Credit Scores are Bullshit

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.