Your credit score is not a measure of how good you are with money

What is actually in the number?

FICO publishes the weights, and they are worth reading slowly, because what is missing from them is the whole story. Payment history is about 35% of the score. Amounts owed — mostly how much of your available credit you are using — is about 30%. Length of credit history is 15%. New credit is 10%. Credit mix, meaning how many different kinds of debt you have handled, is the last 10%.

Now the list of things that are not in it at all: your income. Your savings. Your investments. Your net worth. Whether you own your home outright. Whether you have a year of expenses in the bank. Whether you have ever been late on rent, which is not reported unless somebody chooses to report it. None of that touches the number.

So it is possible — routine, in fact — to have no debt, a paid-off house, two years of expenses saved and a perfectly good income, and to have no usable score at all, because you have not borrowed anything recently. The industry has a name for those people. They are called credit invisible, which tells you whose point of view the naming is done from.

In the score: how you have handled borrowed money.

Not in the score: how much money you have, how much you earn, or whether you need to borrow at all.

Who is the score for?

Fair Isaac Corporation is a public company. It does not sell you anything and it is not trying to. Its customers are lenders, and what it sells them is a prediction: the likelihood that a given borrower goes ninety days delinquent in the next two years. That is the actual definition. The number is not a grade for your character or a summary of your financial health. It is a risk estimate, priced and sold to the people deciding what interest rate to charge you.

Once you see it that way, the parts of the scoring model that seem perverse stop being perverse. Closing a credit card you no longer use can lower your score, because it reduces your available credit and shortens your average account age. Paying off a car loan early can lower it, because it thins out your credit mix. Having never borrowed at all is worse for the number than having borrowed and repaid, because a lender learns nothing from an empty file.

None of those actions make you worse with money. Every one of them makes you a less legible customer. The score is not malfunctioning when it punishes them — it is doing precisely the job it was sold to do, which is to describe you to a lender, in a lender’s terms, for a lender’s purposes.

Where do the rewards points come from?

A rewards card pays you 2% back, and that money has to come from somewhere. There are only two places it can come from, and neither of them is the bank being generous.

The first is interchange — the fee the merchant pays every time you tap the card, typically somewhere between 1.5% and 3.5% in the US, and deliberately higher on premium rewards cards than on plain ones. The merchant does not absorb that; it goes into the shelf price, which everybody pays, including the people paying cash.

The second place is interest and fees, and it is the larger one for the richest rewards programmes. Credit card APRs have been sitting north of 20% on average, and Americans collectively carry well over a trillion dollars of revolving card balances. The people paying that interest are, overwhelmingly, not the people flying on points. They are the people who could not clear the balance this month.

Economists have measured the direction of the transfer rather than just asserting it. The best-known study is a Boston Fed working paper by Schuh, Shy and Stavins, which found that the combination of interchange and rewards moves money from cash users to card users, and from lower-income households to higher-income ones. The mechanism is not subtle. Somebody revolving a $4,000 balance at 24% is paying roughly $960 a year in interest, and a slice of that funds the lounge access of somebody who clears their statement every month and never pays a cent of it.

If you pay your card in full and collect the points, you are not doing anything wrong and you are not the villain here. But it is worth being clear-eyed about what the arrangement is: it is a rebate scheme funded substantially by people who are struggling, paid to people who are not, and administered by a bank that keeps the difference. It is marketed as a reward for being good with money. It is closer to a dividend on somebody else’s bad month.

So who wins?

Follow each thread and it ends in the same place.

A high score means a lender will lend to you more cheaply, which is only worth something if you borrow. Chasing a higher score means keeping accounts open, keeping a mix of debt types, and staying legible as a borrower — which is to say, staying in the system. Rewards make spending feel like earning, and the studies on this are consistent and old: people spend more per transaction on a card than in cash, and more again when there is a points multiplier attached.

The bank earns interchange when you spend, interest when you carry, a fee when you are late, and an annual fee for the privilege. The scoring company earns a fee every time somebody pulls your file. The only participant whose position improves from a rising score, by itself, is the one selling you credit.

This is not a conspiracy and nobody needs to have arranged it. It is just what an industry optimises for when the thing being measured is profitability-to-lenders and everybody has agreed to treat that number as a report card.

What actually makes you secure?

Three things, none of which appear in the score.

Money, meaning cash you can reach today. An emergency fund is what turns a broken transmission from a debt event into an annoying Saturday. It is the single highest-leverage financial position most people can hold, and it is invisible to FICO.

Income, meaning money arriving reliably. Underwriters care about this enormously — it is on every mortgage application — but it is not in the score, which is why the score and the decision are two different things even to the lender.

No debt, meaning nothing compounding against you. A person with no payments due is not made safer by a number describing how well they would handle payments.

Those three are also, not coincidentally, the only three things you can actually change by acting. You cannot decide to have a longer credit history. You can decide to have four months of expenses saved, and the second of those changes what happens to you when something goes wrong.

Money you can reach today.

Income arriving reliably.

Nothing compounding against you.

What should you do instead?

Stop treating the score as a scoreboard and start treating it as a document about you held by a third party — which is what it is. Check it, because errors are common and expensive and you have a legal right to dispute them. Do not optimise for it.

Measure the things that describe your actual position instead: what came in, what went out, what is left, and how many months you could survive without the first of those. Those are the figures that decide what happens to you in a bad month, and none of them require anybody’s permission to improve.

If you are carrying card debt, the interest rate on it is a guaranteed, tax-free, risk-free return on every dollar you put against it — better than almost anything you can buy. That is the number worth watching. Not the three digits describing how appealing you look to the people charging it.

Where this argument is weakest

The honest limit of this argument is that a credit score is still a gate other people control, and refusing to have one has real costs. Landlords screen on it. Insurers in most US states price on a credit-based insurance score. Utilities ask for deposits without one. A mortgage without a score means manual underwriting, which exists — FHA lenders do it — but means a smaller pool of lenders and more paperwork. "You do not need a credit score" is true about what makes you financially secure and false about what makes an application easy. Deciding to ignore the score is a decision with a price, and anybody telling you it is free is selling something too.