While I generally check my free credit report every 4 months or so, the last time I checked my credit score was November 2008. At that time, it was right at 740. Earlier this week, I checked my credit score again. I was pleasantly surprised to find out it was 730+!
Why would I be pleasantly surprised that my credit score has dropped between 5-10 points over the last 16 months? Because that's when we stopped playing the credit game.
In early November 2008, Courtney and I not only canceled our credit cards, but also paid off our only non-student installment loan. The following month, we decided to take it a step further and close our final remaining credit card.
For the last 15 months, we've lived free of credit cards, other revolving credit, and traditional installment loans. (We still have student loans). While this has had an overwhelming positive affect on our financial life, it was supposed to have a dramatically negative affect on our credit scores.
According to the graph and the information on the site, we have several strikes against us:
- The length of our active accounts would obviously be affected. Several of our gas credit cards were 4-5 years old. Canceling them reset the length of our active revolving loans back to zero.
- The type of credit used would be less diverse. We didn't have a mortgage and now didn't have any active revolving credit, either. I've read that FICO likes to see an installment loan that isn't a student loan (for example, an auto, jewelry, or personal loan). We're now lacking that, as well.
- Our overall credit limits were all but eliminated. Previously, we had close to $15,000 in credit card limits. This was obviously reduced to $0 by closing the accounts.
To be fair, we did have several factors working for us:
- Canceling our credit cards didn't increase our utilization rate (the percentage of our limits we actually use). When you don't have a balance, the utilization rate will always be zero, whether your limits are $10k or $0.
- My payment history has no negative marks. It's certainly possible that my punishment for canceling my accounts may have been augmented had my history shown several negative marks. A clean payment history may help counteract the downside of canceling the accounts.
- We have no dings from new forms of credit. In addition to closing our accounts, we also chose to place a credit report freeze on both of our reports. As a result, we've had very few (if any) checks on our credit and certainly no newly opened accounts.
Could my credit score be even higher?
It's very possible that even though my credit score hasn't tanked, it could be much higher. Had I not canceled my credit cards, maybe my score would be 750+ or 760+! There's no way to know for sure, but canceling my credit cards may have caused my score to stagnate.
Another possibility is that FICO's algorithm may still need more time before it begins to punish my “negative” behavior. I find this theory less likely, as it's been well over a year. Over time, maybe the score will slip more dramatically.
On that note, if we keep up our current pace, we'll eventually cease to have a credit score at all! It can be argued whether this is good or bad, however you'll be hard pressed to convince me that executing our current plan for another 5 years will put us in a bad position financially.
So what does this all mean for you?
It's important not to draw any sweeping conclusions from a single example. I fully expected my credit score to drop more than a mere 5-10 points, based on the information I've been reading for the past two years. It would be irresponsible to assume canceling your own credit cards would yield a decrease or an increase in your score based on my results.
At the same time, my sample case study has caused me to reevaluate just how much we know about the algorithm used for calculating your credit score. After all, no one knows the exact formula. All we have are graphs and lists of potentials factors that may be taken into consideration.
The only universal lesson that can be extracted from this is to ensure that an estimated change in your credit score isn't the primary influence on your major financial decisions.
Of course, you should have any and all information you can. I'm not suggesting we should all ignore the information that is available about the make-up of credit scores. You should absolutely consider it. Just be wary of letting it dictate any major financial decisions on its own.
A week ago, I considered myself fairly savvy on the topic of credit scores. Today, I'm not so sure anymore!