For those of you not “in the know,” FICO (Fair Isaac Co.) is the company that has tasked itself with reducing your existence in the financial world to a three digit number called a “credit score.” A credit score is a three-digit number which is used to judge your “worthiness” for future borrowing. But FICO’s deity-complex is not even limited to borrowing anymore. The score they slap you with could affect things like insurance rates, utility rates, opportunities to rent an apartment, acceptance at a private school, acceptance for elective medical procedures, and even employment.
In other words, if you couldn’t afford to pay off a debt, you will get slapped with a bad score, which means no one will hire you to work for them ensuring that you are definitely not able to pay off a bad debt. Makes sense, right?
It’s like we’ve all been “incepted” whilst dreaming and convinced to turn our lives completely over to FICO. Indeed, if you look up FICO in “The Saurus” (which is a relative of the dictionary, but strangely has no pictures of dinosaurs) it might say, “Preposterous, presumptuous, pretentious, highfalutin.” This is my way of saying that I didn’t make the rules, and I don’t necessarily agree with them, but in the real-world FICO is the loony king we all must bow to in order to keep our heads (and wallets). That being said, here is one interesting thing about the way FICO works that few people know:
10% of your credit report is determined by the types of accounts that you have, and there are only three types of accounts out there. You have your installment type, including mortgages and car loans, and you have your revolving type which include credit cards, store cards, lines of credit and the like — both of these types of loans, if paid back responsibly and on time, will build your credit score.
But many people don’t know much about the third type, Finance Company loans. These are high-cost, subprime loans from payday lenders, check cashing shops, rent-to-own stores, and subprime mortgage stores (eg. banknamefinancial).
And there’s one little thing about finance company loans that makes them very different from installment or revolving loans. They are AUTOMATICALLY NEGATIVE, even if you pay them back responsibly and on-time!
Like the mild mannered neighbor whose house gives off a peculiar odor in the hot summer months, and the police discover that for years he’s been secretly stashing rooms full of stolen stinky left-footed sneakers. Sorta like that, there’s something about Finance Company loans that just don’t smell right.
Again, it does not matter if you pay these loans back responsibly, the minute you sign on the dotted line you have ensured a drop in you score of about 15-20 points per loan. This is because FICO looks at these subprime lenders as high-risk lenders. If you choose to do business with them you are basically putting on a t-shirt that says, “Member of BFBC (bad financial behavior club),” and on the back it says, “Kick me in the credit score.”
Indeed, if your payday lender were to sing you a pop song it might go something like this:
Hey, I just met you,
And this is crazy,
But here’s your number,
I dropped it eighteen.
It’s hard to look, right?
At your low FICO.
But here’s your number,
Now, they all think you’re psycho!
Like a song that gets stuck in your head, records of doing business with finance companies will be stuck to your credit report for 7 years from the date of your last payment. The good news is that the further in the past your last activity with a finance company, the less negative weight it has on your current score. My advice? Steer clear. And if you already have a Finance Company loan, pay it off as quickly as you can and then wait for time to pass. In a few years we’ll all look back and pretend it never really happened.