FIRE: Seriously, how the F*ck are they calculating my credit score?
Boring topic but a needed answer to how your credit score is calculated. And constructing a better system.
I'm going to lead off with - I think credit scores are a useless archaic device of the pre-internet era.
So there are 3 companies that pretty much do credit scores: Equifax, Experian, and TransUnion.
Likely fact: all of them have been breached and given all of your personal information away.
So now that you know that you're information has already been breached, we may as well continue to how these guys are fucking you out of financial independence.
So credit scoring has really been done since people needed to be lent money.
Credit scoring is just a mathematical way to tell someone they are a fuck and that you will not give them money. The use of numbers somehow makes it hurt less since numbers don't lie.
In the olden times, pre-1989, banks/lenders determined if they should give you money based on your "character". In a country riddled with bias, sexism, and racism, one can only imagine how this used to go.
If you got a loan was completely dependent on someone else's opinion. Honestly, not much has changed.
So then they developed a fancy formula that tells us if someone pays back money well - known as FICA.
The history of this is far too boring for me to go any further so let's skip ahead to how it works.
So based on credit.com, here's what determines your credit score:
*Below is a direct quote from the linked website. All credit to @JeanineSko
"Payment history: This is one of the biggest determinants to your credit scores. It accounts for approximately 35% of your scores. The payment history on your credit report shows lenders whether you paid your bills on time or not. If you were late making payments, the lender may view you as a higher credit risk and deny your application.
The total amount owed: This category accounts for about 30% of your total scores. You should never utilize a significant portion of the credit you have available. Doing so may make lenders feel as if you are spread too thin and can’t take on any more credit or debt. Watch your utilization ratio on each of your accounts so you can see how much you have used versus the amount of your total credit limit (the amount you have available).
Credit history length: Accounting for 15% of your credit scores, the length of your credit history is important because it shows that you have managed different credit accounts over the years. It also shows the overall age of each account, so the older your accounts are, the better it looks to a potential lender.
Credit utilization: This accounts for about 10% of your credit scores. You never want to have too many different credit accounts open at one time. You also want to avoid having too many hard credit inquiries on your credit when applying for new credit accounts or loans.Hard inquiries can negatively affect your credit scores.
Diverse credit portfolio: Lenders will check how many types of credit accounts you have. Having a variety of accounts is always better than just having credit cards, for example. A mix of an installment debt, a car loan, personal loan, and credit cards shows that you can borrow money and then pay what is owed. However, multiples types of each account can be seen as negative."
Ok, so payment history makes sense.
If you pay your bills on time you are likely pretty decent with your money.
The total amount owed makes some sense too.
If you owe a lot of money to a bunch of people, chances go up that you may not be able to pay it all back.
Credit history length is just plain fucking stupid.
Why on earth would we want to promote people getting into debt for a longer period of time? Who wins there (the credit card companies, duh). This is a clear exploitative way to promote people opening/using credit cards and debt as young as possible.
No logical person (who isn't making money off of this) would think "the longer that guy has been making debt payments, the more reliable he is".
The exact opposite is true - if you are a person who has avoided debt, you are likely financially prudent. Which would then make you the superior borrower.
Credit Utilization is almost not incredibly stupid too.
Obviously, the less debt you use the better. Especially if you have access to way more debt on-demand.
But explain to me why "hard credit inquiries" decrease your "score"?
So you're telling me if I work with another reasonable human being and they want to double-check if I am truly an individual who is reasonable using the credit scoring system (which is the agreed-upon mechanism for determining if I am reasonable) - then my fucking score goes down?
So if we use the very system that supposed to help us, we are worse borrowers?
So my landlord who wants to check my credit score (no problem with that) is really hurting my ability to get a fucking credit card?
Diverse credit portfolio is by far the dumbest of these
I don't even know where to start.
So if I have credit card debt, student loan debt, mortgage debt, and a car payment, I am a fucking better borrower than someone who has zero debt?
This is absolute nonsense and clearly a ploy to get people to rationalize taking on more debt - "it will help increase your credit score!".
Come on people. How on earth would this make you a more reliable borrower?
If you have only a credit card that you pay off in full every month, and no student debt/home mortgage debt, you are by far the more financially sound borrower IN EVERY SINGLE SCENARIO.
I'm not even going to provide you strategies on how to "build your credit score".
One, the system is stupid and I'd rather spend my time building a better one (details provided below).
And two, just pay your bills. It's not fucking rocket science.
So here are a few ideas for a new system:
Every individual starts with 50 points (as we love numbers).
Your lowest score can be zero - no one will lend you a dime.
Your highest score can be 100 - you can borrow 5X your current assets.
No one should be lent more than 5 times their assets. And even 5 times is kind of crazy.
For example, if I have $100,000 in total assets, someone should not lend me more than $500,000 (even those I'm prudent enough to accumulate a solid savings amount).
Every year you avoid adding net debt, you get a +2
Every month you pay all your bills on time, you can a + (1/12).
Every year you save +10% of your salary = +1
Every year you save +25% of your salary = +2
Every year your save +50% of your salary = +5
Every year you add net debt, -2.
Every month you miss a payment (-2/12).
Every year you overspend by 10% = -2
Every year you overspend by 25% = -4
Every year you overspend by 50% = -10
Car loan outstanding each year = -1
Other stupid forms of debt outstanding each year (by type): -1
Credit utilization is irrelevant.
Diversity of credit does not help.
Credit history does not help.
The total amount owed only matters NET each year.
You build your own history but in a fair format.
If you are not employed/working or retired - you are introduced to a completely different system (as this & the current FICO both wouldn't make too much sense).
You also now are incentivized to operate for your own financial good, rather than for a credit card/bank's profit line.
With this system, we lend to the people who are the best in managing their wealth. Not those that play the nonsensical current game that was built so they would at some point miss payments & pay insanely high-interest fees.
Let's give it a go.