Why FICO Scores Are Broken and Obsolete

The Case for Reinvention of the US Credit System.

The FICO score—a three-digit number that can define your financial future—has been a cornerstone of the U.S. credit system for decades. However, in today’s fast-changing economic landscape, this system is not just outdated; it’s fundamentally broken. It fails to account for modern financial realities like crypto, real estate investments, and diverse portfolios. Worse yet, it alienates a significant portion of the population, including fresh immigrants, high-achieving individuals on Einstein visas, and anyone who doesn’t fit the conventional credit mold.

I know, when I was a fresh immigrant to this country, I discovered I could not do anything without a “credit score history”. I couldn’t rent a place, I couldn’t buy a car, I couldn’t get a credit card. My life was a “Cash-Only” daily with little hope to have it better until that 7 years mark of credit history. It was not easy (and a bit shaming) to have these pre-paid “credit card” with a maximum authorized expense of $500 despite the fact I had constantly $5,000 in my checking account.

For an independent young adult, the feeling was like being a teen with constant monitoring from an untrusting parent with weird intentions. And talking to young entrepreneurs and new immigrants to this country, very little has changed in two decades plus. And that’s a sad realization. So, can it be changed? Let’s start with the roots of the problem.

Here’s why the FICO score is obsolete and what needs to change.

1. Overlooking Real Wealth: Real Estate and Crypto

FICO scores primarily evaluate debt repayment—credit cards, loans, and lines of credit—while ignoring assets that represent real wealth. A person might own multiple properties with no mortgages (I did) or hold a substantial portfolio of cryptocurrency (I don’t), yet these don’t factor into their FICO score.

This exclusion is particularly glaring in an era where alternative assets like Bitcoin or tokenized real estate are playing a growing role in personal wealth. Financial stability today isn’t just about managing debt—it’s about building and managing diverse assets. Yet, the FICO score remains stubbornly tethered to a debt-centric model that doesn’t reflect modern financial ecosystems.

2. Penalizing Fresh Immigrants

For new immigrants, the FICO system feels like a trapdoor into the American financial system. Imagine landing in the U.S. on an Einstein visa, recognized as an extraordinary talent in science, arts, or business, only to be treated as a credit “ghost.” No credit history? No score. And no score often means no access to essentials like a car loan, mortgage, or even a decent credit card.

These individuals may have stellar credit histories in their home countries or substantial financial assets, yet FICO doesn’t recognize them. It did not for me despite owning fair and clear an apartment in France and having a multiyear American Express card (which is hard in France for young people to get). This creates a barrier to integration and progress, forcing them into subprime products (my first car loan to “build” my credit history was a whooping 29% which is a bad credit score rate) or expensive alternatives while they slowly build a credit history from scratch. The system, in essence, penalizes them for being new.

3. Ignoring Investment Accounts and Alternative Data

FICO scores also fail to account for the growing trend of diversified financial management. From brokerage accounts to investment in startups to major art pieces (I have inherited few of them), people today manage their money in ways that extend far beyond traditional savings accounts. For many, these assets provide a stronger safety net than any credit line ever could.

Furthermore, FICO doesn’t consider alternative data that could offer a more accurate picture of financial health. Rent payments, subscription services, and utilities—expenses that millions of people manage responsibly—are often left out unless users pay for costly services to include them.

4. Lack of Transparency and Education

The FICO scoring process is opaque at best. Even for seasoned professionals, understanding why a score fluctuates can feel like cracking a code. For immigrants or anyone new to the system, it’s even more baffling. How can someone improve their score when the rules are murky and, in some cases, arbitrary? Worse, myths about how scores work abound, leading to unnecessary mistakes.

Without education and transparency, the FICO score perpetuates financial inequality, favoring those already in the know while sidelining those who aren’t.

5. A System Built for a Bygone Era

The FICO score emerged in the mid-20th century, long before the financial innovations of today. It was designed for a simpler time when most Americans’ wealth was tied to steady jobs and predictable credit lines. But the gig economy, global investment opportunities, and decentralized finance have changed the game. The scoring model hasn’t kept pace.

What Needs to Change

To fix this broken system, we need a credit model that reflects the complexities of modern financial life. Here are some ideas:

1. Incorporate Real Wealth: Include real estate, arts, crypto holdings, and investment accounts as factors in creditworthiness.

2. Adapt for Immigrants: Recognize international credit histories and provide pathways for new immigrants to establish credit quickly without making them feel they are financially worthless and untrusted.

3. Leverage Alternative Data: Use rent, utilities, and other recurring payments to give a fuller picture of financial responsibility.

4. Improve Transparency: Simplify the scoring process and educate consumers about what impacts their scores and how they can improve. Publish the algorithms! Show that there is no cognitive biais built-in.

5. Account for Risk in Diverse Ways: Move beyond debt repayment to include broader measures of financial stability and resilience.

The Bottom Line

The FICO score is no longer fit for purpose. In ignoring modern wealth-building strategies, penalizing immigrants, and clinging to outdated notions of creditworthiness, it’s leaving millions behind. As the financial world evolves, so too must our approach to measuring and rewarding fiscal responsibility. It’s time to reimagine credit scoring for the 21st century—one that works for everyone, not just those who fit into a decades-old box.

If we’re serious about fostering financial inclusion and empowering people to thrive, the change can’t come soon enough.