What Affects Your Credit Score and Why It’s the Worst

At one point or another, you’ve probably looked at your credit score and either been stressed out or very proud of yourself. That’s because society puts so much emphasis on the almighty FICO score—as if it determines your chances at wealth, happiness and success.

But I’m here to tell you guys—that’s a lie.

Your credit score isn’t an indication of success at all, or even how much money you have. In fact, you could inherit a million dollars today from Aunt Ira in Idaho, and your credit score wouldn’t go up one single point.

A credit score doesn’t show whether or not you’re winning with money. What it does show is how much you love debt.

If that surprises you, check out the five things that affect your credit score.

1. Your Debt Payment History

Your debt payment history affects your credit score the most, accounting for 35% of the total number. Which makes sense, because when lenders use your credit score to decide if they want to lend you money, they want to make sure you’ll pay them back. So they look at your track record of debt payment.

This indicator looks at things like your credit card history, mortgage payments and car loans. If you’ve ever been late on a payment, even just once, it’ll ding your credit score. Bigger payment issues like repossession, foreclosure and bankruptcy will sink your score real quick.

2. The Amount of Debt You Have

The amount of debt you have is used to predict if you’re likely to experience money trouble in the future. If you don’t have a lot of debt right now, the theory is that there’s a lower risk of you taking on more debt. This makes up 30% of your credit score.

FICO also takes into consideration how many open credit accounts you have, and how much you use them. This is called a debt-to-available-credit ratio. FICO wants to see that your debt doesn’t approach or exceed your credit limit. Let’s say, for example, you have a credit card with a $1,000 limit, and you carry a $750 balance from month to month. It will look like you’re using too much of your available credit, and that could ding your score.

See how dumb this is? You have to strike the perfect balance of getting just enough debt so you can have a credit score—but not too much. This reminds me of when my favorite show, Friends, introduced Emily in season four. A little bit of Emily seemed harmless—she made Ross happy at first. But by season five it was like, Whoa, calm down, Emily.

And, in my opinion, just like debt, Friends could’ve done without Emily.

3. Length of Your Debt History

Do you remember when you opened up your first credit card account? If you’re like a lot of Americans, it was probably when you were in college. Everyone told you to hurry up and get one so you could build your credit score.

The length of your credit card history makes up 15% of your total FICO score. The longer you’ve had open accounts and paid them on time, the more positively it affects your score.

What credit card companies don’t want you to know is that in all those years using credit cards, you’ll spend thousands more on purchases and hundreds more in interest. Research shows that you’ll spend more when swiping a card versus paying with your hard-earned cash.1 And if we tack the typical interest rate of about 18% onto the average credit card debt of $6,506, it totals an extra $1171 per year. So, it’s not cheap to build up a credit score!2

Once again, none of this proves how much money you actually have. In fact, studies show that households with the lowest income level have the highest percentage of credit card debt.3 To me, that stat tells the sad, real story about what a good credit score is costing Americans.

4. Types of Debt

There are two types of debt your credit score considers: installment loans and revolving accounts.

An installment loan would be a mortgage or car loan, where the borrowed amount is paid back in a set number of payments. A revolving account would be a credit card that you can use and borrow from, ongoing, until you reach the limit.

This affects your credit score by only 10%, but since it’s an “I love debt” score, FICO wants to see as many types of debt as possible.

5. Number of Credit Inquiries

Your credit report is pulled anytime you apply for a loan or credit account. And several inquiries within a short period of time will negatively affect your credit score for an entire year!

You guys, the whole reason to have a good credit score is to get approved to borrow more money—but when you actually apply to do that, it dings your credit score.

Can you tell I’m passionate about how flawed all of this is?

A credit score has nothing to do with how well you handle your money—it’s all about how much you play around with debt.

Your credit score is solely built on how much debt you have, what kind of debt you have, how long you’ve had debt, and how you’ve paid your debt. That’s it.

And you guys, you don’t even need a credit score. I don’t have one, and I have a car, a house . . . I even have friends. Crazy, I know.

But a lot of people worry you can’t do things like rent an apartment or get approved for a mortgage without one. Well, it will take something called manual underwriting—but you totally can! Check out my video below for more on that:

The best way to pay for things is with cash, not credit. But if you’re one of the millions of Americans who bought into these lies and wound up deep in debt, I want to help you.

Financial Peace University is a proven plan to get out of debt and build wealth. You’ll get practical tips that actually work. It isn’t a stuffy finance course—in fact, I promise we’ll laugh a lot along the way!

Say good-bye to money stress and sign up for Financial Peace University today.