is the source for the information used to compute your FICO score.  You may want to check out this legitimate way to get Free FICO Scores & Credit Reports.  If you find errors, then work to get those resolved.

What do you think about the ways companies are using your FICO score?

PinExt Is It Fair For You To Be Judged By Your FICO Score?

10 thoughts on “Is It Fair For You To Be Judged By Your FICO Score?

  1. I think it can be fair to use FICO score as a judge, just not as the sole measurement. No one number can give a well rounded view of a person. I think in today’s credit crunch we may see FICO scores and similar measurements used more. From an employer’s perspective – if a person can’t handle their credit cards how can they handle a million dollar account? Again all situations are different but I think it’s a valid question to at least consider for an employer. There does need to be some better way to account for people who pay their bills promptly but do not use credit. For them a FICO score may not seem fair.

    I’m thinking that FICO is an adult version of an SAT score. SAT’s don’t tell you everything you need to know about a student but it is a basic measure of a student’s aptitude.

  2. I think it is silly since it often rewards what I consider really low value handling of finances. So what that a person can open a whole bunch of debt and pay it on time. I would take the person without debt and tons of cash flow in a heartbeat. It is pretty much a sham IMO and reinforces a debt culture.

  3. I understand your point about the system being unfair to those who have low credit scores because they simply don’t take on debt. And to an extent, I agree. The FICO score may be imperfect, but you have to recognize the FICO score for what it is. I’m of the opinion that it may be easier to just take out a small loan to build some credit than to try and find a creditor willing to lend you money based on no credit history – especially with many creditors tightening their purse strings in recent months. Very thought provoking article. :)

  4. @FFB – I think we are on the same page. The FICO score sums up a person’s payment history. It tells you if the person borrows money and then whether or not they follow through on such commitments. It has a fairly narrow focus. However, I think that many organizations are using it far beyond it’s original intention.

    @Happy Rock – I agree that the FICO score reinforces a debt culture. I would also take the person without debt and tons of cash.

    @Patrick – The trouble is it seems many organizations don’t recognize the FICO score for what it is. They are using it much more broadly than it was intended. This has negative reprecussions.

    I don’t agree with the strategy of taking out loans to build up your FICO score just because it is easier. I think Happy Rock was right about this reinforcing a debt culture. No thanks!

    I appreciate your well-thought out comments!

  5. Insurance companies have mangled statistics to justify raising premiums based on FICO stores because of some supposed correlation between low FICOs and accidents. I hate that FICO has taken over our lives, but it just about has. I don’t go out to try and destroy my FICO on purpose, but I refuse to be held hostage by it, too.

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  9. Thank you for all the tips. It is such a great article. Had fun reading it. I personally think knowing things about credit score charts too can be dead useful when it comes to improving credit score because we will need them when applying for bank loans or any kind of loan even payday loans. You can find some cool tips about how to improve your credit score at http://www.repaircreditscore.info. They helped me a lot.

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