Reader Story: My Falling Credit Score (and Why It’s Not the End of the World)

Scores can also be used in decided how much to charge for car insurance, weather to hire a person, or even if ou need a deposit to get a cell phone. So it can affect people who don`t plan to borrow money again.

I have no idea what my credit score is. Never got a loan from a bank and never intend to.

Wow, this has been eye opening. That explains why my credit rating has suffered. I’m also in the best financial shape of my life, so I couldn’t figure it out.
Thanks for a great article.

You were penalized for closing accounts! You would have been better off by leaving them open and not using the cards. It is one of the unfortunate parts of the way they create the FICO score. The only cards I close are ones that have an annual fee.

The only time we know our credit score number is when we do a refinance. The mortgage broker gave us clues on how to raise it. She told me to close any cards that have not been used in a long time. I did that and when we did another refi, my score dipped 30 points! Even the brokers don’t know how the scores are calculated!

Money magazine did an article about it and yes, it was revealed that the equation for calculating the FICO score would not be revealed. It was not a long article, but Money did mention their theory on what can drop/raise a score. The readers here are correct- keeping cards with balances, keeping cards that don’t have balances, mortgages, car loans and so forth help keep your score up.

I hope to be a “deadbeat” one of these days as well!!

Our FICO score has always been high in part because we use credit cards heavily for our business (and pay them off in full every month). But we’ve still been subject to decades of idiotic thinking on the part of banks whenever we tried to get or renew our mortgages. Even though we’ve paid our bills on time our entire adult lives, all they cared about was the fact we’re self employed. No matter that the average Joe working in an office can be fired or laid off just as easily as we could go belly-up, or that people still have car payments even when they can’t write them off – all they cared about was that wretched pay stub. We had to scrape and beg every single time, even after years and years of timely mortgage payments. As it always seems to be, now that we don’t need them, they’re much nicer to us. SIGH. We look forward to the day when even the mortgage is paid off (7 years, fingers crossed), and we’ll be free of the whole messed up system.

Thanks for sharing. You are so right that the credit score doesn’t tell the whole story. If you never use credit, your score will fall, despite the fact that you have a “perfect” credit history.

Great article with some good insights. I see your reasoning behind closing out credit cards (I’ve done the same myself over the past 2 years) yet, when it comes down to it, why not just keep them open? Like yourself, I was worried having too many credit cards open may create the opportunity for fraud or identity theft. Really though, is it reasonable to act on that fear to the detriment of a credit score? If you have the self-control to not use the cards why not just shred them and forget you have them? My score dropped from the high 700s to the mid to low 700s. Owning your own business and living purely on cash is 100% the way to go and allows you to break away from the controlling powers of the credit score. This is how I am trying to shape my future as well. Yet, as you know the average American and reader of this blog is tied to the credit score for major life purchases and the impact that has on the long term interest they pay. Having a score of 675 vs 750 can have a big impact on the amount of interest you pay. Just food for thought. If you have the self-control to not use credit cards the fear of fraud on those cards shouldn’t persuade you to close the cards.

Haha — I see many of you thought the FICO score was your score.

You see: it’s not. It is THEIR score, for you.

I’m going to say something kind of wacky — I don’t think credit scores were ever meant to be a perfect indicator of an individual’s ability (and willingness) to pay. Rather, they’re meant to bucket you into groups so that the loans you are given are priced competitively. And, quite frankly, in the aggregate, I think they do a decent job.

I say this as both a math major and former Prosper lender. As a math major, one gets into something called the “fallacy of averages” which more or less says that expecting every member of a group to perform as “average” is wrong. This is why you have people with low scores who pay their bills, and people with initially high scores who don’t. (I say initially because if you stop paying your bills, you won’t have a high score for long.)

Credit scores are about credit companies trying to beat the odds. If we didn’t have credit scores, we’d have one “average” interest rate that we would all pay. And, if there were a bunch of dead-beats, that rate would be pretty high. Then, we’d probably get into adverse selection issues. People who have no intention of paying their bills, wouldn’t. People who are extremely low risks of default likely wouldn’t pay high interest rates. So, credit scores allow banks to set appropriate pricing for their financial products. People who have little ability or willingness to pay either won’t get loans or pay high prices for it, as demonstrated by their history. People who have great history and little chance of default will pay a lot less money because the banks want their business. Credit scoring doesn’t have to be absolutely perfect for each individual; it has to be generally correct in the aggregate.

Now, the Prosper lender part of me says these scores are a lot less hooey than individuals may want to think. Prosper was more or less founded on the principal that banks were screwing up, charging to much, and filtering out “higher risk” borrowers who may be able to pay. Well, Prosper’s performance (rather, the collective performance of individual borrowers) suggests that banks more or less know what they were doing. The performance of “no credit” borrowers was absolutely atrocious, even worse than “high risk” (aka subprime) borrowers. As I mentioned above, I didn’t care that the scoring models were perfect for a single person. (How could they? The occasional prime-grade borrower will default, and more than a few sub-primes will pay.) But what matters is the performance of the group as a whole. And, as a whole, sub-prime borrowers were absolutely terrible — I think more than half of mine defaulted.

As far as income went, I evaluated borrowers who made more money than I did. I thought it was ironic that I was lending money to people who made more than I did. High income people default too. They lose jobs, yada yada. Nobody’s perfect.

I also meant to add that if you have a large cash reserve, you might want to look at increasing the deductible on your insurance. The higher the deductible, the lower your premium. FICO, again, is only one (small) piece of the equation.

Haha. I read an article about how some video games are using psychological techniques to get you to keep playing their games (and keep plugging money into them) long after you’ve stopped having fun. (Heck, some people treat WoW like it’s a /job/. This isn’t an accident, and the people aren’t freaks of nature. It’s the study of psychology used for evil.)

I think it’s pretty clear that the people who dreamed up the FICO scores were more concerned with rewarding people for staying in debt and punishing them for staying out of debt, than giving an honest review of their financial health. If they wanted to give an honest review, they’d be more concerned about making sure the information was accurate…

I have two credit cards and I never pay full amount and keep it revolving. I wonder if it is good or bad for my credit score ?