The INSANE Math Behind Your Credit Score (Make It Make Sense)
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- Most of us know what our credit score is, or at least how to find it. But do you know what makes it go up or down? In today's video, we'll pull back the curtain to show you the insane math behind how your credit score is calculated, and you'll find out exactly how to get the best credit score. If you know, you know. But before we jump in, you know what makes my subscriber count go up and down? When you hit that button and then you hit the button again and it undoes what you did, so don't only hit it once. Thank you. - You're welcome.

Okay, before we reveal the mysterious cocktail of factors that determine your credit score, here's a quick refresher on what your credit score is and why people think it's important. Think of your credit score as a grade that tells lenders how likely you are to pay back what you borrow. The most widely used scoring model is the FICO score, which was introduced in 1989. Just like me and Taylor Swift. Coincidence? Yeah, it was a total coincidence. We don't share the same parents. Yet. Mr. Swift, reach out to your boy. Am I a joke to you?

It was started by the Fair Isaac Corporation, hence the cleverly named FICO, as a universal and objective tool for evaluating credit risk. By 1991, the credit score became available from all three major U.S. credit reporting agencies, Experian, Equifax, and TransUnion. Generally, the scores range from 300 to 850, with 850 being considered perfect.

And aiming for that perfect number matters to a whole lot of people out there. So why does your credit score matter? Or why do people think it does? Well, this little number determines what's known as your credit worthiness. But for the record, I think you're worth so much more than credit. Put that on a little Valentine's card, will ya? This credit worthiness affects whether you get approved for loans or credit cards, plus the interest rate and terms that you're offered. On top of that, your credit score can impact job opportunities, insurance rates, and your ability to rent cars and houses.

And in all of these areas, a high score can help you, a low score can hurt you, and having no score at all is actually perfectly fine. More on that later. But first...

First, let's pull back the curtain and reveal how your credit score is calculated. It all starts when lenders report the details of your payments, both the good and the bad and the missing, to one of the three credit bureaus. Then a credit scoring company like FICO or VantageScore takes that data and creates your magic number based on their own scoring model. When you apply for any new debt in the future,

The potential lender does a vibe check with the credit bureaus and uses your score to decide whether to approve you or not. And while the exact mathematical algorithm remains a mystery, they do disclose the factors that go into your score. Here's the breakdown. First, there's your payment history. This makes up the biggest chunk of your credit score, coming in at a whopping 35%. Payment history means how consistently you've made on-time debt payments over the years. The next biggest factor is amount owed.

This is how much debt you owe and how much of your credit limit you're using, aka utilization. This accounts for 30% of your score. Then there's the length of credit history. This is how long you've been in debt and how long you've had open lines of credit. Generally, a longer history leads to a higher score, and that makes up 15% of your overall score. Then you've got new credit, which is how often you apply for and acquire new debt. This one makes up about 10% of your score.

And lastly, your credit mix, which is how many types of debt you have. Things like credit cards, auto loans, student loans, installment loans, mortgages, yada, yada, yada. And you don't have to be the brightest crayon on the box to see a pretty dark theme here. Everything used to calculate your score has to do with debt. Basically, the only way to achieve and maintain a high credit score is to go into debt,

stay in debt and continually pay your debt accounts perfectly without adding too much or paying too much off too soon. So it's really an, I love debt score because all it tells you is how good you are at borrowing money and

and paying it back. Not only that, but you're actually penalized for making smart decisions with money. You paid off your car loan? Awesome! Your score just dropped 15 points. Paid off your student loans early? Congratulations! Your score just dropped 40 points. Closed that credit card account? Minus 10 points for you. And if you think this sounds crazy, you're right. It do be. Most of us have been led to believe that a good credit score is a sign that you're doing well financially. But in reality, a high credit score means you're crushing it with debt management, not money management.

Think about it. Your credit score has nothing to do with your income, your net worth, or how much money you have in the bank. So if you get a huge raise, you inherit a million dollars, it wouldn't impact your score one bit. A credit score only represents your relationship with debt. And contrary to popular belief and roided up hustle culture TikTok bros, financial success is about what you have in the bank, not what you owe to the bank.

You see that down there? That was the mic being dropped. May have missed it. In the wise words of my friend, Rachel Cruz, if your credit score is higher than your bank balance, you're headed in the wrong direction. She says it a lot nicer, but that's how it came out for me. As it turns out, the credit score is an ingenious way for lenders to lure you deeper into their web of debt while convincing you that you're doing great with money. And this little game has caused so many people to fall for debt traps and held them back from building true wealth. Think about this. Why do we want a credit score?

To access more debt. Why do we want to go into debt? To buy things we can't afford and higher credit score. Why do we want a higher credit score? To have more access to debt to buy more stuff we can't afford. Make it make sense. But this is the system we find ourselves in. And it leads us to a valid question. Is the credit score game a necessary evil you have to play in order to live your financial life? Before I get to the answer, let me tell you how to avoid those evil phishing messages you keep getting. The way I do this is by using Delete Me, a sponsor of today's video.

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Just click the link in the description to make it easy on yourself. And speaking of saving money, if you're stashing a lot of cash in a regular old savings account earning dismal interest, it's time to switch over to a high yield savings account like the one offered by Laurel Road, another sponsor of today's video. With online bank Laurel Road, your account balance earns top to your APY. So your money is making you more money, which is great if you're saving up for a big purchase like a down payment on a house or a dozen eggs. Plus with Laurel Road, there's no minimum balance required to open an account,

Okay, back to the question at hand. Is the credit score game a necessary evil you have to play in order to live your financial life? Thankfully, no. Here's a crazy truth about credit scores that may blow your mind. You don't need one.

I said it. I ain't scared. Come at me, bro. One at a time, though. Hey, single file. Also, don't touch me. Hashtag boundaries. It's true. You don't have to play the game. You can live your life without a credit score. In fact, living without it can help you build wealth faster. That's what happened to me. When you decide to pay off all of your consumer debt and cut up your credit cards, you will take back control of your greatest wealth building tool, your income. And with that comes the welcome disappearance of...

of your precious credit score. Yeah, it goes away. And I know that might not sound like something you want, but go with me here. If you're done with debt for good, then you don't need any more credit, which means you don't need a credit score. You see, after I paid off all of my consumer debt years ago, my credit score soon became indeterminable, which is a $10 word for she gone. After becoming debt free, I was invisible in the eyes of the Consumer Financial Protection Bureau, much like I was invisible to girls in high school.

And while it was a lonely existence back then, I'm in good company these days. In 2021, the CFPB reported that about 1 in 10 Americans are credit invisible, amounting to 32 million people. So it's honestly not that uncommon. So if you're ready to put on this cloak of invisibility, I got just the spell for you.

Creditus Dremuvo, JK. There's no wizardry needed for this, which is good because my Arabic Baptist mother is not a fan of Harry Potter and his witchcraft and wizardry. She's more of a Twilight girly. Bite Club, where you at? Now, getting rid of your score takes some old-fashioned effort and a little bit of time. The effort part is getting completely out of debt and closing all accounts. And after about six to 12 months with no debt, no loans, no credit history, and no open lines of credit, your score goes poof.

So at this point, you might be wondering, when is he going to tell us how to get the best credit score? Well, I just did. The best credit score is no score at all.

And before you jump in the comments with, but George, how am I supposed to buy a car, rent an apartment, or buy a house without a credit score? Hey, cool your jets, Jeff. You can do all of these things without a credit score, and I've got the videos and receipts to prove it. I will drop links to those videos in the description so you can check them out later and see that it's possible to live without a credit score. And not just live, but live better. For my Taco Bell fans...

Live Moss. Now, I want to be clear here. No credit score is different from a low credit score. No score equals rad. Low score equals bad. No score means you've avoided debt or gotten out for good. But a low score means you've probably made some money mistakes. And that bad credit score will make it harder for you to rent an apartment or get a mortgage. So if you have a low credit score, don't worry about trying to get it back up. The ultimate hack to fix your credit score is to get rid of it completely by getting current on your payments and getting out of debt for good.

And with some intentionality and good financial standing, you can do all the things you thought you couldn't do without that three-digit number for validation. Will it take a little more effort?

Sure. But it's a heck of a lot better than owing other people money for the rest of your life and playing a stupid, nonsensical game like Settlers of Catan. I'll trade you a chaff of wheat. No! Stop! I want to go home. I don't want to see your expansion board. Sorry, guys. I get real heated over chaffs of wheat. This is what we are. Wool? Sheep! It's not called sheep. It's called wool. Now that you know chasing a high credit score makes the banks richer and richer and puts you further and further from your goals, the question is what will you choose to do about it? If

If you want to know more about how to live life without a credit score, be sure to check out my book, Breaking Free from Broke, The Ultimate Guide to More Money and Less Stress. I wrote a whole chapter on credit scores, and it's totally worth the listen. That's right. It's available as an audiobook read by yours truly, and you can get your copy with the link in the description below.

And if you want to see how I bought a house with no credit score, be sure to watch this video coming up next or click the link in the description. Thanks for watching. We'll see you next time. Hey, real quick before you go, we just launched an audience survey and it would mean the world if you could take the time to fill it out. It's going to help us make more content to help you get better with money. It's in the link in the description below.