The Truth About Your Credit Score

The dreaded FICO score. It’s that number that’s associated with every credit report. We all know about it—most people have one—but what does the credit score really mean?

Like it or not, your credit score is not an indicator of winning financially. All it tells you is whether you are good at borrowing money and paying it back. That’s it.

But let’s take a deeper look. How is your FICO score determined?

  • 35% of your score is based on your debt history.
  • 30% is based on your debt level.
  • 15% is based on the length of time you’ve been in debt.
  • 10% is based on new debt.
  • 10% is based on type of debt.

It’s the I-Love-Debt Score

Your FICO score is an I-love-debt score, isn’t it? Does it factor in your income—or, even better, your debt-to-income ratio? Nope. Does it factor in your savings accounts, net worth—anything other than debt? Absolutely not.

The only way to have a good credit score is to go into debt, stay in debt, and continually pay your accounts perfectly—without adding too much debt or paying too much off. In other words, stay in debt for as long as you can. How ridiculous is that?

Now, if you are on Dave’s plan—paying off old debt and not opening any new debt—then you’ll eventually reach the point of being debt-free. At first, you’ll pay off credit cards, car and student loans and things like that. Then, one sweet day, you’ll finally knock off that mortgage.

After killing all that debt, your credit score will become “indeterminable.” This is great news! By this point in your life, you haven’t taken out a loan in years, you’ve saved a ton of money, and you’re paying cash for everything. So you don’t need a credit score, anyway, since you don’t plan on using credit!

Getting a Mortgage Without a Credit Score

Let’s go back a few years, though—back before you paid off that mortgage. How can you get a mortgage without a credit score in the first place? Isn’t this magic number your key to the world of mortgages and homeownership?

Actually, no, it isn’t. You can get a mortgage without a credit score. How so? Manual underwriting.

Not every lender is going to do manual underwriting—which is basically when they use a little common sense and look at factors like your income and not just your credit score. Churchill Mortgage is the lender we recommend for manual underwriting.

Now, this doesn’t mean that just anyone can walk into a bank or mortgage lender and walk out with a home loan using manual underwriting. Remember, this is the way weird people do it, so there are some requirements you’ve got to live up to. Specifically, you must:

  • Put at least 20% down on your home.
  • Choose a 15-year, fixed-rate conventional mortgage.
  • Have a strong employment history and personal income to support the loan.
  • Demonstrate 4–6 trade lines that span 18–24 months. These are just regularly recurring expenses such as rent, electric bills, water bills, cell phones, etc.

Also, your old credit history has to be in good shape. Even if you have a zero score, the old history is still there and impacts the loan decision. If you have an old history of late or missing payments, then you could have some problems.

You Can Live Without It!

Now don’t go out and trash your credit score and say “Dave Ramsey told me to!” That’s not what we’re saying. But we will tell you not to bow at the altar of the “Great FICO.” In other words, don’t worship your credit score—because you can live without it.

Dump debt, save money, and pay cash. Do that and you will be well on your way toward building wealth—not your credit score. And what’s more important?