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They're not even subtle about it. The system directly rewards you for being in enough debt to always be paying someone interest but not enough that you might file for bankruptcy.
You don't have to be in debt, but you do need open credit lines. Having debt on them actually makes your score worse.
Her score likely went down because she closed out a credit line, i.e the open loan, so technically the "i have an open 5yr loan ive been paying on diligently" is no longer part of her score. The fact that she did pay it off is part of that score, but its weighted differently.
If she instead had 40k of credit cards she had open for 5yrs, with zero debt on them, her score would have gone up. Just having the account open, even not using them, shows a high "credit to debt usage" ratio and "a long time open loan." Both of those make up about 45% of your "credit score."
So no, you dont have to use a CC every month to keep a high credit score. If you want a high score, you want to open a credit card or 2 for their max value until you get about 30k-40k of total credit, and then don't use them at all. Not a bit. Never close them. The "long time accounts" + "high amount of debt not in use" + "never delinquent" is roughly 80% of your score. You can sail into the 700s/800s if you dont have any other credit hit.
While this is all technically correct it’s still dogshit that your score goes down when you do the thing you are supposed to do with a loan.
Your options are:
Take out a loan and pay it off: score goes down
Take out a loan and don’t pay it off/default: score goes down
Remember that your credit score doesn't exist for you. It's not for your benefit. It's for the benefit of lenders, and they don't give a damn how unfair the system is.
This is what people are missing. Credit score is a completely valid metric, but it's just a measure of how likely lenders are to make money off of you.
What I don't get is: since she paid off her car loan, she'd have more disposal income now...? Shouldn't that increase her credit score?
There's a mess of things that go into their formula, but as I recall one of them is actively paying on things. We had our daughter get a credit card and told her that, instead of using her ATM all the time, she should use the credit card, but pay it off every month. Doesn't cost her anything to do that, and it builds a credit rating way more than having a card with a zero balance. Doing that, they'll also end up raising your limit, which increases your rating too. Oh, and if you pay your credit bills as soon as they come due instead of just before the deadline, that also increases your rating.
Ah! I get it. So it's a valid metric in theory. It's shit for everyone in practice.
Seriously. “I rarely take on debt, regularly save aggressively, and pay off my debts as quickly as is convenient” means I’m bad to loan to in their eyes when if you had evidence of all that as an ordinary person I’m exactly who you’d want to loan money to.
That’s how I’ve tried to be (and currently have no debt!).
When I needed to buy a car a few years ago, they gave me a terrible rate because I had a bad score. I had paid off a couple of personal loans AND all my student loans…but it’d been a few years so my credit score had dropped. So fuck me for not borrowing money every day.
I ended up doing a co-sign for a better rate. And guess what? I paid off that car loan a couple years early and got dinged on my credit just like the original post.
But I know they don’t care about any of that and are actually mad I didn’t pay the minimum for the entirety of the loan.
If I would loan money to people, I want them to pay me back as soon as they can. But if I wanted to make money with loans, I'd want my customers to pay their loans as slowly as possible to put a lot of interest rates in my pocket.
Your second option is 2 options. You dont need to default, just never finish paying it off.
Maybe you could just keep refinancing over and over until you're making 0.01 payments a month on 100 loans. And have a max credit score.
Real-life min/max'ing right here
The terms of a loan boil down to "we'll give you x, pay it back plus interest in y amount of time". How do you stretch something with a legally binding predetermined end out indefinitely without hurting your score or financial wellbeing?
Take out a personal loan for the balance?
Isn't that just kind of burning money at that point, i.e. harming your financial wellbeing? Also, aren't personal loans seen as "bad" for credit score purposes? I had to take one out a few years back and my score dropped like 45 points within the week
You do have to use them a little bit though. It wasn't a great surprise to learn that my credit score evaporated right when I was looking to buy a house because a credit card I hadn't used in 7 years was turned off due to not using it. Having no debt, lots of savings, and decent income apparently counts for nothing.
Having no debt,
This is the only part the credit reporting agency sees. In that situation they have to make the lending score base on your history, which tells them nothing of your current situation.
lots of savings, and decent income apparently counts for nothing.
The credit reporting agencies don't see any of this. There is no component in a credit score for your savings or income.
Sure, the credit agency doesn't see it, but the person I'm talking to at the bank to get a loan can see it when I show it to them. But it doesn't matter and they only really seem to care about the credit score.
My guess is that the bank may start with the credit score, and if its below a threshold the bank is willing to lend to, then they don't look any further. Unless you have a truly egregious credit history, you'll likely find other lenders more interested in your business.
Most companies don't want every customer. There are those that only want the safest customers because they have the lowest risk, and that may mean you might get declined even if you would otherwise have the means to service the debt.
I don't know why this dude is getting downvoted. This is basically what I do. And I have a great score.
Yeah I dug into all this a while back while I was trying to raise my score. Turns out the most productive thing I did was just ask my current cards to up my limit. A couple of them doubled, so it dropped my utilization way down, which shot my score way up. I think I was around 675 and went up to 750 just with that trick. I got into the 800s by paying off the credit cards.
Its an annoying metagame you have to play to get the "good interest rates," but those little tricks can save you a fuckton of money over time.
I think the point here though isn’t as much ‘how do we play the game?’ as it is why there hell are we all forced into playing a metagame that is so inherently harmful and specifically designed to encourage risky behavior (I.e. the idea of debt being favorable)?
It's a measure lenders use to figure out how likely they are to make money from loaning to you. It's a very successful metric for them. It's not really for your best interest, but if you're aware of what goes into it there are simple, harmless things you can do to raise your score and help you get better rates.
why there hell are we all forced into playing a metagame
Because the alternative is "how white are you"
Yep, find credit cards with no monthly fee and open them. I have 3 lines of credit and only use the one with the highest benefits. I pay off the bill after it hits my statement, and my credit is always 780-790. Also, like you said, up your limit if you can to get a lower debt to available credit ratio.
Edit: I bet the people down voting me have terrible credit lol.
Try paying it off before it hits the bill. I bet you can squeeze a few points out of it. A friend and I both do that and I've been at 804 since summer and his sits between 810 and 815. Although in truth there's no real difference between your lowest and my friend's highest in terms of what interest rates you'll get.
Every time I've done that it seems to tank my score by like 10 points. No idea what that's about, the whole system is so convoluted its hard to tell what really makes it go down when it does sometimes.
It's fucking weird for sure. If it works for you, do it.
I think the only way we will know this is real is if you post your social security number too. You know, for science.
So I should get five more credit cards and not use them?
I feel like you meant this sarcastically, but the answer is probably yes.
The trick is to not use them though, which so many seem to struggle with. If you're someone who struggles to manage debt, then getting more credit cards WILL BE DISASTEROUS.
So, sounds like a skill issue /s
You can use the cards, just don't carry a balance. If you don't use a card ever, it's likely going to get cancelled.
The easy thing you can do is set recurring bills only to a credit card and then set that card to auto pay the entire balance each month. Something like Netflix or even your electricity bill.
Put the bill on the card, and if you don't have the willpower to shove the card in the back of a drawer and never use it, cut it up. The card doesn't go inactive, you don't rack up debt or interest, and you can maintain a high credit to debt ratio.
Yep. This was a big part of my strategy when I rebuilt my credit. I have a pile of cards, several of which have a single bill associated with them. I wanted to cancel because now I have a great score and a couple of really high limit cards, but that drops my length of history.
So I'll be sitting on these low end cards forever probably. They'll pay a single bill, get paid off before it closes for the month (that's the number that gets reported to the bureaus) and every month from now until I decide I never need credit they'll report $0. Just like they have the last 5ish years.
Don't want to set here and repeat TexasDrunk, but yeah, that's largely what i do.
Though my solution for most cards is to buy a candy bar with each card towards the end of June every year (I have a handful of niblings who were all born end of June through July, so makes a good little treat for when I come to visit)
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I'm not American, but a credit card means that you owe a bank money, right? If I owe my friend money I'm in debt with him. How is having a credit card not being in debt?
Just having a credit card doesn't mean you're in debt. Its a line of credit. You can choose to use it and carry debt, but there's no requirement you do so. The long term consequence is that a bank may choose to close your credit card account if you don't use it for a long time. The shortest time I've had a bank threaten to close an unused card of mine was 5 years. Even then, you can by a $5 sandwich on the card, pay it off immediately, and reset that timer of non-use for another 5 years in that case. I have other cards I haven't used for 15 years and the accounts are still active.
O wow, strange system
O wow, strange system. So you are basically encouraged to sign up for a service that you won't use?
Its a bit of gaming the system, but I see the logic in it.
Since self control is an important part of repaying debts, having a card (line of credit) that you could use, but don't, indicates you have a level of self control. There are people that, given any amount of credit line, will immediately run the debt up to the limit.
The measure of a person having a line of credit and not using it indicates to lenders you do have that level of self control. This isn't the only input used in a lending decision, but I can see the value of it when we're trying to determine one small test applied to general large populations.
The credit score is based on how much money the banks think they can make off of you, not your moral standing.
I should partner up with someone who does that while I do the consistent thing and we cover each other.
Wait.
That's illegal.
Is it? Why?
Reasons.
The system directly rewards you for being in enough debt to always be paying someone interest but not enough that you might file for bankruptcy.
The only interest I pay is a mortgage, but my score is over 800. It must be rewarding for something else too.
Same, mostly. Use the credit card for the cash back and points. Pay the balance off every month. Only things I pay interest on is my mortgage and car.
It’s been a bit since I took personal finance, but I think it takes into account your assets too.
Sorry for the negative vote, but credit score does not take into account your assets. I just dont want folks to think that might be the case. Personal assets will come into play when a creditor considers you for a loan/line of credit/etc along side your actual credit score.
Edit: Well. This is turning into a wall of text.
Credit score is based on several things:
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Ratio of debt available to debt used. I'm trying to remember where the sweet spot is, but it's somewhere around 10% to 20%. If your credit cards have a cumulative limit of $20k, aim for a maximum use of $2-4k. Pay off your previous balance so you don't get hit with interest and you'll gain credit.
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On time payments. At the very least, pay the minimum each month, but really one should be budgeting to pay it off each month to avoid interest.
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Oldest account. I don't like or use my first credit card, but I still have it. Note: cards must be used periodically to keep them active otherwise they won't be considered, I want to say every 3 months. So even for my oldest card, I have a small subscription on it that hits monthly. This gives me an active, old credit line.
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There are "good" forms of debt where on time payments is the name of the game. These are car loans, mortgages, etc. If you have the resources, set up auto pay on these so you never have to worry. Paying them off asap will save you on interest, but it could harm your credit as that is no longer an active line. It's likely still in one's benefit to pay them off, but then we get into a discussion of interest vs cost of money. That's a different rabbit hole.
Uh, there's other stuff, but my thumbs are tired. Hope this helps someone.
I have played around a bit credit score estimators on the credit agencies sites. If they are not lying, a few things found interesting.
The largest jumps in credit come from increasing the credit limit on existing credit cards. Opening a new card is a slight decrease in the score.
Mortgage and cars loans combined (installments) are how you get to "excellent credit". When I was renting my credit was always 60 points lower. When I bought my first home my credit hit excellent for the first time 3 months later. When I paid off my cars my credit dropped by 20 points each time.
Late payments or missed payments on any account decrease the credit card the most.
Credit scores are designed to discourage you from taking out lots of loans in short amount of time. Buy a car, your score decreases for 3 months then bounces back up.
Just a note, but your credit score went up when you got a mortgage because it takes into account "mixed loan types" like unsecured credit (credit cards) where there is no collateral and secured loans (home/boay/auto) where there is.
When you have more mixed loans that you pay without issue, your score goes up.
It helped me recall all these facts!!
Thank you!
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To play devil's advocate, I wouldn't trust a parachute that's never been deployed or one that's deployed every day for the last year. I want the parachute that was used maybe a dozen times over the last few months so that it's not brand new but not overused so I know it works but isn't a significant risk.
I have no idea how to calculate reliability, that's just what monke brain thinks.
Yes, lenders lend to make money.
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