Why Are Credit Scores So Important?

No doubt you’ve heard of the acronym FICO. After a quick Google search, you come to find out that it’s not the name of Warren Buffet’s pet dog, but actually an extremely complicated algorithm that summarizes the likelihood you’ll repay your loans in one easy number. The number will range from 300 (unlikely to repay) to 850 (very likely to repay). A good score is generally anything over 650. As you can imagine the more likely you are to repay a loan, the better rate you can receive on your loans. This basic principle drives millions of people to strive for the best FICO score possible. But have you ever stopped and asked ‘why’? What’s the point? 

I did.

I put that question to Google--Google’s response? “Tips to earn a higher score” “Manage your FICO score” and “Raise your score” where a sample of the results. In fact, nearly every hit was a strategy on how to keep a good score. It seems that not too many people are asking, “What’s the point?”

Now that you’re asking the right question... The point of a good credit score is to lose less money after you’ve already decided to lose it. Seriously. Credit scores are derived primarily on debt, whether or not you’ve repaid the money that you’ve borrowed in the past. Look over your last credit card statement. How many of those purchases increased in value? You’ve lost money on those purchases so that you’re FICO score would go up, thereby increasing your capacity to lose even more money in the future. FICO enthusiasts will tell you that a good score allows you to get a better rate on both a car loan and a home loan. As we’ve noted, both of these are poor investments and loose money in the long run. Thanks FICO for making it possible for me to lose more money faster. 

In this regard, FICO is no different than any other discretionary, fun(!) purchase. You shouldn’t decide not to buy your dream home simply because its a poor investment just like you shouldn’t decide not to buy a TV or a haircut because they are bad investments. If you have already committed to driving a brand new car that you will lose a huge amount on, a solid FICO score will help you lose a little less.