Trapped by Numbers: How Credit Scores are Limiting Financial Freedom
by Kent O. Bhupathi
It should have felt like a victory. Late last year, I paid off a student loan—not with lottery winnings or a flashy promotion, just consistent payments over time. A quiet milestone, sure, but one that felt like an upward step toward financial freedom. Then, two days later, I got the alert: my credit score had plummeted. Dozens of points gone overnight. The reason? I had closed out a loan. No missed payments. No defaults. Just a responsible, completed obligation. And somehow, I was penalized for it.
It was, as my friends jokingly put it, the beginning of my "villain arc."
But beneath the humor was a realization that hit harder than the score drop itself: this system doesn’t reward fiscal responsibility. It rewards ongoing indebtedness. And the more I looked into the matter, the more I saw the rot beneath the surface.
The Mechanics of an Opaque Machine
Credit scores in the U.S., most notably FICO and VantageScore, are three-digit distillations of your financial history. Created by private companies and managed by for-profit credit bureaus, these scores are used to decide everything from your mortgage rate to whether you get a job interview. Yet, the formulas are proprietary and often feel like they punish the wrong things.
Surveys consistently show that many Americans don’t understand how their credit score works—not because they aren’t financially literate, but because the system itself is cloaked in secrecy. It penalizes people for paying off loans, rewards having a long credit history (even if that history includes costly revolving debt), and often overlooks critical factors like income, savings, and rent payment consistency.
Worse, credit reports are riddled with errors. A landmark study found that one in five Americans has a significant mistake on their credit report. While consumers have the legal right to dispute errors, the burden is entirely on them to identify and fix those mistakes in a system they were never given access to design.
Credit Score Myths and Built-In Bias
Despite claims of objectivity, credit scores often reflect deeply ingrained socioeconomic disparities. For example, renters typically get no credit for paying on time, while homeowners build credit with each mortgage payment. Immigrants who arrive in the U.S. with impeccable financial habits in their home country start at zero because their credit history doesn’t transfer. Young adults are penalized simply for being new to the system.
Then there’s race. Data from the Federal Reserve shows that Black and Hispanic borrowers, even those actively seeking home loans, have significantly lower average credit scores than white borrowers. These disparities are not a reflection of financial irresponsibility, but of historic exclusion from wealth-building opportunities.
A so-called neutral score that fails to account for structural disadvantage isn’t neutral at all. It ultimately just reinforces inequality under the guise of math.
A stark reminder of financial gatekeeping: this image shows a prompt to purchase one’s own credit score, illustrating an audacious move by credit agencies to monetize access to a metric to which individuals never consented, cannot independently verify, and by which they are nevertheless assessed in nearly every major financial decision.
The Cost of Being ‘Subprime’
The consequences of a low credit score extend well beyond high interest rates. Poor scores can disqualify you from renting an apartment, increase your car insurance premiums, or even block access to basic utilities unless you pay a steep deposit. Some employers check credit before hiring, especially for jobs involving financial responsibility.
This creates a vicious cycle. Those with lower incomes or unstable finances—who could benefit the most from affordable credit—end up with the worst credit terms. Meanwhile, those with excellent scores enjoy cash-back rewards, waived fees, and premium perks. One Brookings study describes this as a "reverse Robin Hood" effect, where low-income consumers effectively subsidize the rewards of wealthier cardholders.
The Honest Economist Responds
That student loan experience didn’t just frustrate me. It activated me. I started sketching out a new framework that doesn’t punish financial stability but uplifts it. This became the basis for what I now call the Healthy Financial Practices Score (HFPS).
Unlike traditional credit scores, the HFPCS rewards:
Debt sustainability relative to income,
On-time repayment behavior over the past 90 days,
Emergency savings that can handle real-life disruptions,
Minimal or no outstanding tax debt,
Responsible budgeting that prioritizes essential expenses,
Credit usage that shows restraint rather than reliance (HFPCS model draft).
Using the HFPS, the exact behavior that dropped my FICO score by more than 4% would have raised my HFPS by almost 1%.
I’ve built a draft model and have launched an interactive calculator at HFPS Calculator, where anyone can input their financial data and see how they score based on healthy practices, not legacy debt structures. Absolutely NO data is stored or saved! 😊
This model is not designed to replace all existing scores but to challenge the outdated definition of financial responsibility.
Rethinking What Financial Health Means
There’s a broader point here. The credit score system we use today is not just outdated—it is misaligned with how modern financial health should be measured. True responsibility includes having emergency savings, managing debt within your means, and planning ahead. Yet these traits are barely reflected in traditional credit scoring.
Regulators, lenders, and fintech developers have an opportunity to shift course. Whether through cash-flow-based underwriting or inclusion of rent and utility payments, there are viable paths forward. What we need is not just better data—but better values underpinning the system.
Conclusion: Toward a More Honest Credit System
Paying off debt should never be a liability. For me, it became the spark for something bigger. The beginning of what my friends jokingly called my villain arc. In truth, it marked the start of a more honest journey—one that calls into question the scorecards we’ve all been told to live by.
I’m not saying the HFPS is the final answer. But it is a better question. And I welcome your thoughts on how we can build something that works for the responsible, not just the leveraged. Because when paying off your loan hurts you more than holding onto it, we don’t need a better strategy.
We deserve a better system!
Sources:
Austin, Stan. "How Traditional Credit Scoring Can Be a Barrier for Many Consumers." Federal Reserve Bank of Kansas City, January 17, 2024. https://www.kansascityfed.org/ten/how-traditional-credit-scoring-can-be-a-barrier-for-many-consumers/.
Avery, Robert B., Kenneth P. Brevoort, and Glenn B. Canner. Does Credit Scoring Produce a Disparate Impact? Finance and Economics Discussion Series 2010-58. Washington, D.C.: Board of Governors of the Federal Reserve System, October 12, 2010. https://www.federalreserve.gov/pubs/feds/2010/201058/.
Consumer Financial Protection Bureau. "CFPB Report Finds 26 Million Consumers Are Credit Invisible." Consumer Financial Protection Bureau, May 5, 2015. https://www.consumerfinance.gov/about-us/newsroom/cfpb-report-finds-26-million-consumers-are-credit-invisible/.
Klein, Aaron. "America’s Poor Subsidize Wealthier Consumers in a Vicious Income Inequality Cycle." Brookings Institution, February 6, 2018. https://www.brookings.edu/articles/americas-poor-subsidize-wealthier-consumers-in-a-vicious-income-inequality-cycle/.
Klein, Aaron, and Lisa Servon. "To Reform the Credit Card Industry, Start with Credit Scores." Brookings Institution, May 20, 2019. https://www.brookings.edu/articles/to-reform-the-credit-card-industry-start-with-credit-scores/.
Klein, Aaron. "Reducing Bias in AI-Based Financial Services." Brookings Institution, July 10, 2020. https://www.brookings.edu/articles/reducing-bias-in-ai-based-financial-services/.
Federal Trade Commission. Section 319 of the Fair and Accurate Credit Transactions Act of 2003: Fifth Interim Federal Trade Commission Report to Congress Concerning the Accuracy of Information in Credit Reports. December 2012. https://www.ftc.gov/sites/default/files/documents/reports/section-319-fair-and-accurate-credit-transactions-act-2003-fifth-interim-federal-trade-commission/130211factareport.pdf.
Hair, Christopher M., Sabrina T. Howell, Mark J. Johnson, and Siena Matsumoto. Modernizing Access to Credit for Younger Entrepreneurs: From FICO to Cash Flow. SSRN Scholarly Paper No. 5093589. January 11, 2025. https://doi.org/10.2139/ssrn.5093589.
Parthasarathy, Vinny. "Credit Checks in Employment." OnLabor, November 7, 2023. https://onlabor.org/credit-checks-in-employment/.
U.S. House of Representatives. Committee on Oversight and Government Reform. The Equifax Data Breach. Majority Staff Report, 115th Congress. December 2018. https://oversight.house.gov/wp-content/uploads/2018/12/Equifax-Report.pdf.