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The Credit Score Breakdown: Don’t Believe the Hype

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Why are we obsessed in America with the credit score? Is it a sign of winning with money? You may be surprised to learn what is in the credit score breakdown, what it means, and the myth’s surrounding its use.

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The Breakdown of the Credit Score (FICO)

Most of us know what the credit or FICO score is, but very few Americans know the score is based on.

Your credit score consists of the following:

  • 35% is Payment History: How well you kept up with payments. 
  • 30% is Debt Level: How much debt you have. Too much is bad for your score, not enough can lower your score.
  • 15% is Length of History: The longer you stay in debt, the better your score. Not enough history of borrowing money counts against you.
  • 10% is New Credit: How much new credit are you taking on?
  • 10% is Type of Credit: The type of credit matters. The bigger the better especially secured debts such as a house.

Why Do You Need a Credit Score?

You need a good credit score to borrow money at a decent interest rate for purchases such as:

  • buying a home (not always)
  • an auto loan or auto lease
  • financing an appliance or furniture
  • business loan

What the Credit Score Doesn’t Tell You

Having a high credit score does not show how well you are doing financially? Actually, it is the opposite.

For example, let’s say that you pay everything with cash, no credit cards, a decent amount of savings in your retirement, and you own your home mortgage free. Your credit score may be zero or on the way down to zero. You may not be able to qualify to rent an apartment, but you may be able to buy the complex. How backwards is that.

My wife and I don’t own credit cards, we pay for things with cash, and are close to paying off the mortgage. Our credit score is going down, but our net-worth is going up. Critics may say, “what if you need to borrow money?” My answer is that I don’t need to because we have a plan for our money. That includes budgeting, saving for emergencies, and saving and paying for large purchases with cash.

And yes, if want to finance a home, you can find a quality mortgage broker that actually loans money to those who are worth the risk, and have cash in the bank.

We have been on both sides of the fence, and we like the debt free side better. Heck with you Mr. FICO.

Question: Have you always believed that keeping a high credit score is important? If so, is it based on our culture or the real mathematics? 

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