It’s a funny thing. Before my financial education started, I would have told you that credit score was a really important thing. Deven though I wouldn’t have had any idea what mine actually was. But now, it’s not something I think about all that often. However, I see a lot of questions come up online about credit scores so I think it is worth digging into. As an experiment, let’s start analyzing my credit score and we examine why it does matter and then why it may not matter so much.
What is a credit score?
Very simply, your credit score is a 3 digit score ranging from 300 to 850. The higher your score, the better. This score was first instituted by FICO.
There are three main credit agencies (Equifax, Experian, and TransUnion) that compile and distribute these scores.
And in the end, your credit score is a very generalized measure of your creditworthiness. It essentially tells others how likely you are to pay back any debts you accrue.
What is a good credit score?
Generally, anything above 720 is usually considered good.
Here are the categories:
- Excellent: 800–850
- Very Good: 740–799
- Good: 670–739
- Fair: 580–669
- Poor: 300–579
How does your credit score get calculated?
Great question!
There are 5 main factors that get built into the credit score equation:
- Payment history (35%)
- Amounts owed (30%)
- Length of credit history (15%)
- Types of credit (10%)
- New credit (10%)
The problem however is that all 3 companies use slightly different formulas. And these formulas are not openly available. So there is some variability (many lenders will use an average of all 3 scores) and a lack of transparency. But it is helpful to know the factors involved so you can make any necessary adjustments.
However, these factors don’t always work perfectly. For instance, let’s say you pay off a loan that is 10 years old. The length of your credit history (oldest account) will decrease. This will negatively impact your score. But is it bad that you paid off that loan? No way! It would be way worse advice to keep accusing interest on it just to keep your credit score slightly higher. (And don’t talk to me about points! Getting $0.01 back for every $1 spent and paying 20+% interest on the balance makes no financial sense or else the credit companies wouldn’t do it!)
Like anything, even net worth, credit score is an imperfect measurement.
Why credit score matters
Like we said before, credit score is a vague measure of your creditworthiness. So, a higher credit score means that you are more likely to receive a line of credit and even get access to lower interest rates.
This obviously means more access to things like mortgages and car loans. And lower interest rates means less money spent in terms of interest over time.
So those are good things.
But before I get into why credit score may not actually matter that much, let’s get into analyzing my credit score…
Analyzing my credit score
This history is going to start around June 2020. The reason it’s going to start then is because before that time, I never had any clue what my credit score was.
And that alone is interesting, right?
I was able to secure over $400,000 in federal and private student loans without any income and without even an inkling of my credit score. That itself is a tricky thing to sort out. Student loans are obviously important to gain a higher education. But no one would otherwise give a teenager this kind of money with no income and no assets. Maybe our higher education costs are getting a bit out of control…
Anyway I digress.
Back to analyzing my credit score
In June 2020, Selenid and I moved from NYC to Buffalo. We had to go to our local bank branch to open and account and set some things up. After doing this, they asked if I knew about their online credit score check feature. I said no and she pulled mine up. My credit score was 620.
You will recall from the hierarchy above that this is considered a “fair” score. And that may be putting it lightly.
Anyway, that’s what happens when you have over $500k in debt, minimal payments made on that debt, no assets, minimal savings, and credit checks. The only “positive” thing I had going for me on the report was the length of my credit history (oldest account).
Since that time, I started tracking my credit score every once in a while. Through my bank, Chase, I had access to Experian scores and through Credit Karma (a free service), I had access to Equifax and TransUnion. Unfortunately, the previous scores I can access only go back so far.
But you can see here a recent run down of my Experian credit scores over time:
Even in just this short time, you can see some pretty big swings. So let’s take a look at a few…
Most recently in April 2024, my score spiked by 25 points. This is why:
However, the opposite happened in October 2023 when my score dropped 44 points.
And the reason was pretty much the opposite of above. My credit usage went up as we paid for this vacation using a credit card. We used credit because most would be paid using CME. So our score went down and then back up after we paid it off using CME and cash.
Unfortunately, the available reports don’t go back much further than that so I can analyze exactly. However my score gradually improved from its initial 620, especially as Selenid and I paid off all of our credit care debt within 1 year of my graduating training.
Up until now where my score sits at 808 via Experian and Equifax and 803 via Transunion.
My current credit report
Looks like this:
- 1 revolving account (My Chase credit card, $242)
- 8 installment accounts (7 federal student loan accounts and 1 private loan account that is now actually fully paid off, $273,637)
- 9 real estate accounts (8 rental properties and our home property, $1,801,170)
- 19 closed accounts
- 3 credit checks (for investment property mortgages)
- 0 collections
- 0 public records
Why credit score doesn’t matter
Now that we’ve dove into my credit score history and what goes into it, let’s talk about why credit score may not actually matter.
The reason is because when my credit score was a “fair” 620, we applied for and got a mortgage on our primary home. We also bought our first investment property. And we leased a car (which counts as a lone of credit).
Did my 620 credit score matter? No, not really.
Sure, I’m sure we would’ve gotten slightly better interest rates with a better credit score. But we still got a 5.63% rate for our investment property and a sub-4% rate for our primary home.
Why? Well, it’s simple. Because of my pay check. In fact, despite my credit history, mortgage companies were willing to give me a loan for over $1.5 million on a primary home. That would obviously be a horrible financial move on my part. But they don’t care. Because they felt I could cover the loan. Again, not because of my credit score but because of my (at that time still prospective) income.
For better or worse, your credit score only really matters a lot in terms of access to credit when you have a low income. This disparity is not necessarily fair but it exists.
What I actually think credit scores are good for
For you, as a credit holder and a high income earning physician, I think credit scores are useful for mainly one thing:
- Your credit report provides a nice, neat way to view all of your liabilities
This can really help you get organized as you calculate and track your net worth.
Otherwise, as a high income earner, they really just don’t matter that much. Because of your income, even with a not good score, you could secure lines of credit.
But this does not mean that you should!
In fact, this is were credit scores can become misleading. As I highlighted above, paying off loans in full will often lower your credit score because the length of your credit history gets shorter.
This obviously doesn’t make sense! And that’s why I don’t think anyone needs to be overly concerned about their credit score.
Develop and implement the right financial habits and your credit score will eventually follow in the right direction. And even during that process, you won’t have issues getting access to debt that you may actually want, like mortgages for investment properties, which I consider to be good debt.
And if you are interested in learning the financial habits that will lead you to financial freedom, here they are:
- 7 Financial Habits of Highly Successful Physicians
- The Simple Habits That Will Make You Financially Successful
- 5 Important Ways Patience is a Financial Superpower
What do you think? Do credit scores matter? Have you ever took a turn analyzing your credit score? What did you find? Let me know in the comments below!
Hey Jordan, great synopsis man and that’s great that your credit score is in 800’s because as you buy more properties, you’ll just get those better mortgage rates. I was kind of shocked that paying off an account would lower your credit score as well. I would think that the reason would be that if you were the type to pay off your accounts in full, then you’re not paying extra cash in the form of high interest rates to the credit card companies. Looking from this angle it kind of makes sense that you may not wanna lend credit to somebody that will pay off the loan quickly. FICO scores I believe don’t just look at the ability of a borrower to pay you back, but also the ability for a company to profit as much as possible off the borrower in the long run.