Yes, you are incentivized to stay in debt, because creditors want to know that you are both willing to take on debt AND pay it off. The sweet spot for them is someone who never really pays it off but still makes minimum payments while interest piles on. This is the system working as intended.
Your credit score can affect the interest rate of getting an auto loan or a home loan. Most adults will have a credit card to establish credit history but won’t be using it to get by. Some might use it for stupid purchases though.
Not just credit cards, you want a car, or a phone, or a place to live? I’ve even hear of some employers asking to check the credit of potential employees, were suppose to always be in debt, because our out of control capitalism means the average person can’t afford anything, it must be financed.
Even apart from its necessity for getting bank loans at reasonable interest rates, most landlords check your credit score before renting an apartment or house to you. If your score is low you’ll have trouble finding anywhere to live and you might have to live in your car … if you can even afford a car without getting a bank loan for one.
Most Americans can’t afford a $400 emergency and live pay check to paycheck. Car breaks down, emergency medical expenses, emergency house breaks down could all cost over $400. You need a Credit card for that back up that you could eventually pay back by probably sacrificing something else. Need a car need a credit score or you pay $3-10,000 more in interest same with buying a home. Want to rent need a credit check. Want to get a job at a bank, military contractor, some government positions, and other secure jobs. They want to make sure you don’t have bad credit or can’t be taken advantage of . Which no credit is often considered bad credit.
Your “good” credit card customer is presumably paying more credit card fees on accounts so is actually less sound financially.
So if you mean playing the rules means paying higher fees to credit cars companies then that just helps show how stupid the system is.
Also, I actually disagree fundamentally with the argument. If it’s just based on how old your accounts are then that is a shitty system. It’s not only easy to play by the rules, but then presumably to abuse them as age of an account doesn’t indicate much about your ability to pay off bills.
So this is kind of a breakdown of how it works. My 3 credit scores are all in the 800s, I only have one pay fee card and we’re likely canceling it soon as we’ve got other cards that have better cash back deals. Here are a number of things that affect your score:
Using your cards, but not having a big balance on them monthly (we pay ours off, if not completely then the statement balance to avoid interest, but typically we pay them completely if we can)
Not missing any payments (haven’t missed a payment in the 12ish years we’ve had cards)
Not having derogatory marks (credit dings from stuff like not paying debts or repossessions of cars or that sort of thing would hit hard)
Any temporary hits like applying for a new line of credit (cards, loans, mortgages)
Average age of credit (older lines help a lot, it hurts less to close a newer card than an older one)
Number of accounts, they want you to have a lot, over 12 I think is where it really positively impacts your score, and it can hurt you to only have a few
Anyway it’s a complex system that’s annoying and can be difficult to understand
I shat my credit into single digit range threeish decades ago (yeah, I’m a boomer puke). I couldn’t even get a bank account until about eight years ago. I finally was able to get an acct, got a secured card, and built my credit up to 729. ‘Upgraded’ my secured card to unsecured, but left the limit at $300 to keep me in check.
Then I made the mistake for applying for a modest credit line with my bank. Not only did I get denied, but the hard credit hit put me under 700. Then my credit took another major hit *because I used that card for more than 31% of its limit.*Never once made a late payment, neither.
As I hoped that a line of credit could afford me access to an oral surgeon (which I really need to even consider dentures, as I have mucho malo in my mouth), and as I have no interest in writing a grant to cover it, I’m fucked, as oral surgeons don’t seem to take Medicaid in my shit state.
If I survive another yearish, Medicare might be helpful, but the problems in my pie-hole might not wait that long.
I do not want a handout. I want the chance to pay it off and not leave it to Medicare…and not die of the infections spreading to either my brain (such as it is) or my heart.
Why do you use credit cards in the first place? As a non American I never really understood that. Why doesn’t America just have the “normal” (from my perspective) bank cards that just let you use money from your bank account. Why do you need to borrow and pay back? It seems like such a weird system, not just weird also dangerous, where you can end up in debt.
American here. We have normal cards, they are called debit cards and are what most people use. Generizing a lot here, but credit cards are for people who were never financially educated, desperate poor people, or people who only use them to get plane miles or cash back.
It’s absurd to me to put myself in debt for all but the most desperate of cases.
I don’t think debit cards or their associated bank accounts affect your credit in any way since those transactions don’t go through any of the credit agencies.
When I was just starting out in life, I had a credit card but only used it maybe once a year. Just with that I somehow had a credit score in the upper 700s.
Most good credit cards have some form cash back, as in they give you a little bit of the credit card processing fee they place on merchants. Credit card benefits vary from card to card.
We use credit cards so much because it builds our credit score, which makes it significantly easier to take out loans for large purchases (eg car, house, etc) or rent an apartment.
We do have “normal” cards, they’re called debit cards. You are right that it’s weird and bizarre and dangerous. You shouldn’t be using credit cards if you’re living paycheck to paycheck imo.
Does that mean that your credit score is determined by companies? Or is the credit score something the government calculates for people?
I think in the Netherlands if you want to get a mortgage, the bank looks at your income, other loans you have, etc and they determine on rules the government set how much you ca borrow. There is a register for people that fail to pay bills, but it’s not something you get on easily, you really need to fail a lot.
Credit cards offer more fraud protection, at least where I live, while debit cards offer nothing much. I buy on credit and pay it off fully every month.
Agreed. Weird system, and dangerous for many. That’s why I only allow myself a very limited card, which is what I used to build my shitty credit back up.
Most Americans can’t afford a $400 emergency and live pay check to paycheck. Car breaks down, emergency medical expenses, emergency house breaks down could all cost over $400. You need a Credit card for that back up that you could eventually pay back by probably sacrificing something else. Need a car need a credit score or you pay $3-10,000 more in interest same with buying a home. Want to rent need a credit check. Want to get a job at a bank, military contractor, some government positions, and other secure jobs. They want to make sure you don’t have bad credit or can’t be taken advantage of . Which no credit is often considered bad credit.
If you don’t have 400 in savings and live paycheck to paycheck how can you borrow 400? Like how can you pay that back? It still seems really weird, and if you can somehow pay it back, why didn’t you save a small amount before the car broke down?
Buy ramen, skip meals, Put off getting new shoes for another year, Don’t get a haircut, skip an oil change, run your car on a donut, cut cable or internet or phone for a few months, pick up overtime or get a second job, wait for tax refund.
There is flexibility but doesn’t mean you have savings. When you are poor some things are an emergency and sometimes you have flexibility or a chance to earn a bit more money. But when you are poor life is expensive and there is a ton of things you can buy as an upgrade, fix, or comfort.
When you are poor there is an endless list of things that need to be fixed and improved.
Median income for an individual is $50k median which is $39,129 a year after taxes. $3,260 monthly budget. Rent for 1 bedroom is $1,496 that is 46% of your real income. Usda say cost for food for male is 300$ a month on the low side that brings you to $1,464. Transportation for a household with 1 car(not median individual) is 410$ a month. $1054-electric $84- phone $140-water $30- health insurance $456 - car insurance $165- internet $75 =$104 leftover
Some of these costs are a mix of average per person or median per person. Health insurance cost you money to use. I didn’t put dental or eye insurance it is easy for you to live in a place where these expenses are more or less. Only recently has 10% of Americans built positive wealth. I think we got it to 7% recently people aren’t in total debt. (1% of Americans is 3.5 million people)
It seems there are details missing from your story. I find some similarities to your story to my credit history and I’ve had drastically different results.
The single digit score was what I was told by a friend in banking who looked it up for me, years ago, but I’m not arguing with you, as I didn’t see it with my own eyes. She could have been lying.
Boomer = old person. Puke = asshole, fucker, or other insult.
As much as I can see the appeal of gaming the system, I don’t look good in orange.
Also, I have gigs to attend to (filthy bass player here), as well as taking care of my sweetheart, who has wicked mobility issues. I don’t think I can do that from a cell.
I paid off all of my debt and closed all of my open accounts. Credit score 515. Make it make sense. Fuck up once? 7 years of bad juju. Pay off all your debt? they forget immediately.
You need open accounts. You need to show you’re responsible with debt management. Use a credit card like a debit card, any purchase you make pay it right away.
A 35 point drop should either be a temporary blip, or a result of having practically no other credit.
A significant portion of your credit score is the average age of accounts. When an account closes, that is no longer accumulating time (this is also why you should just keep credit cards you aren’t using open, and if they have an annual fee, have the issuer change it to a free card if they can, I.e Chase Sapphire down to Freedom).
Another portion of the score is debt-to-limit ratio. If that goes from $250:$10,000, down to 0:0, you look a lot worse as a credit customer.
The system was built around the needs of the upper middle class and it suits them just fine. Someone earning $500k+ per year will have a whole lot of credit cards, loans, mortgages, etc. That diversity helps them generate the scores they need.
You’re spot on. I do want to point out, though, that upper middle class in the US is a household income of 90k to 150k. 500k would be solidly upper class. My apologies if you’re referring to a different country.
I suspect that those numbers may be higher now, though. $90k won’t buy you a house in any sizeable city, you really need to be at the $150l+ level. I take your point that $500k may have been a bit of an overreach in my original comment.
It’s pretty good for most people. There will be outliers.
The problem is, we have massive faceless banks that cater to nearly everyone. They need some system to gauge how much of a risk an individual lendee is.
The only real fair way to do that is based upon their reputation with other creditors over the past so many years. There’s a lot of metrics they can use ti measure that reputation, but all of them suck if you have little-to-no reputation to begin with.
Small community banks and credit unions had some more flexibility here since the bankers knew you, personally. However, I think it’s pretty obvious how subjectively judging someone’s credit worthiness can have some serious consequences based upon any -ism or -phobia you can name.
But we, the consumers, did. By putting all our money in them, and continuing to bank with them as they gobbled up all the local banks and became mega banks.
It’s a consequence of the barely-regulated capitalist system that we have, sure, but it was driven by decades of consumer (mostly boomer) complacency.
I never asked for my bank to be bought by another bank. I have no say I’m the matter and it keeps happening. Pisses me off every time. I switched to a credit union
Even more unfortunately, the big banks have more power and capital and as a result can offer loans on better terms than the small community bank or CU. For a credit customer, even a half a percent can make a huge difference in monthly payment and total cost.
For the credit customer faced with the choice of which line to sign on, it’s really tough to stick to your guns and pay more, intentionally putting yourself at a disadvantage.
Example, when I bought my wife’s car, I came in with an approval letter from my CU. The interest rate was really good. But the bank was near my work, an hour and a half away, and I’m a telecommuter now. Ain’t nobody got time for that.
Still, I told the salesman to run it with their banks. I doubted they’d be able to beat the rate.
They did. By a quarter percent. Not much, but when it also means they handle all the paperwork and I don’t have to take 3 hours out of a weekday to drive into and out of the city, plus actually handle the paperwork myself…
I went with their bank. Sue me. At least it’s a community bank.
From what I understand it’s a pretty shit system that doesn’t work that well.
From the example posted here, it’d be extremely trivial to set up a system that doesn’t deduct points because you paid off a debt. That makes zero sense.
Some dude may have come up with a basic model 20 years ago but it needs updating - any half decent data scientist at this stage would be able to build a better system.
A lot of the FICO scores (there are different scores for different things) don’t ding you for it, but most of the monitoring apps use Vantage.
I find the difference between my FICO 8 and Vantage 3 to be as much as 100 points. Most people seem to have higher Vantage scores, but my FICO tends to be higher. They’re different companies that use different systems.
It only negatively impacts your credit score if you are a bad credit customer.
A good credit customer with low credit would be one that has a few credit cards. They likely have a low limit because they have poor credit…say $750 each on three cards. A good credit customer would not let the balance exceed 1/3 to 1/2 of the limit, and pay the statement balance in full.
Now, suppose this person has these cards for one year, and another person with no credit cards or history, buy a 36 month car loan valued at $5000. To make the math simple I’ll say 0 interest, it doesn’t really matter for this level of explanation.
Customer A understands the game. They do exactly what they are supposed to, and are rewarded with a better reputation with the creditors, as well as a higher limit on their cards…lets say $2000 (though being a good credit consumer, they still do not charge more than they can afford to pay each month, and keep their balances under 1/3).
At the 35th month of this car loan, Customer A has:
4 accounts total - three credit cards that are ~48 months old, and one car loan that is ~36 months old. Average age of accounts is 57 months.
A total available credit of $11,000 (the 5k loan and three 2k cards), with a total reportable balance of $139 (the last car payment).
Meanwhile customer B has:
One account that is ~36 months old. Average age of accounts is 36 months.
A total available credit of $5000 with a reportable balance of $139.
Right off the bat, Customer A is looking like a far safer customer to lend money to.
At the 36th month, Customer A has:
Three open accounts that are 49 months old and one closed account that is 36 months old. Average age of accounts is 58 months. Still trending up.
A total available credit of $6000 with a reportable balance of $0.
Customer B has:
No open accounts and a closed account that is 36 months old. Average age of accounts is 36. Now stagnant.
A total available credit if $0 with a reportable balance of $0.
At the 40th month, customer A has:
Three open accounts that are 53 months old and one closed account that is 36 months old. Average age of accounts is 62 months. Still trending up.
A total available credit of $6000 with a reportable balance of $0.
Customer B has not changed.
It’s not that Customer B did anything wrong by laying their bill on time, it’s more like a divide-by-zero error. The sole source of information on their credit reputation has stopped reporting information and reported that they have ended their business relationship on good terms.
Had customer B been more like customer A (and honestly, those rules aren’t that hard to stick to…don’t charge too much and pay it off every month. That’s a very low bar to set for responsibility), it would be a little blip on their report that would even out over a few months. But because they didn’t, there is no new information coming in about their behavior as a credit customer. For the lenders, they aren’t following “no news is good news”. They need data to show that you are still willing to play by a very simple set of rules.
This is the kind of thing that seems good on paper, but in practice it alienates anyone on the outside of it. If you’re born into a low credit score (i.e. born poor) you’re automatically at a disadvantage. No one will lend you any money because you have a certain score, which in turn means you’re never given an opportunity to improve your score. When credit scores start including rent payments, I’ll be open to seeing it as equitable.
It’s not a perfect system. It’s just the best so far.
Everybody starts at the same baseline. Being born to a poor family doesn’t set you off lower than anyone else as far as credit goes, unless your parents start running up bills on your SSN, which happens, a lot. Cash and investments aren’t part of credit score at all.
Really as far as cash/cash-equivalent accounts go, just pre-paid credit cards that can impact credit, and they can only impact positively, and they are marketed exclusively towards the poor and those with bad credit.
If you want to be mad at anybody, really, it’s the predatory lenders. The payday advance companies, rent-a-centers, slumlords, and especially buy-here-pay-here car lots. Those guys that will sell and repo the same car over and over again when people don’t make payments with exorbitant interest rates.
Hell even Sprint PCS back in the day. They’d give anybody a phone with a $150 deposit.
All of them will pull a credit score at the start and then only report delinquent accounts. These are all aimed at people who are poor or have bad credit, and can only negatively impact the score.
Most of these are all run by sleazy local businessmen. Wealthy, but still exceptionally far from the super rich.
Honestly this sounds like one of the few times where the banks actually have the customers best interest (bank pun) in mind. The credit score formula is well understood (even if it’s not fully known by most people, since it’s proprietary). The risks and benefits are disclosed and agreed upon. Customers are expected to know how to use their products properly. If they do, the bankers may even sweeten the pot with some cashback or points, and provide an improvement to their reputation with the banks. If they don’t, they pay the pre-disclosed interest rates and late fees, and they earn a bad reputation with the banks.
I know it sounds like I’m shilling for the banks here. I’m not. I’m just saying this isn’t the right fight.
To turn it around, suppose you are a wealthy lender. You have three total strangers asking you to lend some cash. On what basis do you determine how risky it would be to lend them money? Or do you assume they are all an equal risk and give them all the same offer? Credit scores serve the purpose of determining how risky a credit customer is, based upon their reputation with others lending goods and services. Assuming an equal risk will either make you a loan shark, or you won’t be a wealthy lender for long.
Now, I’d be very impressed if the banks adopted a fully disclosed formula. It’s great that we can pull our full credit reports for free and see what they see, but what would be better would be to know exactly what they are basing their decisions on. It’s understandable that they’d want to keep that close to the chest, though. In a time of formula-based automatic approvals/denials, it’s only a matter of time until someone figures out how to game it.
I’ve never seen the need either, and it’s never caused me any problems. I’ve bought cars, a house, etc., and nobody has told me no yet, so I haven’t worried about it.
Everything is on autopay now, but I’m in my 40s and there was no autopay back when I was having trouble remembering to pay bills. Then I was self-employed for years and the money was variable from month to month and I didn’t feel like it was a safe bet to get a card if I couldn’t be sure I’d have enough in my account to pay it back. And then when I got other jobs, I just never got around to getting a card. Now I’m not working (putting my daughter through online school) and my wife essentially gives me an allowance and it doesn’t really make sense to get one.
Thankfully, my wife of 23 years has excellent credit.
I’ve gone through a bit of what you said but never really made enough money to get into real trouble. Things are very stable now and we really don’t spend much so our credit has really gotten good over the years.
What do you mean, pay things off? My credit card account is linked to my bank account and it’s automatically balanced on the 20th of each month. Do you have to perform manual labour to send money from one account to the other one? Genuinely curious.
How dare I choose to not get into credit card debt!
Having/using a credit card needn’t cause you to pay a cent more than not using one.
If you just put on a credit card what you’d be buying in another way anyway, and then pay off your statement balance each month on your due date, not only do you not spend a single cent more (you’ll never get charged interest this way), but you continuously build credit. The only difference will be that instead of paying for stuff the moment you buy it, you pay for all of your month’s purchases all at once, at a later date.
I’ve never paid a cent of interest on any of my credit cards because I’ve done the above, and my credit score is over 800 as a result, today.
I get that and if automatic payments had been a thing when I was younger, I would have gotten a credit card back then. At this point, it’s moot because I won’t be working for the foreseeable future as I work with my daughter who is going through online school.
ITT I’m seeing a few common misconceptions repeated by many otherwise correct and knowledgeable commenters without remediation. I’m addressing them here, because understanding financial systems empowers everyone, whether they wish to use them, change them, or burn them to the ground.
Lenders only see your credit score. Mixed truth. Lenders can order specific scores to get a quick idea of credit-worthiness, but for most credit decisions a credit report or ordered. (This is often called a hard inquiry, and indicates a credit was applied for. A single inquiry is basically ignored by most scoring models. Many inquiries in a short timespan can be considered risky.) Regardless, the report is the same one you see when you order it directly from a credit bureau.
Your credit score is universal. Mostly false. Credit scores are just someone’s guess of your risk to a lender based on data reported by previous lenders. Good guessers can make money guessing, but none are perfect, and some are only good at guessing risk for specific contexts. Who are they? First, there are the bureaus. They have various branded scores that they sell as products to lenders (for credit decisions) and borrowers (for credit building). Next, there are numerous companies who exclusively develop and sell scoring models. Finally, some lenders such as larger banks develop their own internal scoring models. All the above are adjusted regularly and tailored for specific industries and debt classes. I say “mostly false,” because it’s true that many scores use similar scales and the same records, which means they tend to rise and fall together. That’s why lot of people, even financial wellness advocates, often talk about “your score” as if it’s a single agreed-upon value, but the reality is scores are numerous, distinct, and variable.
Credit reporting agencies use personal information for scoring. Mixed truth. Many bureaus have affiliated entities that broker financial data for ad revenue, but the information they are allowed to distribute in credit reports is tightly regulated in most countries. (Exceptions: there are alternative scoring model providers who fill a gap of niche debt types sought by applicants with no credit history, such as LexisNexis’ “RiskView” which can use more personal details like address stability and online purchase history to determine risk.)
Credit history is permanent. False. Negative records like late payment, non-payment, and bankruptcies have expiration dates by law in most countries. Aside from when accounts were opened and closed, generally nothing in a credit report is permanent, and the scores can be extremely variable in practice.
I should worry about my old credit score. False. Credit scores are used and discarded. New score overwrites old. The only thing that persists would be a credit decision, if there is one. Most scores are partially based on transient data and thus can bounce around wildly. For example, VantageScore 2.0 can dip by over 150 points because a large transaction put a card slightly over the limit but then rebound 150 points after the balance is reported within the limit. Similarly, FICO 8 can jump by 100 points just because the applicant was added as an authorized user to a card with a long payment history. Likewise, most scores can rise and fall drastically based on credit utilization (which is usually reported based previous statement balance, meaning even if you pay off cards every month your credit score will fluctuate in proportion to variance in monthly spending).
Banks like credit card debt.FalseTrue. (Corrected by @d00ery) Banks love it when you carry a balance. The interest accounts for the majority of their revenue.
The volatility of scoring is the most important takeaway, I think. The temporary nature of scores can be exploited pretty easily. If you understand how they work, you can often get the score you need at a particular time with a bit of planning. And the rest of the time, when you aren’t using your scores for anything, they’re vanity numbers at best.
Anyway, if I missed something or am wrong, please point it out.
True. This inquiry collapsing behavior is a feature of recent iterations of two popular models: FICO (8,9,10) and VantageScore (2.0,3.0).
Note however that:
It only works for certain types of debt. For example, FICO8+ includes auto, student, and mortgage. VantageScore2+ includes utilities, auto, mortgage. No model includes revolving accounts like credit, retail, or charge cards.
The inquiry collapsing behavior only occurs within a single asset class. For example, FICO8+ would collapse simultaneous shopping for student loans, car loans, and mortgages into 3 inquiries, not 1.
The shopping period varies. FICO8+ ignores same-class inquiries for 30 days and collapses same-class inquiries within a 45-day window. VantageScore2+ does the same but only within a 14-day window.
Bonus hack: Certain banks also routinely collapse/reuse inquiries for same-day applications, permitting additional applications “for free,” which can be useful if you are denied your first choice and have a fallback in mind or if you are instantly approved for one product and want to try for another.
Credit card companies posted $176 billion in income in 2020, down from $178 billion in 2018. Interest fees accounted for $76 billion and interchange [merchant] fees accounted for $51 billion in 2020.
Interesting to see that this has only changed, fairly (last 3 - 6 years), recently and the profit from merchant vs interest fees has pretty much flipped!
I didn’t know about the Fed data, so that to me feels like a good solid source as well.
A lender will look at those things, as well as a credit score. Lots of folks in this thread are mistakenly trying to make credit score more than it is.
That’s not at all a universal rule, and a low credit score can even affect employment in the US.
FICO Credit scores weren’t even invented until 1989, when the US middle class began it’s slow death.
Paying off loans early lowers your score. Using a credit card with a higher limit increases your score. It’s never ever been a way of establishing that a person is trustworthy to receive a line of credit, it is a scam to put more people into debt and keep them there.
No one opts in to have a private company collect (and lose) their private information. You’re born into a credit score.
Ive only ever carried a mortgage and a small car loan as debt. My cc are paid in full every month. My credit is consistently well into the highest category. It’s certainly a game, but an easy one to play if you have any type of self discipline, and I’ve never felt like it’s kept me in debt.
That’s not at all a universal rule, and a low credit score can even affect employment in the US.
I understand that companies use them improperly, but that isn’t he fault of the credit score. Thats the fault of the employer (or our lack of laws protecting employees). Nowhere does FICO sell their credit score product as an employment screening tool.
Paying off loans early lowers your score.
I don’t believe thats true. Paying off a loan might lower your score, but I don’t believe there is anything in the model that takes into account whether it is early payoff or not. Feel free to cite a source that backs your statement.
Using a credit card with a higher limit increases your score.
That’s incorrect. Having a card with a high limit, and having only a small revolving balance on it (or no balance) can improve your score. Another way to achieve the same thing is multiple cards with with low to no balance that adds up to a larger total limit.
It’s never ever been a way of establishing that a person is trustworthy to receive a line of credit, it is a scam to put more people into debt and keep them there.
I’m not sure what you’re saying here. If a person is able to limit their behavior in spending above a certain percentage of their credit line, then that is a pretty good objective measure someone is trustworthy of certain levels of lending to them. Do you question that?
No one opts in to have a private company collect (and lose) their private information. You’re born into a credit score.
There is no law saying that you are required be involved in borrowing. If you’ve never opened any line of credit, you won’t have a score.
There is a lot of misunderstanding about credit scores posted here.
The purpose of credit scores is to answer only one question:
How good are you at pay back a debt if someone were to loan you some money?
Thats it. Everything on how the score is calculated is weights and measures to service that question.
The reason that making payments on an active loan improves your score, is because it is real proof you are getting money from somewhere (the credit score doesn’t care where) and you’re choosing to spend that money on an agreed payment on the debt. Lets say I’m a lender and I’m considering giving you money, and I see that someone prior to me make a similar agreement, and you’re honoring that agreement to pay, then it gives me a good reason to think you’ll also pay on debts you have with me. The reason your score goes down when you pay off your last loan, is because I can’t see you still have the money to pay on a new loan. It means you’re a (slightly) higher risk because I’ll have to take it on faith that where ever you got the money to pay off the last one, you’ll also be able to get that money to pay off the one to me. There’s no guarantee for that, so its a risk to me, a lender.
Another thing I’m seeing missing in the discussion here is:
“Doing X makes your credit score go down”
Technically true, but many of those things that make it go down only do so for a short time. Maybe a month or two (using modern FICO score system).
There can be arguments as to which inputs they use, and how much each of those inputs affects the score. So much so, rating agencies themselves even change their minds over time. They update what they think is important and downgrade what they think matters less. You’ve likely heard of a FICO score. Over time there have been SIXTEEN DIFFERENT VERSIONS of what makes a FICO scoresource. Some of the variation you see when you get your score from different places is those places using slightly newer or older versions of the scoring system.
Unfortunately lots of organizations that have nothing to do with lending you money are choosing to use your credit score for their own systems. I’ve heard of insurance companies using FICO scores as inputs to how they calculate premiums, which they shouldn’t do. Some employers are using these now to filter applicants. Those employers are perverting the credit score system (again, a system just for loaning money) as a measure of trustworthiness or fidelity. I wouldn’t mind laws that prevent that as that isn’t what credit scores are designed for, and doesn’t answer that question.
No it isn’t. It’s to force you to use credit under the guise of checking how good you would be at paying back.
I’m from europe, you know how much credit i had before i got a loan for my condo? absolutely zero. All they needed to know was that i had no debts, lived well within my means, knew what i was doing, not “how many credit cards and car loans have you got running”. The best possible person to loan money to is someone with 0 credit history who can prove they’ve got a solid source of income, and are living well within their means. Because you know, once i bought my condo, paying my loan is the exact same thing as paying my rent.
And if you wonder if i got a decent loan with such a “terrible credit history”. It was a loan with variable interest rate, after the first change, my interest dropped to 0 due to the financial crisis, and it remained at 0 until i paid it of.
Anyone actually believing the american credit score system is anything else than just a way to force you to use credit while you really shouldn’t, is just indoctrinated. I’m sorry, but someone perfectly paying rent, and saving up for purchasing a house without ever using any credit is the perfect person to give a good mortgage too, and the exact kind of person this system sets out to punish because they’re not taking part in the American banking system the way the banks want you to.
The best possible person to loan money to is someone with 0 credit history who can prove they’ve got a solid source of income, and are living well within their means.
Okay, so the “solid income” component is easily provable.
How can a lender know you’re living well within your means?
I’m sorry, but someone perfectly paying rent, and saving up for purchasing a house without ever using any credit is the perfect person to give a good mortgage too
Paying rent is NOT equivalent to paying a mortgage. With rent, you’re responsible for only making the rent payment. Nothing for housing upkeep and repair. Almost zero liability on how you keep your home could make you open to a law suit. No renter has to pay for the replacement of a roof or complete replacement of HVAC. Skills developed only to pay rent are insufficient for home ownership. That doesn’t mean a renter can’t grow to those home ownership skills too, but it isn’t equivalent as you’re suggesting…
How can a lender know you’re living well within your means?
It basically goes like this: here (the Netherlands) debt is registered, including what your monthly payments on those debts are. When you want to get a new loan you go to the bank with proof of income, they then look at your existing debt / payments and make an estimation of your cost of living. You will only be approved for a loan if monthly payments for current and the new loan + cost of living < your income.
You’re not supposed to be able to borrow more than you can afford the payments on.
Of course you can still get into trouble if you have a sudden drop in income, but at that point you can’t get any additional loans.
They also register non-payment of debts, not just on loans but also on things like energy bills, rent, cell phone plans, etc.
The best situation is that they have no records on you, because that means that you have no outstanding debt and no failures to pay.
Someone else already replied, but about living within your means, lenders can look up other debts you have, and missed payments you have. And they all request access to your pay slips so they get a basic view of your income. In the end it’s close to the credit score system, with the difference that someone who doesn’t have any loans or credit cards willl also have a good score since they don’t have any missing payments, and haven’t gathered too much debt already, which makes sense.
Regarding your point of rent vs ownership. In the end you can still boil it down to needing a certain amount of money/month. Only part of it is your mortgage of course, you need to save up for bigger things, but it’s not that different. And i don’t even see this being relevant in this discussion, i don’t see how the credit score system would predict you being up to being a house owner and setting money aside for bigger repairs.
The first part of what you say is still off even. Its based on other factors like debt to income, income amount and credit utilization. different lenders also use different calculations depending on the type of loan. For example a mortgage wont be the same as an auto loan and theres even a system for renters the scores can vary wildly and really the numbers dont even mean fuck all half the time. Underwriting is a whole career and a company doing lending that knows anything will look at how well you actually pay your obligations and weight it with how much you make, practically ignoring the score itself. Ive seen people with 350s get top tier financing and people with 700s without even a thin file (low history) get completely denied or stupid interest rates.
For reference I havent missed a single payment in my entire life, my credit is damn straight outside of some credit utilization on low limit cards and because of that my score is “mid” i dont really care at all though cause chasing the number will stress you out and you wont benefit much from it if you just make your payments anyways. Ive still gotten approved for most things ive applied for because of making my payments
different lenders also use different calculations depending on the type of loan.
I already touched on that with the 16 different types of credit scores: source
Underwriting is a whole career and a company doing lending that knows anything will look at how well you actually pay your obligations and weight it with how much you make, practically ignoring the score itself.
You’re right that underwriting is a whole career, but we’re not talking about underwriting. We’re talking about FICO credit scores. You’re bringing in things that aren’t credit score, but are factors that lenders use for determining loan worthiness and interest they charge, but that isn’t FICO credit scores.
Myself and OP are talking about the price of apples here. You’re asking me why an apple pie costs so much. Yes, apples are an ingredient in apple pies but not the only thing that influence the cost of the pie.
How good are you at pay back a debt if someone were to loan you some money?
That’s the point!!!
The only information we are given is that the OP paid off a debt and the credit score went down. You claimed that maybe it is only temporary. But that still goes against your giant text claim.
Why does paying back a debt announce that you are bad at paying back a debt?
It doesn’t say that. You’re drawing your own conclusion from the score decrease. Also, I didn’t downvote you.
The only information we are given is that the OP paid off a debt and the credit score went down.
If that was the OPs only long term debt being serviced, (credit cards don’t count), the credit agency now has no proof you can CURRENTLY pay off a new debt. Meaning OP is a slightly higher risk.
Credit agency has no idea where the money came from that paid off the debt. It only knows that OP was regularly finding money somewhere, and that OP was putting that money toward debt as agreed. Did OP lose their job after paying off the debt and doesn’t have income anymore? Did OP have someone else helping them pay that that person won’t help in the future? The credit agency has no idea. It only knows that in the past they were able to service the debt, and today they have no way to measure if they can. So it is a slight increase in risk, meaning slight decrease in credit score.
All of that is technically true, but still kind of a shit policy as it consequently raises the cost of borrowing on someone who paid back the full loan plus interest.
You can rationalize all these shit policies with any number of talking points. Some of them might even be actuarially sound. But they’re still shit.
it consequently raises the cost of borrowing on someone who paid back the full loan plus interest
This is mostly likely untrue because she was paying off her debt the whole time she had the loan, and her credit score and history were probably improving that whole time. Maybe her score went up 300 points over the years of that loan, and then dropped 35 points.
her credit score and history were probably improving that whole time
Until she paid it off, at which point it dropped.
Maybe her score went up 300 points over the years of that loan
Maybe, but I highly doubt it. And 35 points is a big drop when you’re already in the 700-range. That can be worth a quarter point on a mortgage loan, which will end up costing you tens of thousands of dollars over the life of the note.
And 35 points is a big drop when you’re already in the 700-range.
Which means the tons of points she likely gained by paying off the debt for years saved her at least a point.
I’m not arguing that a lower credit score isn’t worse, I’m pointing out that cherry picking a single month movement to claim that she got screwed for doing something that actually likely helped her doesn’t make any sense.
No. Because there’s a soft ceiling. If she started in the 700s, she wasn’t going to get a 1000 credit score by the end of the loan. Those don’t exist. She wasn’t going to hit 850 for carrying a single small commercial loan, either.
cherry picking a single month movement
This isn’t cherry picking, its about incentives.
If I’m carrying a car note and I don’t want to be saddled with debt, I’m forced to take a credit hit because I’m finished paying my loan. This impacts the cost of a future loan when my car needs to be replaced.
By contrast, if I’m loose with my money, I’m effectively rewarded for refinancing or rotating out my vehicle before my loan expires and remaining in debt indefinitely.
The credit score becomes a means of penalizing people for failing to carry these burdensome loans uninterrupted.
If she started in the 700s, she wasn’t going to get a 1000 credit score by the end of the loan.
Of course, assuming she started at 700, and not much lower. But even if she did start at 700 and only went to 800, that’s still a net gain of 65 points.
This isn’t cherry picking, its about incentives.
lol. It’s one number in a vacuum and you’re basing your entire argument on it. Not only is it blatantly cherry picking, but you’re assuming everything else in the favor of your position in order to make it as bad as possible.
If I’m carrying a car note and I don’t want to be saddled with debt, I’m forced to take a credit hit because I’m finished paying my loan.
All of that is technically true, but still kind of a shit policy as it consequently raises the cost of borrowing on someone who paid back the full loan plus interest.
You’re moving the goal posts now. Before your argument was that paying the loan back in full with interest hurt her, which is almost certainly untrue and what I was addressing, and now you are arguing that she would have been better off going for a new loan in the month before she closed out the loan than the month after. The latter argument I can’t really challenge as much but is pretty meaningless.
The credit score becomes a means of penalizing people for failing to carry these burdensome loans uninterrupted.
I know this is BS from personal experience. I’ve only ever had a small car loan, which I paid off early, and a mortgage. I carried credit card debt one time about 4 years ago when we moved across country and my wife was in between jobs, and that was only for about 3 or 4 months until her pay checks started coming in. And there was a good bit of time between when I paid off my car and got our mortgage and we got a fantastic rate and my credit has comfortable sat about 800 for close to a decade now.
Yes, it’s annoying that you have to be using credit to prove that you can currently use credit responsibly. But what other way is there? Are they just supposed to assume you are good with credit because you don’t use it? That’s like thinking it’s safe to believe some stranger you just met on the street because they have never lied to you before.
All of that is technically true, but still kind of a shit policy
Your complaint is with lenders then, not credit agencies. If someone misuses a tool, its not the fault of the toolmaker, but the person using the tool. Would you blame a hammer manufacturer because it is really crappy at driving in screws? I would hope not. You’d be upset at the person using the hammer to try to hammer in screws.
Your complaint is with lenders then, not credit agencies.
If the credit agency adjusts your score downward and then reports me out as “less credit worth” then my beef is the business that is effectively slandering me.
If someone misuses a tool, its not the fault of the toolmaker
If the tool reports inaccurate information, the toolmaker is at fault.
Who would you rather give a loan to? A person who you know is currently able to pay you back or a person you know was able to pay back the loan 10 years ago?
Exactly, so that answers the question. When you finish paying your loan, you stop paying back money and thus your credit score is slightly lower than when you were actively paying back.
That’s the opposite of my point. Let me correct myself here. The person who just *finished paying me back because they can obviously *make every payment until it is paid back again, as they have obviously demonstrated.
I find that my score drops roughly twenty points, and stays there for a couple months any time I’ve got a zero balance on my credit card on statement day.
I returned an $1,100 generator in January, resulting in an enormous negative balance on statement day.
I suspect my credit score will be down to zero this month because of it.
As a general rule, I pay my credit card off three or four times a month, making sure to leave five or ten dollars on there for statement day. It costs me zero interest to do this. It’s just stupid that I need to do it.
I don’t thing they do, as doing so does not result in zero balance on statement day, nor does it require paying the card 4 times a month, nor does it incur interest. Unless they just like doing things the hard way then complain it’s stupid they ‘need to do something’ they don’t need to do.
I basically never have a balance on my statements, but score has been stable at 821 for many years. I even got a car loan this month and it only dropped to 817.
Mine is generally the same as yours, but I can track back for years and see correlation with drops down to 800 or even 790 every month I’ve ever had a zero balance. I mean, it’s really all vanity, but I had shit credit when I was young, so it’s wired me to constantly monitor my score in my later years.
Yeah, keeping a small amount on the card will help, but that’s really only to eek out a couple of points. I don’t bother trying to min/max that much and my credit is 821/823 TU/equifax
It is bullshit, but there are ways to game the system. Essentially, a higher credit score means you’re a better mark for creditors. It means you pay your bills, but you’re never debt free. In order to maximize your gains and keep the capitalist machine running, you always have to be leveraged in some meaningful way. Basically, if you’re really poor, you’re fucked, but if you can somehow manage your bills every month and put your normal expenses on a credit card of which you never use more than 50% of your limit, your score will go up. Finish paying off a car? Finance a new car! It’s ridiculous, but that’s what they want us to do to keep the ruling class in power.
Basically your credit score is some amalgam of how much credit you have available, vs how much you owe, and whether or not you pay your bills. If you have available credit and you have never used it, you suck. Giving you credit won’t get the lender anything for their trouble. If you have a little debt, and you consistently pay it (read, pay them interest), then your score goes up because you’re paying your creditors, so other creditors know that you’re a good source of income for them.
The only thing that having a good credit score does, is give banks and institutions information on how much they could possibly wring out of you.
My score should be through the roof, but I’m too leveraged, I have something like 80% usage of my available credit. But I have a nontrivial amount of debt that I have carried for years and I’ve (sometimes painfully) always paid my bills on time.
My suggestion for anyone currently carrying significant debt trying to pay it off and increase their credit score: pay more than your minimum and take every offer they give you. If some institution says you’re pre approved for some loan device, say yes. Even if you just throw it in a drawer. It will increase your total available credit driving down your occupied credit % and driving up your credit score.
If you’re trying to build your credit score, having a bunch of credit that you’re not using can help very much.
That, in and of itself is the key: having credit that you’re not using.
If you immediately use any credit you claim, then you’re going to eventually sink (go bankrupt), which takes 5 years, sometimes longer, to clear from your credit score.
The insanity of the system is evident. Understanding what the credit score really means, can inform your decisions about how to best maximize your score, if that’s your desire.
I know people who are classifiably wealthy with terrible credit scores because they’ve never needed credit for anything, so they don’t have any credit sources and certainly have not ever held a balance on a credit account for any length of time. So they look very bad on paper to creditors. Consequently I know very diligent people who are remarkably poor by comparison with near perfect scores because they know how to game the system in their favor, and do everything the way creditors want it to be done. They’re never so leveraged that it negatively impacts their score, they have plenty available and they’re never so much in debt that they can’t pay their interest.
I’m not saying the system isn’t stupid, I’m saying that blindly applying for every credit offer carries risk in and of itself. Plus hard credit pulls will temporarily hurt credit scores anyway. I just wanted to caveat that piece of advice for folks because I think being cautious and intentional with personal finance decisions makes more sense.
That’s not what I suggested. I’m speaking more on the lines of being pre-approved for credit, which usually doesn’t require a hard credit inquiry.
Usually your own bank will do stuff like this, or financial institutions that you have history with.
Credit increases and new forms of credit that are pre-approved are generally what people should focus on, not filling out applications for credit as much as possible.
Such offers are not frequent as long as they’re genuine, and usually result in a reduction in total credit utilization, which leads to a better credit score.
I also agree that filling out requests for credit without being promoted by your existing financial institutions can be detrimental, at least in the short term.
My credit isn’t perfect and I’m continually trying to improve by paying down my loans and credit accounts to try to get them to and keep them below 50%, but if my bank sends me an offer for a pre-approved card, I’ll go ahead and accept. When it arrives, I’ll activate it then toss it in a drawer and do everything in my power to never use it, simply to get that utilization number under 50% and keep it there.
Also in Australia, no idea what my credit score is. I admit I am unusually lucky, tho. Have only had one loan in my life, with which I bought my first real car over a decade ago.
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