A couple years ago as I was getting a credit report from Experian (I was about to buy a new car and wondered where I stood credit-wise), I signed up for one of their monthly tracking features. I justified this waste of money because I'd had a credit card number stolen and wanted to watch my credit records for a while. Over the past year, I've watched my credit score start low and go lower, and I've come to the realization that it's complete bullshit.
My credit history is pretty ordinary: I got one of those credit cards that come with a free t-shirt and frisbee in college, mostly because I was amazed anyone would give me credit. The introductory $500 limit quickly went to $2k when I put some ski trips on the card, and I always carried credit at about 35-50% of the card's limit. After college I continued to use the card and watched my limit go to $5k and then $10k (as I carried more and more on it), and a few years after college the card's limit was at $20k. At the same time, finishing my Bachelor's degree and getting a Masters racked up about $25,000 in student loans (in 2011, 4 years of college only costing $25k is quaint!). I also owned a couple used cars with small car loans I paid off in time.
After I moved to Oregon in 2003, I finally got serious about my ~$30k in debt. My previous years of carrying thousands in credit and paying things off in time (but rarely getting ahead) ballooned my credit score into the low 800s. This was great when it was time to get my first home loan, and my second a couple years later. Once I settled into a long-term home, I started paying off my credit cards and school loans aggressively. By 2006, I had no balance on my credit cards and my wife and I finally paid off our school loans. I started closing my unused credit card accounts and shifted towards buying things with my bank's ATM/VISA card instead, so that I never carried a balance and the money came directly out of my checking account. I also followed the Get Rich Slowly mantra and focused heavily on building my retirement savings and over the years of maxing out my retirement with the help of an investment planner, I have a pretty good nest egg going.
You can imagine what all this fiscal responsibility did to my credit score the past few years. It dropped below 800 soon after I paid off all my cards and started closing accounts. For a few years I had no open credit cards and no open balances. I paid off two car loans and was paying ahead on my house loan, and each year I'd watch my credit score fall in the 700s. A couple months ago my credit score was barely above 700, and the main negative flag on my account was having no open credit card accounts, so before I took a recent trip I decided to finally sign up for one of those personal airline cards my frequent flier program has been pitching me and use the card on my vacation.
Today I learned that my credit score dropped into the high 600s and my risk just went from low to medium. The culprit? The credit card account I opened had "too low of a limit" (it started at $5k) and I had "too high of a balance" on it as I used it on vacation (I paid off the card as soon as I returned, two weeks before the first bill even showed up).
Financially, I'm in the best shape of my life right now. My house will be paid off in about 5 years at the rate I am going, I have a great retirement portfolio that I contribute aggressively towards and it continues to grow, and my business is doing well even as we've expanded with a new employee and several contractors.
I had the highest credit score at a time in my life when I was leveraged to the hilt and I lived paycheck to paycheck. Now that I have my own business, a healthy retirement, and can pay for everything I need/want, I have a low score and I'm dubbed a higher risk even though my ability to pay is very high. I used to think a credit score was all about your ability to pay, but it's clear now it's more about how profitable you will be to banks.
Where is the science? Because if there is not a direct (math) formula, then the whole thing is made up by a human. Which means, it’s a human decision that varies by the whim of it’s master. It is merely a legal (protected) way to discriminate to me.
Great article. The others already mentioned the reason for the drop is from closing cards with a long history, but your point is valid- now your in a stronger financial position, less risk–but your score is lower. Clearly a flawed system. It ignores liquidity, net-worth and ability to pay off debt.
I agree wholeheartedly with the premise. And regardless of the true machinations behind our credit scores, what this frustration highlights is how powerless and meaningless the average consumer is to our financial industry. When our parents were growing up, they probably saw their parents get loans from a bank who looked at the merits of lending to them. Now, everyone thows up their hands, under the thumb of some unseen higher-up.
Way back when we got our last car loan and maybe our home loan to we were cautioned against too many credit checks, that that would lower our score. So, shopping around our loan would lower our score. Aint that some bullshit?
Also, I’m not sure what Ulzheimer’s wicket is but he seems a little tightly wound on this issue. And, dude, if you want people to get your name right, you should use a space and a capital letter between your names. It’s basic, eighth grade grammar.
When you buy things with a credit card, the proprietor has to pay approx 3% of the purchase price to the credit card company in fees.
You are generating them profit, and you’re paying 3%, you just can’t see it.
OK – warning, I am about to rant. But these things have been on my mind awhile and I am going to express it despite the fact that I already fear most will take my viewpoint as that of a hippie/wacko/whatever other label is often put on people.
Really??? Nobody has just come right out and bluntly said how scandalous this entire system is? Of course I understand that it may have (although I have suspicion about even this) originally come about to protect companies from losing money due to cheaters…however, there is not a lot in place to protect PEOPLE from predatory companies! Many companies these days (even those in the medical, energy and other essential industries) are very quick to submit information to a collection agency, which in turn can make it difficult to even pay (once it’s turned over, you cannot just pay the original company, you must pay the collectors, who sometimes only send 1-2 notifications; this happened to my best friend who always tries his best to pay any and all debts).
Allow me to ask this; does anyone truly think it’s fair for someone who simply doesn’t know a lot about the credit system/is forgetful and therefore late on payment (but still pays their debts – I know so many people like this)/is poor deserves to be at the mercy of their credit score? I think this is incredibly narrow-minded and flawed logic, especially in a society where corporations have so much control and your average joe has so little.
Furthermore, I personally consider it slavery that your average person is even expected to spend their precious moments of life (which could end at any time) researching and learning how the system works, what their credit score is, how to improve their score, etc. I am not saying I know how to fix this, but I think awareness of that is very important. I know some here may think this is a moot point, but is it? Life is too short to spend it writhing around in such an endless and purposeless web. Just trying to give a bit of perspective instead of accepting this as a necessity. It’s not really. But companies want you to feel like it is because it makes it easier for them to make money. We have lost touch with so much….
I take the part about no one calling this out back since I now see that Amanda has hinted at this in her comment.
PS – It looks really out of place and weird, so I will mention that I actually wrote END RANT before the silly smiley on my last comment, but bc I put arrows around them it did not post that part…in case anyone was wondering why a smiley would be there randomly.
BTW, this rant was not aimed at the author of this at all, just to clarify. In fact, it just angries up my blood a bit to read that someone who tried to follow the credit system in an honest and earnest way still ends up getting the short end of the stick. My best to you, Matt! Obviously I agree whole-heartedly with the title of your article.
A couple years ago, I had a zero for one of my three scores. This was due to a lack of sufficient history on that particular bureau’s report, but the bank I was trying to get a mortgage through interpreted it as a zero score, not as “no score available”.
Your other replies in this discussion lead me to believe you will chastise me (“Ramsey zombies”, “8th grader”…). Hopefully you don’t find that kind of response necessary here. It makes discussion with you quite unpleasant.
This point has probably already been made, but I’m not yet all the way through this discussion and can’t help but say:
Stop being a shill.
It’s people like you that justify the perverse universe that everyone else is supposed to learn to play. Except, the game is run by house rules, and the house always wins.
[Also, note two things: 1) one can be a shill without greasy palms, and 2) if you’re going to complain about people spelling your name incorrectly (name calling? really?), perhaps YOU should do a little very basic observation and realize that wouldn’t happen if you used CamelCase. natch.]
Seems to me there’s a line between communal grouping for the benefit of individuals and homogenization of individuals into a faceless mass. Also seems like the industry which creates these credit scoring rules have crossed that line. Credit scoring reduces someone else’s estimation of my fiscal responsibility to a comparison of me and others in my demographic rather than seeing my individual fiscal worth and productivity.
For example, when I go to a doctor, I expect medical care based in scientific evidence AND treatment options which suit me as an individual. Just because 2/3rds of the people in my demographic are at risk for a disease doesn’t automatically mean I will get that disease, after all.
Matt – Couple of points I would like to highlight here.
“I understand the benefits of a high score and realize the system isn’t going away anytime soon …”
“I honestly had no idea you weren’t supposed to go over 50% of a card’s credit line……..then I don’t really pay attention to credit card/score rules too closely …”
In lieu of the above two points, why not:
1. Learn the system, since it has been there for a while and will be there for a while
2. Screw the system, within the boundaries laid down by the system
You surely can have best of both the worlds, i.e., a good FICO score AND a good real-world financial standing. No debt is probably the best thing, but if in order to have the best credit score, if you need to have some outstanding credit, why not keep that outstanding credit?
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