THE END OF CREDIT SCORES | Major Changes Explained

What's up, Graham? It's guys here. So, as I'm sure most of you are aware, one of the most important aspects of personal finance, building wealth, and saving a ton of money is your credit score. Those three numbers can very much dictate whether or not you get approved for a home, whether or not you could borrow money, whether or not you'll have access to a credit card, how high or how low your interest rate will be, and even sometimes whether or not you'll be approved for a job.

But that might not be the case for that much longer. Because the other day, articles began to circulate about the potential end of the credit scoring system as we know it, and instead, it would be replaced with an entirely new credit scoring algorithm that would take completely different considerations into effect that don't show up on current credit reports. That could either help you out a lot or it could hurt you depending on your situation.

So let's not waste any time. We'll go into detail about exactly what this new proposal is, what these new changes are, how this is going to impact your credit score, and lastly, what you can do about it. Because even though these changes will make a difference, there are some solutions that you could begin working on today if and when this is actually implemented.

But first, the biggest thing that you could do right now that would make the largest impact on my channel is to smash the like button for the YouTube algorithm. Just one gentle annihilation of that like button will send instantaneous data to the YouTube algorithm who will then begin recommending this video to an even bigger audience who could also gently demolish the like button. So thank you guys so much for doing that!

And as a token of my appreciation, here's a picture of a baby koala. And now, with that said, let's begin the video.

Now, just to quickly bring you up to speed, exactly how your credit score is calculated is one of the biggest mysteries of mankind. Okay, I'm exaggerating. The existence of Bigfoot is pretty important too. But even though we know what has an effect on your score and approximately how much weight each category has, we don't know the precise considerations that give us what's called our FICO score.

But from what we do know, your credit score is approximately calculated by the following: The first and largest factor is based on your on-time payment history, and that makes up 35% of your score. This means that you always pay your bills on time as agreed, and you never miss or pay a payment late.

The second largest impact is your utilization rate, and that makes up 30% of your score. This calculates how much credit you have available versus how much of it you actually use. If you're somebody who routinely maxes out your credit cards or uses almost all of the credit given to you, your score is going to be lower because you're seen as a riskier borrower.

The third, we have the average age of your credit, which makes up 15% of your score. Overall, the longer you've had your credit cards open for, the better your score is going to be because of the more experience you will have had paying them off on time.

Then fourth, we have the types of credit that you have, which makes up another 10% of your score. This just means that lenders want to see you have experience handling multiple types of loans to prove to them that you're a financially responsible adult who always pays their bills on time.

And finally, the remaining 10% of your score is calculated by the number of hard inquiries you have on your report. See, any time you apply for a new line of credit, it shows as what's called a hard inquiry. Generally, lenders get worried if you have a whole bunch of hard inquiries in your report because that means you're out there trying to apply for a lot of credit, and that worries them, therefore lowering your score.

So really, we could use this information to our advantage by always paying off our credit cards on time in full, keeping the accounts open as long as possible, keeping hard inquiries to a minimum, and then making sure to get our two free stocks down below in the description. Because Webull is going to be giving you two free stocks when you deposit a hundred dollars on the platform, and those stocks are potentially worth all the way up to $1,600, and it's pretty much free money.

But anyway, if you follow this consistently for a few years, that's going to boost you up to top tier credit where lenders are basically going to be throwing money at you because you're seen as a safe borrower. However, there are concerns with this and some problems that need to be addressed because this system is far from perfect.

Just recently, there's been a new push to shut down the three existing credit reporting agencies and slowly phase in a brand new system with a completely different scoring algorithm. The problem they say is that the current credit scoring model leaves out a significant portion of the population and is not a good indicator of whether or not someone is actually a credit risk.

And here's what they have to say. First, the big three credit reporting agencies of Experian, TransUnion, and Equifax are all privately held for-profit corporations that gather your data and then develop their own independent algorithms that calculate how likely you are to repay back a loan. Fun fact: Equifax was actually started by a grocery store owner who created his own list of creditworthy customers who would pay him back, and then he sold that list to other grocery stores so they would know who to trust.

Over time, that business grew and regulations were put in place, and today we have the big three credit reporting agencies that are used throughout pretty much everything. But unfortunately, all three credit reporting agencies have had their fair share of controversy.

Experian settled with the FTC for unscrupulous business practices when they had their users sign up for a free credit report, but then later billed them at $80 a month. In 2015, they experienced a data breach that affected 15 million customers. TransUnion was sued in a class-action lawsuit for including inaccurate information on their credit reports. Equifax was also breached in 2017, impacting the information of hundreds of millions of people.

Now, obviously, the system is far from perfect, but when you take a step back, you begin to realize that we rely on for-profit private corporations who develop their own in-house algorithms to determine whether or not you're qualified to get a loan. These companies also gather and sell consumer data without letting us know exactly what they're looking for. This inadvertently excludes people who don't play into their credit scoring algorithm, which I will admit is far from ideal and creates way too many blind spots where people get left out.

Second, the credit scoring system can sometimes be highly inaccurate, and it's very difficult to correct false information. In fact, according to the FTC, 20% of people have at least one error on their credit report, and those errors have the potential to lower your credit score, hurt your ability to get a new loan, and most likely will cost you a higher interest rate. Not to mention, as anyone who's experienced false information will tell you, actually correcting that information on a credit report can be a daunting process.

Even though this should be something you'd be able to do yourself, it's often left to third-party companies who have the resources to actually fight for this, at a cost, of course. The new proposal sees this as a huge issue, and rightfully so. It shouldn't be rocket science to dispute false information on a credit report, but they say the problems don't end there.

Third, the credit scoring model leaves a large portion of the population as what they would call credit invisible. Like I've consistently joked, that if you want a credit card, you have to have a credit score, but in order to get a credit score, you need to have a credit card. It makes no sense. And even though there are ways of building up your credit score with a secured credit card, it's a confusing process for people who don't know they need to do this in the first place.

That's why 20% of the U.S. population falls in the invisible category where they don't have a credit score simply because they've never needed credit to begin with. But this proposal argues that that scoring model is extremely inefficient, and from a risk profile, studies have shown that analyzing alternative information like on-time rent payments and utility payments are just as accurate as the traditional approach of analyzing credit cards and loans.

Before the credit scoring model contradicts itself a lot, and here are a few quick examples: If you want a good credit score, you are rewarded for taking on higher credit limits and being able to borrow more money because that's how you establish a payment history. You're also rewarded for keeping your accounts open as long as you possibly can, even if you don't use those accounts. Otherwise, the average age of your account is going to be lowered, and therefore your score is going to go down.

You're also rewarded for taking on different types of loans, even if you don't need them, like credit cards, auto loans, mortgage payments, and lease payments. That way, lenders could see that you know how to pay off different types of loans, and that's good. But you're also penalized for opening up too many loans too fast because those show a hard inquiry on your credit report, and that will lower your score. And that's bad.

I've said this before, and I fully acknowledge the whole thing makes no sense. But as long as you know how to play the game to your advantage, you could do quite well for yourself.

And finally, fifth, the new proposal says that the credit scoring system just excludes too many people. Like since credit scores reward extensive credit history, younger borrowers suffer from lower scores and higher interest rates simply because they are not old enough to have built up a proper credit profile. Lower income applicants are also eight times more likely to lack credit history because they're more likely to rent, and rent payments don't show up on a credit report, which means they have a lower credit score, which means they have a higher interest rate, which means they have less money left over, which starts the cycle all over again.

So now, the new solution being proposed is to create a much more fair system that would work like this: They want to create a publicly run credit reporting agency within the Consumer Financial Protection Bureau. That's a mouthful to say, that would eventually replace the current for-profit system with a totally neutral, non-profit public entity. As they say, it would diminish credit discrimination, deliver transparent scoring, provide greater data security, and offer a publicly accountable way to resolve disputes.

They would also cap the interest rate at no higher than 36%, clean up debt collection practices, and even potentially discharge student loans in bankruptcy. Things like bank account data, utility payments, and rental payments would be considered in your credit score, and negative information would fall off your report after four years instead of the seven years as it is now.

The algorithms would be completely transparent so you know exactly how it works, and accuracy is expected to increase because lenders would be accountable for guaranteeing the information that's on there. Finally, security would be of the utmost importance to prevent any sort of data breaches from happening again.

In order to transfer over to this new model, they suggest a seven-year period where they gather data and shift from private credit reporting into the public credit registry. After that, lenders would only be able to make their credit decisions based on the new data set, not from privatized companies.

As far as what I think of this, as the self-proclaimed credit score expert here on YouTube, here's my neutral standpoint on what I think of it. First, the current credit scoring model is inefficient, and I agree. It's very much a system that you have to play into if you want to be successful. And even though it's kind of stupid, I've always had the mindset that it is what it is. If you want to use the system to your advantage, you may as well just get a credit card and use it responsibly.

For me, that turned into an obsession of getting as many new credit cards as I could, getting all the free sign-up bonuses, and then trying to get my score as high as it could be. For me, it just kind of turned into a fun game. But it's a flawed game for sure, and if you don't know you need to play into it, you're gonna be left behind.

Second, your credit score should include rent and utility payments so more information is included. Like I mentioned, lower income households are more likely to rent, and those rental payments do not show up on a credit report like a mortgage would. It also just makes sense that utility payments would be included as well, and as long as it's accurate, I'm all for it.

The third overall, the new proposal is intended to solve a lot of confusion around the current system, and I like that. Credit reporting agencies should be more transparent about why your score just suddenly dropped out of nowhere for no reason at all. But there it is, right in front of you.

And fourth, I also think security is a huge thing that needs to be addressed, and so far privatized companies have not done a great job at that. So if our data could be protected and secured, that gets a big thumbs up from me.

However, though there is some criticism from a lender's point of view, all they care about is how likely you are to repay back a debt while they match you with an interest rate that correlates with the risk that you won't pay. If you have a late payment, you are a riskier borrower. If you've never had a credit card before, they're taking a bit of a shot in the dark that you will pay it off in time.

While it's certainly not a perfect system, the goal should not be around getting people as much credit as possible, but instead accurately matching risk with profit. The more data they use to analyze a person's ability to repay back a loan, the better businesses are able to lend money. If that includes alternative information that accurately shows a person's ability to repay back a loan, I'm all for it.

But certain things become difficult to accomplish. Discharging student loans in bankruptcy is going to be a difficult one to implement because in bankruptcy, you forfeit all of your assets and you're essentially forbidden from borrowing money for the following seven years. However, under those conditions, you would still retain the knowledge and the degree.

Now, removing negative remarks from your credit report after four years instead of seven will certainly open up a lot more credit for people who ordinarily would not qualify. But it also might minimize the severity of discharging debt and give the impression that if you get too deep, you can let it all go and try again in four years because by then it will have fallen off your credit report and everyone will have forgotten about it.

Although, to me, the solution to all of this really just comes down to education. Personal finance is not a zero-sum game, and just because one person has a good credit score, doesn't mean another person has to have a bad one. The more we improve financial education, the more people could learn how to use the system to their advantage, and the more we can equalize free information across the board. Like what we have at YouTube, with the click of a button, the better.

Now, in terms of the new credit proposal, it's certainly not without its flaws, and nothing is going to be perfect. But allowing alternative information is good, being more transparent is good, preventing data breaches is obviously good, and overall, it's a big push on the side of the consumer.

But at the end of the day, execution of this is going to matter the most. And even though the intention is good, it will need to be properly implemented if it's going to be successful. But basically, as far as what you could do with this information: If you already have a good credit score, make sure to pay your utility payments and your rent on time, and you'll be fine.

And if you have a bad credit score, just make sure you also pay your rent and your utilities on time. Never miss a payment, regardless of what it is. And even if you can't afford to pay it off in full, always make the minimum payment so that way you don't have a late payment showing up on your credit report.

I'll be sure to keep you updated as this develops, but one thing is a hundred percent certain: Over time, credit scoring algorithms will change, new policies will be implemented, and maybe hopefully, if you enjoyed this video, you will smash the like button for the YouTube algorithm and get your two free stocks down below in the description.

So, with that said, you guys, thank you so much for watching. I really appreciate it. As always, make sure to destroy the like button, the subscribe button, and the notification bell. Also, feel free to add me on Instagram; I post pretty much daily. So if you want to be a part of it there, feel free to add me there.

As in the second channel, the Grim Stefan Show, I post there every single day I'm not posting here. So if you want to see a brand new video from me every single day, make sure to add yourself to that. And lastly, if you guys want those two free stocks, use the link down below in the description, and Webull is going to be giving you two free stocks when you deposit $100 on the platform, and those stocks could be worth all the way up to $1,600.

So if you want basically totally free money, use that link down below. Let me know which stocks you get. Thank you so much for watching, and until next time!