Credit Scores: The Silent Killer of Financial Health (Especially for Variable Income Workers)

In a world where credit scores reign supreme, it's time we sound the alarm on their hidden dangers, particularly for those with variable incomes. While the surgeon general warns us about the perils of drinking, no official has cautioned us about the hazards of credit scores - financial tools that often manipulate consumers into harmful behaviors.

A Ubiquitous Menace

Credit scores have become entrenched in our financial culture. They're not just for lenders anymore — landlords, insurance companies, and even dating apps are using them to judge our worth. As Chi Chi Wu, a senior attorney at the National Consumer Law Center, points out, "There's this idea out there that somehow your credit score is a marker of how responsible and moral of a person you are" [1]. But this couldn't be further from the truth.

A Rigged Game

The credit score system, dominated by FICO and the triopoly of credit bureaus (Equifax, Experian, and TransUnion), rewards borrowing over financial prudence [4]. You're incentivized to take out multiple credit cards, mix in various types of loans, and keep your credit utilization under 30%. Ironically, you get little to no boost for consistently paying bills on time or clearing your credit card balance monthly [2]. In effect, this creates tremendous hazards (particularly for people whose only options are predatory products), while ignoring the basics of good financial hygiene that actually show whether someone is responsible and trustworthy.

A Generational Gap

This system isn't just flawed - it's perpetuating economic inequality. Yeshimabeit Milner, founder of Data for Black Lives, explains that credit scores are another way for "a lot of economic inequality, disparity, generational-wealth gaps to just be further encoded and passed on" [3].

Consider these stark statistics:

• "Eighteen-to-20-year-olds from white-majority communities start out with credit scores 24 points higher than those from Black-majority communities" [4].
• In 2021, the median credit scores by race were:
• • Black Americans: 639
  • White Americans: 730
  • Asian Americans: 752

A Head Start for the Privileged

Some families have found ways to game the system, giving their children an unfair advantage. Take Hannah Case, a former Federal Reserve researcher, who discovered she'd been building credit since age 14 as an authorized user on her parents' credit card [5]. This practice, along with co-signing, is creating a widening gap in credit scores among young adults.

And A Double Whammy for Variable Income Workers

If you're a gig worker, freelancer, or anyone with an unpredictable paycheck, the credit score system hits you even harder. Here's why:

1. Inconsistent Income = Inconsistent Payments: When your income fluctuates, it's harder to maintain a perfect payment history, which can quickly tank your score.
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2. Higher Risk in Lenders' Eyes: Traditional lenders often view variable income as inherently risky, potentially leading to higher interest rates or loan denials.
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3. Limited Access to Credit-Building Tools: Many credit-building strategies assume a steady income, leaving variable-income workers at a disadvantage.

Your Secret Weapon: Income Tracking and Cash Flow Forecasting

In this credit score-obsessed world, variable income workers have a powerful tool at their disposal: meticulous income tracking and cash flow forecasting. Here's why it's crucial:

1. Predict and Prepare: By tracking your income patterns, you can anticipate lean periods and build a buffer to ensure on-time payments.
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2. Demonstrate Financial Responsibility: Detailed income records can help you make a case for your creditworthiness, even if your credit score doesn't reflect it.
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3. Optimize Your Finances: Understanding your cash flow allows you to strategically time large purchases or loan applications when your financial position is strongest.
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4. Build a Safety Net: Tracking helps you identify opportunities to save during high-income periods, creating a cushion for leaner times.

Remember, while we work towards a fairer system, mastering your financial data is a powerful way to navigate the current credit landscape. It may not instantly boost your score, but it can help you make smarter financial decisions and build a stronger case for your creditworthiness when it matters most.

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Citations:

[1,3,5] Parents Are Gaming Their Kids’ Credit Scores, The Atlantic, Michael Walters

[4, 2] Credit scores are hazardous to your financial health, The Financial Times, Sheila Bair

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