I Don't Get Credit Scoring

[Julie Moriarty]

When I sold my house my credit score was pretty decent. I then paid off all the credit cards. I owe nothing now. I applied for a home loan about a month later. All credit card usage since then has been paid in full as soon as I get the bill.

My credit score is now 60 POINTS LOWER than before I sold the house and paid off all the debts.

[Dick Strauss]

You might want to pull your credit score to see what has changed. Hopefully some scammer didn't get your info and open cards in your name, etc.

Is the financial institution making false excuses so they can justify locking you into a higher rate?

[Greg R Bradley]

First, make sure you are looking at the correct credit score. If you are applying for a mortgage, virtually all lenders will use the lowest score of FICO 04 version from each of the 3 CRAs. Let's just say ALL lenders as the only ones that could use something else are few.

If you applied and they gave you a score, you may be comparing it to some other score you had before.

As far as the amounts showing on your CC accounts, they report the last statement balance. So if you get a statement from the CCC, that is the amount reported. Paying it in full does not hurt your score.

You didn't CLOSE any accounts other than the mortgage you paid off, right?

[Dan Hintz]

Pre-pay your credit cards. If you know your next bill will be roughly $2k, when the next bill arrives, pay it + $2k. Your reported balance at the end of each month will be very close to zero. This can have a huge effect on your score if you tend to charge a lot (regardless of whether or not you pay it off every month).

I'm currently 10 points shy of max after purchasing the house last year, and the highest I've been is 3 points shy of max.

[Wade Lippman]

Supposedly my suboptimal score was because I never had any debt. I financed a car and my credit score went down. Paid off the car loan and it went down again. Go figure.

[Matt Schrum]

I've found using CreditKarma.com (and they have an app-- services completely free) seems to give me a pretty good feel for my current credit score. I don't have too much advice you don't already know regarding your score-- however CreditKarma is great for keeping tabs on it.

[Greg R Bradley]

Pre Paying a CC lowers the amount that lender reports to the CRAs. That is not necessarily good. It depends on what you need. Reporting zero is almost universally bad. If you mean max to be 850, the scores used for a mortgage cannot be 10 points or 3 points shy of max. The algorithms used by FICO vary slightly between the three CRAs and but none of them have any path through the algorithm that will give you those scores. Here is the exact info for FICO used for mortgage:

EQ for mortgage is Beacon 5 - possible range 334-818.

TU for mortgage is FICO Risk Score, Classic 04 -possible range 309-839.

EX for mortgage is Fair Issac v2 FICO - possible range 320-844.

CreditKarma will give you info from your credit report from Equifax and Transunion but no score that is useful for anything other than general info. About like trying to figure out what clothes to wear in FL by checking the weather in CA. Both tend to be warm in summer.

General consensus is that any FICO 04 score above 810 is all the same as they become silly and don't really work properly above that. Unless you are trying to get a second on a ultra high end house from an investment bank like Schwab, you can consider anything above 760 to be perfect, whatever that really means.

[roger wiegand]

Didn't you just move? That will drop your score quite a bit. It should go back up after you've been in a new address for a year or so.

[Dan Hintz]

Pre Paying a CC lowers the amount that lender reports to the CRAs. That is not necessarily good. It depends on what you need. Reporting zero is almost universally bad.

How would reporting less be a problem? If the creditor shows a possible line of credit that's only used for 1-2% of its max, I can't see how that would harm you, only help. The score is based (in part) upon the total credit available to you, as well as the percentage of that credit that is actively used.

[Julie Moriarty]

Didn't you just move? That will drop your score quite a bit. It should go back up after you've been in a new address for a year or so.

We are in a vacation rental waiting for a title defect to clear. The lender told me today the rate lock expired and now the best we can do is the locked rate but if the rate goes up we get stuck with the higher rate. She also said we will have to get an appraisal update and go through the loan approval process again. I'm guessing that means they will pull the credit score, which is now lower than I have ever seen it.

The credit score may have taken two hits from the lender. We had a contract on a house that turned up with a structural defect so we cancelled. The next house ended up with a title defect. I'm batting 0.000 on the new house choices.

I have zero debt, a 100% on-time payment record and a crummy credit score. How does this make sense?

[Allan Dozier]

Yes, it is weird. I charge a lot on credit cards each month for my business. They are always, always paid in full. Some have very large credit limits so my score stays in the 7 hundreds because I have a lot of AVAILABLE credit. At this point in my life I basically have no debt but just the fact that I could borrow on these I guess scares someone.

[Malcolm McLeod]

How would reporting less be a problem? If the creditor shows a possible line of credit that's only used for 1-2% of its max, I can't see how that would harm you, only help. The score is based (in part) upon the total credit available to you, as well as the percentage of that credit that is actively used.

I don't know the exact equation, but have been told its complicated. If it was simple, the lenders might think the serfs could get restless (and we can't have THAT!).

In addition to LOC limits and total debt load, I have also always been told that a significant portion of your score is based on your timed repayment of any debt obligations. So, paying everything off doesn't build any such history.

So my assumption is that paying off a $500/mo CC (no carry-over balance), although good, doesn't yield any info about your ability to repay a larger debt over time (i.e. a mortgage).

[Brian Henderson]

How would reporting less be a problem? If the creditor shows a possible line of credit that's only used for 1-2% of its max, I can't see how that would harm you, only help. The score is based (in part) upon the total credit available to you, as well as the percentage of that credit that is actively used.

From what I understand, they are looking at worst case scenario, if you have a lot of credit available to you, whether you are currently using it or not, they assume that you will use it, or at least can use it, in their credit decisions. The best thing you can do is close down cards that you don't use. This becomes a problem because a lot of credit cards will just automatically increase your credit regularly. We actually fought JC Penney a while back because they kept giving my wife more and more and more credit when we pretty much never used the card. They wanted to encourage us to do it, they kept sending her bigger and better cards, I think she had like $30k credit on the card at one point, with maybe $150 used. I think the most we've ever used at one time was maybe $500. But that counts against us because we can go and spend $30k if we want to. We just don't want to. I'm not sure what they have at JCP that we'd want to spend that much money on, period. We told them that we didn't want to keep increasing the limit unless we asked them to and they fought us on it. I gave them the option between doing what we wanted and cancelling the card and we'd take our business elsewhere. They finally listened.

[Julie Moriarty]

In addition to LOC limits and total debt load, I have also always been told that a significant portion of your score is based on your timed repayment of any debt obligations. So, paying everything off doesn't build any such history.

So my assumption is that paying off a $500/mo CC (no carry-over balance), although good, doesn't yield any info about your ability to repay a larger debt over time (i.e. a mortgage).

In a way, I guess that makes sense. But if you use CCs every month and pay them off on time, wouldn't that show the ability to pay as well as repsonsibility?

Before we sold the house, we charged a lot of the home improvements on CCs. But we never went over 50% of the credit line. The lender told me that was good and as long as you pay on time, the amount of debt isn't as much an issue as going over that 50% mark. I think she mentioned it showed self control.

[Rich Riddle]

After a couple bouts of identity theft, I learned a lot about credit and credit scores. In your case:

Paying off accounts ALWAYS lowers your scores. Seems counter-intuitive but it's the way it works. The more accounts you pay off, the more negative impact that will have on your score.

Revolving credit works on two principles. One relates to the amount of credit cards with a balance on them. If it equals or exceeds 50% of your cards with balances, that is a negative impact. For instance you have two cards with $10 each on them. You have one card with nothing on it. Negative impact even if each card has a high limit. The second relates to the balance you have on them as a percentage. Ideally you should keep the total balance around 6%. You go over 50% and they notice and it gives a negative impact.

To resolve the first and second problem, always pay your bill in full BEFORE they send the statement.

Many folks confuse credit with worth. They are correlated but not the same. To have good credit you must have OPEN accounts in good standing and a variety of accounts, such as mortgage, car loans, credit cards, student debt, etc. That shows you can pay on diversified types of debt. Cash is sub-prime; use it for almost everything and it won't build your credit. Go figure.

The Catch 22 is most people who need credit don't have the best credit, and those with the best credit don't need it.