I Don't Get Credit Scoring

[Garth Almgren]

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.

From what I understand of credit scores, closing down unused accounts counts against you, and having a really high limit with low usage is a good thing, reflecting a really low overall debt load. If you're only carrying $150 on a $30k card, that's using 0.5% of your capacity, which the card companies seem to like (probably because it generates some interest for them). On the flip side and counterintuitively, paying off your card in full every month and having zero debt is seen as a bad thing and makes your score go down - no idea why. <shrugs>

[Brian Henderson]

From what I understand of credit scores, closing down unused accounts counts against you, and having a really high limit with low usage is a good thing, reflecting a really low overall debt load. If you're only carrying $150 on a $30k card, that's using 0.5% of your capacity, which the card companies seem to like (probably because it generates some interest for them). On the flip side and counterintuitively, paying off your card in full every month and having zero debt is seen as a bad thing and makes your score go down - no idea why. <shrugs>

We were told by the mortgage company last time we bought a house to close out any unused credit cards because it would bump up our FICO a couple of points. They might as well be rolling dice.

[Greg R Bradley]

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.

2-5% of the limit on an account is usually optimal. It is zero that can cause a problem. That is zero for each category. If you have 5 credit cards, then optimal could be a small balance reporting on one with zero on the rest. It is very likely that you could have little or no change up to 40% on that one card as long as the other ones report zero. The same amount of debt as a percentage of credit limits spread across two cards is likely to have no change. Spread that across 3 of the 5 and it might change. Spread on 4 it is likely to go down and the same debt will almost certainly cause a drop.

The major categories are Mortgage, Installment, and revolving debt. Having a zero balance on all categories will hurt your score.

The models track problems and people's debt history before that problem. If you really want you can do a lot of work to make some improvements but strange behavior usually hurts you.

[Greg R Bradley]

We were told by the mortgage company last time we bought a house to close out any unused credit cards because it would bump up our FICO a couple of points. They might as well be rolling dice.

They aren't rolling dice, they are giving you horrible advice that will certainly hurt your score. They are completely wrong, which is VERY typical. The mortgage lenders know about as much about credit scoring as a car salesman knows about the cars he sells.

Don't ever close an account! NEVER, NEVER, NEVER. It won't ever help and will usually hurt. If the account is older, it can seriously affect your AAoA, Average Age of Accounts.

There are certain circumstances where you have already qualified for a loan and at the final stage of the process the lender will want you to close some accounts to limit your ability to owe someone else a bunch of money and then BK. This is rare and will generally only happen on someone that barely qualified and has little history.

[Greg R Bradley]

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

It depends. It is mostly backed up by experience in people's credit history. A slight wrinkle is that due to government regulations, the Mortgage industry is stuck with slightly out of date scoring models. The '04 in the name means they were developed a few years before 2004 with the intent to standardize on them in 2004.

You need ACTUAL FACTS about your score and the reasons WHY it is what it is. If you have not compared the information from all three CRAs and know it is correct, go to annualcreditreport.com and pull your report from all three CRAs. You can do that once a year for free. If you want to get EQ and TU, you can do that at creditkarma.com. Just ignore the score. Then go to MyFICO.com and get an actual credit report with a useful score.
If you know the info is the same on all 3 CRAs then only pay for one CRA at $19.95 instead of all three for $59.85. If you have used your free credit reports in the last year, then get the reports from creditkarma.com on EQ and TU and pay for a FICO at MyFICO.com for EX. Or just bite the bullet and get the whole picture on all three from MyFICO.com.

If you want some help you are welcome to contact me privately. I know lots about credit and scoring but very little about mortgages.

[glenn bradley]

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.

"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."

Yes, the error here is applying common sense to an algorithm designed for a specific task. What you could borrow, what you can borrow, what you do borrow and what your payment history on it all is factored in. This is then applied in some magical way that is multiplied by unicorns and then divided by hen's teeth.

For more info: http://www.myfico.com/crediteducatio...yourscore.aspx

[Brian Elfert]

I currently have in excess of $75,000 in available credit across a number of credit cards. It doesn't seem to hurt my credit score as I am above 750. My score is high enough to get the best rates for credit. Never a late payment. I believe just one payment over 30 days is a major hit to the credit score.

The biggest joke with credit scores is the person who chooses to live on a cash basis with zero debt and has a decent savings account probably wouldn't be able to get credit if necessary.

[Rollie Meyers]

No credit & bad credit are about the same, according to my CC company my FICO score is 822, owe them $142.00 & owe on my truck, when I bought my first & only new truck in 1993, made a $9.000 down payment & Ford Credit charged me 15% on the loan, because of no prior credit, made 9 payments and refinanced it at a credit union for a little over 7%, payment went down & continued making the original payment amount to pay it off quicker.

[Chuck Wintle]

call me old fashioned but if one pays their bills on time, have not missed mortgage or car payments, little or no balance on credit cards then this is the best credit rating one can have. FICO ratings seem arbitrary and perhaps a little useless since it does not give the entire story of a person credit history.

[Dan Hintz]

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.

I'm assuming you mean non-revolving credit... revolving credit (i.e., credit cards) has no such issues (else you'd kill your score every time you paid your monthly bill).




I'm simply not seeing what you guys are seeing, and I have no explanation (and like you, no access to the scoring algorithm). Although all three agencies scored me similarly, I usually use only one to keep monthly track (TransUnion, I believe). For more years than I can remember, I have been in the 820-830+ range. After the house was purchased last year, my score dropped to the high-10's to low-20s, but within a few months I had rebounded again to the 830's. Last month's report shows me at 847.

I pay off my cards every month, and if I know a big purchase is coming soon, I add extra to my current payment to cover it. Some months, I have a negative balance (they owe me) on a card because I overestimated the purchase. I must be doing something correctly...

[Mike Cutler]

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.

I don't think we're supposed to get it. My FICO moves between 810-830, but I've seen it as low as 780 with zero change in finances, in or out. Same bills, month to month, and the score can swing 50 points.
I learned a long time ago that if you have no debt, it's hard to get credit. I got turned down for a check cashing card at Stop & Shop. I owed not one dime to anyone, and made a very good wage at the time. I walked into my bank the next day, and told the manager, " I have a problem".

[glenn bradley]

call me old fashioned but if one pays their bills on time, have not missed mortgage or car payments, little or no balance on credit cards then this is the best credit rating one can have. FICO ratings seem arbitrary and perhaps a little useless since it does not give the entire story of a person credit history.

I hear ya. Many of us are caught in a world of what is versus what makes common sense.

[Greg R Bradley]

Brian,
The more credit available available on CCs the better the score you will have. If you have a good score with $75K available it will be better with $175K available. Mostly doesn't matter as there is not much benefit to a score above 750 as long as that is a FICO score in the Classic or standard version - the ones with a range of 300-850.

Rollie,
Some CCC are reporting actual FICO scores with your statement. Discover started doing it a few years ago and Amex started last month. Amex will also let you opt back for a Plus Score, which is not used by any lender for anything. That's more typical of the scores most of the others were giving out for free.
Amex score is FICO 8 for Experian. They also go an extra step and tell you what it was a month before.
I'm pretty sure the Discover FICO is also version 8 and based on your Transunion report. I can't recall if it is a standard FICO or Enhanced for Credit Card applications.

Chuck,
Nothing old fashioned about "pays their bills on time, have not missed mortgage or car payments, little of no balance on credit cards". ALL of those are correct for generally increasing your FICO score.
It isn't arbitrary at all, mostly because it was never intended to be "the entire story of a person's credit history".

FICO scores and other scores used by lenders are properly called a Risk Score, not a Credit Score. They are specifically sold to potential lenders as a rating of the risk that person will have of having problems with that new loan at that time. Most of them even specify a certain percentage of risk of that new loan going 60+ days late within the next 24 months - just an example of the terminology used. Here is a sample of the claimed improvements in EQ Beacon 9 Mortgage Score that they are trying to get implemented. That score is two entire generations later and specifically enhances for a mortgage application. Government meddling is stopping improvements like this:
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The general overview from one of the credit providers is 20 pages describing the 51 scores they offer lenders.

Another thing that is important is that all the Risk Scores are designed to qualify a person at the bottom end of acceptance for THAT loan at that rate. NOT designed to tell someone that they have reached near perfect credit.

Step one is make sure all the information is correct with all three CRAs. Then look at the info and you can answer a few questions here: http://www.scoreinfo.org/fico-scores-estimator/

That will give you a general idea of a real score range. Seems to be based upon the latest FICO standard score. This is very basic but the questions will give you good info on the basics for the highest scores:
1. More than 5 open CC.
1a. Got your first CC 20+ years ago.
2. Got your first installment loan 20+ years ago.
3. Not applied for any loans in the last year.
4. No new loans in the last 6-12 months.
5. Not too many loans with balances. Most open CC should be zero reporting but not ALL.
6. Very low balance on loans other than a mortgage.
7. Never missed a payment (actually lates drop off around 8 years so no lates on your reports)
8. No loans past due (goes along with no lates but this is additional info for people with lates)
9. Low amount owed on CC as compared to limits.
10. No BK, Liens, Foreclosure, Repo, Collections.

Edited to add: Several of these should make it obvious why it is always, well almost always, a mistake to close unused accounts or ask to have your limits lowered. Asking a lender to lower your limit is totally wrong. The exceptions are very few. One example is that older obsolete Scores, like the ones used for mortgage thanks to our goverment, treat a CC with a limit above $50K strangely. They don't count that limit in your available credit. If you have a CC with a limit above $50K and your debt is high, you can benefit on THAT score by having them lower that limit below $50K. Of course it hurts you for any more modern score.

[Rich Engelhardt]

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

Which score?
FICO or Vantage?

FICO is the oldest tha't been around for decades.
Vantage is the new kid on the block and the one that most people see when they order or get a credit report.

They aren't the same and the actualnumeric values aren't the same.
A 760 with one can be the same basic score as an 830 from the other.


FWIW - we (my wife and I )just had our credit get hammered the last few months.
We jumped all over those "free money" deals from the credit card companies, the ones that pay you a hundred or two hundred to get a card and charge $1000 on it within the first three billing cycles.
Since we bough a new rental house and have been spending money left and right on the place, it was super easy to meet the requirement.
The other part is, they offer zero percent for up to 15 months on these cards.
As a result, we've run up a bundle, paid the minimum payments, and haven't used our older cards.

All of that's counted against us pretty heavy.

[Julie Moriarty]

Greg, thank you for that very detailed explanation! I'm beginning to understand some of this. To your 10 points:

1. More than 5 open CC. - Check
1a. Got your first CC 20+ years ago. - Check
2. Got your first installment loan 20+ years ago. - Check
3. Not applied for any loans in the last year. I only applied for a recent mortgage loan which is in limbo now
4. No new loans in the last 6-12 months. - Check
5. Not too many loans with balances. Most open CC should be zero reporting but not ALL. Right now all CCs are only reporting whatever I charged since the last payment in full was made
6. Very low balance on loans other than a mortgage. - Check
7. Never missed a payment (actually lates drop off around 8 years so no lates on your reports) I've got one late mortgage payment from 6-1/2 years ago the lender said I got dinged on. And a few late CC payments that slipped through the cracks which were paid as soon as I found I missed it.
8. No loans past due (goes along with no lates but this is additional info for people with lates) Not in the last 12 months or so, maybe longer.
9. Low amount owed on CC as compared to limits. - Check
10. No BK, Liens, Foreclosure, Repo, Collections. - Check

FWIW, the credit info I'm using comes from Discover. It showed me at 739 just around the time I sold the house. After I sold the house, I paid off everything. Then I applied for a new mortgage. Now it's 679. Seems a bit harsh to me.