This question can only be answered individually, not corporately; so it’s not a question of whether the FICO score matters, but whether it matters to you.
“I start with the premise that the function of leadership is to produce more leaders, not more followers.” – Ralph Nader
I wrote this post to help you realize you have a choice, so you can help others realize they have a choice.
The reality of responsible choice
It is often said that music and art reflect the society within which they are created. Much the same, financial systems, regardless of right or wrong, also reflect the culture in which they operate.
Much like we choose which artists and musicians to follow, we can also choose which financial systems to adhere to and which to disregard.
Yes, the FICO score is here to stay, but that doesn’t mean we have to follow it. The decision is ours to make.
Are the foundations and measurements of the FICO score worthy of our allegiance? I suppose that depends on whether or not it accounts for our chosen lifestyle.
Before taking your stance be sure to give the foundational components of the score careful consideration. If you determine the FICO score accounts for the financial lifestyle you wish to live, then follow its guidelines with confidence. If your findings are contrariwise, then exercise your choice to abandon its guidelines.
Study the score, make your choice, and be ready to accept the benefits and challenges that accompany your choice.
Examining the FICO score
The FICO score itself is not inherently evil, it’s simply a system for gaging the creditworthiness of the indebted. It’s amoral.
FICO is praised by some for it’s ability to separate the wheat from the chaff. It is discredited by others because it fails to account for the debt averse. It is even hated by some and viewed as an evil system of banker control and world domination. Well… let’s take a look at what it really is.
What is a credit score?
A credit score is a numerical expression based on a statistical analysis of a person’s credit files, to represent the creditworthiness of that person. A credit score is primarily based on credit report information, typically sourced from credit bureaus. Credit scoring is not limited to banks. Other organizations, such as mobile phone companies, insurance companies, employers, landlords, and government departments employ the same techniques. Credit scoring also has a lot of overlap with data mining, which uses many similar techniques. 
Who is FICO?
FICO is a publicly-traded corporation (under the ticker symbol FICO) that created the best-known and most widely used credit score model in the United States. 
How does FICO determine the score?
Although the exact formulas for calculating credit scores are secret, FICO has disclosed the following components:
- 35% = Payment history – Late payments on bills, such as a mortgage, credit card or automobile loan, can cause a FICO score to drop. Paying bills on time will improve your FICO score.
- 30% = Credit utilization – The ratio of current revolving debt (such as credit card balances) to the total available revolving credit or credit limit. You can improve your FICO score by paying off debt and lowering the credit utilization ratio. Alternatively, applying for and receiving the credit limit increase will also drive down the utilization ratio. Closing of existing revolving accounts will typically adversely affect this ratio and therefore have a negative impact on their FICO score.
- 15% = Length of credit history – As your credit history ages it can have a positive impact on their FICO score.
- 10% = Types of credit used (installment, revolving, consumer finance, mortgage) – You can benefit by having a history of managing different types of credit.
- 10% = Recent search for credit – Credit inquiries, which occur when you are seeking new credit, can hurt your score. Individuals shopping for a mortgage or auto loan over a short period will likely not experience a decrease in their scores as a result of these types of inquiries, however. While all credit inquiries are recorded and displayed on your credit report for a period of time, credit inquiries that were made yourself (to check your credit), by your employer (for employee verification) or by companies initiating prescreened offers of credit or insurance do not have any impact on your credit score.
There are other special factors which can weigh on the FICO score.
- Any money owed because of a court judgment, tax lien, etc. carry an additional negative penalty, especially when recent.
- Having one or more consumer finance credit accounts may also be a negative. 
FICO score = responsible use of debt
My personal stance on the FICO score
I am debt averse, so I do not need the FICO score. The score fails me because its calculations do not account for my financial modus operandi of complete debt avoidance. I disregard it as an influence in my life because it fails me.
I understand the ramifications of my choice and accept all challenges it will bring. The challenges will come, and I look forward to them. Standing firm in my educated decision will help me seek out companies that do account for my financial lifestyle. It will help me find companies that do not operate solely on a system that fails me. Be sure you understand the challenges before making your decision.
Those who determine the FICO score does matter must live within the rules of the score. That is their challenge. Just as I should not be faulted for my choice, they should not be faulted for theirs.
Always think for yourself
I never plan to borrow money again. If an insurance company penalizes me because I am debt averse, I will get a different insurance company. Rather than doing business with companies who handcuff me, I will seek those who gladly work with people such as myself. I know they’re out there.
What will you do?
Never be afraid to think *and live* outside the box, and never feel like you need to apologize when you do.
If you want to know your FICO score
Visit Credit Sesame (affiliate). If you don’t care, then don’t look – I don’t.
 Wikipedia – Credit score.
 Wikipedia – FICO score.
Andrew @ Money Crashers says
Matt, thanks for this amazing and thorough breakdown of the FICO score. It’s always been kind of a black box for me but this is very eye-opening. Great stuff!
David Bibby says
I haven’t looked at my FICO score in well over two years. I’m currently debt free except for my mortgage and I plan to start accelerating the payoff in the near future.
I’m not worried about the score itself because I don’t plan to borrow money ever again. But it does concern me when I hear people mention that the FICO score can be used by potential employers to aid in their determination to hire you. Is there any truth to that claim? I haven’t found any.
Matt Jabs says
Some do, but not many. As far as I have read, employers who use FICO as a basis for employment are a very small cross section of the pool and are comprised mostly of large corporations.
This is a great post on a much broader scale. Credit scores are one of those metrics by which society likes to ‘measure’ us. Each of us are put into different boxes, and our worth is largely determined by the box we’re in.
While there might be some merit in such measurements (mostly to outsiders), ultimately they’re dehumanizing. Sorry, I’m not a credit score!
Things are out of hand when people find themselves either a) agonizing over their credit scores or b) configuring their credit patterns and tendencies in a way that will enable them to game the system for a better score. When that happens, we’re beholden to a number and the system is running us.
Matt, you’re taking a rational and definitive stand with your statement, “The score fails me because its calculations do not account for my financial modus operandi of complete debt avoidance. I disregard it as an influence in my life because it fails me.”
Much of the crap that fills our heads and keeps us up worrying at night are externally imposed metrics that are either impossible to reach or fail to adequately define us as human beings. The good news is that we don’t always need to participate.
I like how Dave Ramsey describes the FICO score. He calls it a “I love debt score”.
We’ve been debt free for a couple of years now except for our mortgage, and we dropped most of our credit cards except for one of them. That one we use only a few times a year and pay it off right away. So we don’t use a lot of credit or debt. Still our FICO is pretty high, and has remain almost unchanged for the past few years. In any event, that really doesn’t matter to me as we don’t really plan on taking on any new debt anytime soon. To us our FICO is essentially meaningless.
Another thing to consider is how your FICO score affects other areas of your life unrelated to debt. It’s used in calculating your premiums for car insurance and homeowner’s insurance. It’s sometimes used by employers when hiring someone who handles money and occasionally by banks when you open an account.
So keep an eye on it, but certainly don’t obsess.
Matt Jabs says
Thanks for the comment Ron, I did sort of address this in the article, although not deeply.
Chris Gagner @ SmartPF.com says
I completely agree with not caring much about my FICO score. Employers and even landlords sometimes now look a FICO to determine if you’re “trustworthy”. It seems that we assume that everybody has debt.
Guilty. I check almost every month, because for me it matters. I am going to want to sell my home and buy another one in the next year or so – and thus the FICO score will be the #1 determinent in my mortgage rate.
Great take on the FICO score, Matt. You are right, in that it only matters if credit is a need for you. It would be helpful to see some more concrete information about people dealing with insurance issues b/c of their score (i.e. how they found good insurance despite the low or no score, etc.)
Matt Jabs says
I agree. It would be really helpful to have a list of insurance companies whose underwriting policy incorporates calculations for debt averse people.
Matt Angelo says
Sometimes its really worth it to take out a loan (mortgage). In most other cases, if you never go into debt, you don’t need loans, and FICO isn’t really worth much. However, rumor is FICO is important now for landing a job. Not sure if this tactic will remain legal but for the time being that makes it important.
Matt this a great and well thought out post. Personally, I am tired of the tyranny of the FICO score. I stand with you that it is important to find companies that work with people who try to live debt free on a cash basis. Both in the realms of services and employment. Ones personal worthiness as an individual should not be determined by so narrow a gauge as ones credit score. There are many other factors that go into determining the character of an individual. I have had a sort of sketchy employment history and have done many different things. I have learned so many practical skills that way without the benefit of a college education (and the typical debt load that accompanies it). But, as you stated in your post, one must accept the challenges inherent in ones chosen course. It is difficult for me to find an employer who does not look at the typical measurements when making a decision about whom to employ. It can be done, however. I have also experienced limitations in the area of credit because of my lifestyle, but I have chosen not to allow those limitations to control me. In a practical application of the things I have learned by the old American strategy of flying by the seat of your pants, I have determined that my skills are much better utilized by becoming a free thinker. I analyze the benefits of being employed versus being an entrepreneur. I choose to learn the skills to live off the grid and to live according to a budget and become debt free (with your help!) so I am not controlled by my FICO score. Therefore, the government, employers, public utilities and the IRS have much less control over me and the quality of my life.
Matt Jabs says
Awesome mom. My goals are to increase freedom, live a mission centered life, and to help others do the same… so it appears we’re kindred spirits as we’ve known all along! I’m very proud of you, love you very much, and am excited to help however possible. Life is to be lived!
I hear a lot of talk about how the FICO can effect (or is affect?) your insurance rates or even your mortgage rates. The truth is that unless you have a pretty low score it doesn’t really matter. That is what Underwriting is for. When I purchased my home a year ago. I was per-approved almost on the spot because of my FICO. However, that didn’t mean that the bank was just going to hand me the money. It went to underwriting to be reviewed to see if I would be trustworthy enough to loan money to based on my past history. My FICO has actually dropped over the past years as I’ve paid off the cards and auto loans. Underwriting will not look at this and say well “his score is dropping, so let not give him the loan or a higher rate” They use it more as a starting point..
Steve in W MA says
I would imagine that the only reason FICO might affect a job search in any way is if your score is low, not if you don’t have a score in the first place.
Matt Jabs says
Wow! Great information. Thanks for the break down!
Hm… I didn’t know your credit score could affect car insurance. My husband has a terrible score but a really good rate on insurance.
I agree with you that FICO doesn’t have to matter for everyone. I have a coworker who obsessively checks her score. I reject its importance. Yes, it’s a SOMEWHAT valid measurement of how well someone is handling their finances. But mostly, it’s a barometer for people who know how to play the system. For instance, all the “rules” about keeping your longest standing credit card open and only having so much debt to free credit? That stuff is just a waste of time for me. I reject the idea that anyone NEEDS credit cards, so I cut up all of mine and closed the accounts. My husband and I would very much like to save up cash for a home. I’m not going to obsess over some arbitrary score. As long as I’m paying off my debt and don’t plan to take on anymore (which I don’t), I know the FICO Score isn’t for me! 🙂
Matt Jabs says
I know that some people love their credit cards, but I’m with you, cutting ours up and closing them is very freeing. More debt? No thanks, not any more. Congrats on your moves toward freedom… I’ve got your back.
good take! Eventually my goal is to never have to rely on commercial banks to lend me money making my credit score a non-issue. I will fund my purchases through a series of personal banking systems ( a concept known as becoming your own bank) and never have to worry about getting qualified again.
Steve Sildon says
Great breakdown of the FICO. Bottom line is that a FICO score is merely a “signal” of creditworthiness and there is still a certain amount of “noise” in a FICO score that does not properly reflect a true measure of credit worthiness.
Elena Moiseenko says
I love your article – you have a great point there. Instead of worrying about our FICO score, why don’t we just try to get rid of all our debt and stay debt free for ever.
I think everyone should follow this rule. How did the past generations do without credit cards and a bunch of loans?.. They did just fine!
Debt Donkey says
GREAT article! You hit the nail on the head. I think it is incredibly simpler to save, use cash, be committed to living within your means, and tell FICO to take a hike. I especially like the way you describe the FICO score “failing” you in terms of your lifestyle and goals. If you commit to a lifestyle without it, it does in fact “fail” to measure your financial life in a meaningful way. Great post, and great blog. Thanks for your insight on this.
Matt Jabs says
I loved writing this article… glad it hits home with you.
FICO in and of it’s self is not evil but it is often used in ways that are evil or just illresponcible.
It should only matter when borrowing money as that’s why it was created using it for anything else is using it for things it was never meant for.
The truth is FICO is flawed as it attempts to over simplify something that simply cannot be summed up as a single number.
Someone who ended up in debt because they attempted to live beyond their means ie the high roller is a far greater risk for future loans then someone who ended up in debt due to an unforeseen cost such as a something like a medical expense,flood,or fire.
FICO does not account for this.
In a way over dependance on FICO is partly responsible for the banking meltdown of 2008.
Matt, I love all the DIY tips and i have been making my own homemade items off and on my whole life..some for fun, some to save money, some to just get what i really want when I don’t find it in the store. But I do have a problem. My Husband was 31 when we met and never had any debt what so ever. Always lived on a cash basis and as a single man it worked for him. When he met me he wanted to get married and have a family (I am older, divorced with a 19 yr old son), but when he tried to buy me an engagement ring he got turned down left and right because he had no FICO score. In fact a couple places asked him if he had any other names because he didn’t even come up in the system. He ended up having to get someone else to co-sign for to buy the ring he wanted so he could propose and it has made him real awful that after being so independent his whole life he now needs help for something so simple. We have been married 1 month now and are looking at getting a better vehicle and buying a house since i rent a small place we need to do this soon. We do not have a large savings since we just had a wedding but we have a decent income and no real debt but that 1 payment. You would think his lack of bad credit is a good thing but so far we are being told his lack of any credit is even worse. My question is do know of any financial institutions that will work with someone who doesn’t have a long credit history. We have tried banks ect in our area and all use FICO scores ect. Do you have any advice for someone like us?? Thanks
Matt Jabs says
Hi Andrea. eCredable is a great alternative to FICO, check it out. My advice is to save up and pay cash for rings, cars, and even homes – that’s what we do. God bless.