I wanted to explore FICO and what individuals associate it with just to get a sense of whether people think it’s a scary thing or not. When I went around and spoke to individuals about what a FICO score meant to them, I got a lot of similar responses. They said things like “It’s a big black box of confusion, so I don’t mess with it” and “FICO is an antiquated metric that is realistically an inaccurate representation of most people’s credit worthiness, including my own.” These conversations were with individuals ranging from age 24 to 32, which is a smaller representation of the community than I would have liked. That being said, they hit on some pretty key points that are worth talking about. Building your FICO score is tough. The people that I spoke with were worried that if they made one wrong move at such a young age, it could haunt their FICO scores and therefore their credit-worthiness for the better part of their adult life.
To back up a bit, a FICO score is a way of assessing a borrower’s reliability to pay back a loan. The FICO score is the most widely recognized credit score in the US and has become the industry standard for lenders all around the country. Although it is an important metric because it has proven to have a reliable risk model, it also makes it difficult for people with a lower FICO score to get a loan that has amenable terms and fees to what they can afford. Many times individuals in their adult life who missed a payment on their student loan at a young age or even on a credit card, one time, have a FICO score that does not represent whether they can pay back a loan reliably. According to the Consumer Financial Protection Bureau (CFPB), there are 45 million people who don't have a FICO score at all and to take it even further, there are 70 million people (30% of adults) who are considered underserved. According to the Federal Trade Commission (FTC), 1 in 5 credit reports contains some sort of error - that's 20%!
What was really interesting and somewhat uplifting in talking to these folks, was that FICO has also proven itself to be a metric that motivates individuals to learn and maintain spending habits that actually ultimately benefit them. Conversely, they all felt like they couldn’t materially impact their FICO scores with small actions that they took. The only action they felt was in their control was paying their credit card bill on time. Paying bills on time wasn’t something they felt would build their FICO score, but rather maintain it.
What I ultimately took from these conversations was that FICO doesn’t have to be something that we’re afraid of ruining, but rather something that can help teach us how to manage our money in a way that benefits us as consumers according to the financial system that we live in. For example, drawing on less than 10% of the credit that is accessible to us at any given time, or being conscious of the number of hard pulls we allow for. Although the little things that we do or do not do, don’t feel like they materially impact our FICO scores, actions taken to maintain FICO scores build good habits. These little things add up over time, and we have more control over our FICO scores than we might think.