Credit Score Importance While Pursuing a Debt Free Lifestyle

The FICO (or credit) score is a measure of how you manage credit – or debt. A FICO score is a three digit number created via a top-secret formula by the Fair Issac Company.

The FICO score is calculated based on the amount of debt you have, your payment history, and the length of time accounts have been open among other things. A score closer to the maximum of 850 connotes good things about your risk worthiness in the eyes of the financial industry.

As someone who encourages a break from the reliance on debt, theoretically I should also rail against an appreciation of all things FICO. Most famously, Uncle Dave (Ramsey) calls the FICO score an “I love debt score”. He’s known to tout his zero credit score and freely shares a disdain for all things FICO.

I get it. I do.

 Credit Score to Pursue Debt Free Living

In the meantime, there are practical reasons to care about and thus work to improve your credit report and thus your credit score.

  • You’ll want to develop a disciplined financial management approach.  By far, the best way to improve your report and score over time is to make on-time payments. Hosting regular budget review meetings and setting your accounts with automatic payments will help you develop the discipline for on-time payments.
  • You’ll have a barometer to measure progress. Setting a concrete goal to reach can serve as motivation to fix your financial affairs. A FICO score improvement is a tangible metric. When paying off debt, your debt to available credit ratio and credit utilization will improve which positively impacts your score as well. Who doesn’t love an improvement in three digit numbers?
  • You can save money. Better FICO scores allow you to qualify for lower interest rates. Refinancing existing debts to a lower interest rate increases the amount of money available to reduce debt and accelerate your journey to debt freedom.
  • You’ll qualify for lower insurance rates, deposit amounts, or more favorable contracts agreements. Like it or not, we live in a world where the financial industry uses the FICO score to make judgement calls. A FICO score may a factor into employment for certain industries. A cell phone company will waive deposits for those with higher scores.
  • You’ll have access to better rental housing options. Landlords use them. As a landlord, the FICO score is the first level of scrutiny. I won’t accept applications below a certain level. A higher score makes better, plentiful residential options available. You may be a very nice person, but that doesn’t come across in the three digit score. Landlords want your rent on time and a history of how well you’ve paid other bills is the standard use to predict future behavior.

I don’t suggest anyone create debt in or order to build credit. Use debt dumping strategies to build your credit score and keep it high until all debt is paid in full (including mortgages). Then, we can ignore the FICO score all together like Uncle Dave.

That’s my goal.

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