Suze Orman Thinks We Should 'Get Rid of Credit Scores Altogether.' Is She Right?

On their podcast Ask Suze and KT Anything, Suze Orman and her wife, Kathy Travis, answered a question regarding credit scores. According to Orman, credit scores should become a thing of the past. But does she have a point?

The role a credit score plays

The two major credit scoring models used in the U.S. are FICO® Score and VantageScore. They both offer scores ranging from a low of 300 to a high of 850. To achieve a credit score that lands in the "good" category, a person's FICO® Score must fall between 670 and 739. For VantageScore, the range is between 661 and 780. Anything lower falls into "fair" or "poor" territory.

Some financial advisors, like Dave Ramsey, recommend followers allow their credit scores to go extinct. And if you never (ever) plan to apply for credit of any kind, Ramsey's advice may make sense. After all, who needs a credit score? As it turns out, most of us do. Companies use credit scores to decide if you're eligible for the following:

• New mortgage
• Credit cards
• Auto loan
• Personal loan

Companies may also use your credit score to determine the following:

• Your auto insurance rate
• Interest rate
• Loan credit limit

Who's being squeezed?

A low (or extinct) credit score makes it expensive or even impossible for millions of Americans to get credit. Ultimately, it makes consumers more susceptible to predatory lending practices that trap them in a web of high-interest debt.

Still, as important as today's credit scores are, Orman says, "If you ask me, we should get rid of FICO® Scores altogether because they do not really tabulate the truth of your situations."

For a deeper understanding of why Orman may feel this way, let's look at two tables. The first breaks FICO scores by how they are categorized. We're using FICO® Score because it's the most commonly used credit score model.

The following table shows how average scores break down by race.

These averages mean that millions of people fall below the average line, and millions are above that line. You'll notice that the lowest scores belong to Black and Hispanic households. These households have more trouble qualifying for mortgages, credit cards, and other financial products.

The lower the credit score, the more likely a person will take out a payday or other predatory loan. A Pew Trust study found that payday loans disproportionately hurt African Americans. Black people comprise roughly 13% of the U.S. population, yet they take out 23% of all payday loans.

A low credit score could belong to anybody

If you've ever gone through a job layoff, serious illness, or loss of a partner, you know how quickly your financial situation can become dire, especially if you don't have an emergency savings fund to fall back on.

Imagine a person whose partner has left the family home, taking with them an additional income source but leaving a pile of debt. The person left behind may find themselves swimming upstream, trying to pay down old debt while keeping up with everyday expenses. It's not difficult to imagine that person's credit score suffering.

Perhaps Orman's point is that credit scores act as one more stumbling block to those most needing a loan, lower insurance rate, or rental application approval.

The hard truth is this: The current system calls for our financial behavior to be reported to a credit reporting agency. Whether it's fair or not, the best we can do is attempt to keep our credit scores healthy.