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FICO scoring hurts those who don't carry debt

Member

FICO scoring hurts those who don't carry debt

Is it me or does anyone else think this is really screwed up?

I don't think it's fair for FICO to penalize people that don't have revolving debt.  

 

My FICO score dropped from 837 to 819 after my it picked up that I had paid off all of my revolving balances.

This is ridculous.   We all know the banks want us in debt, but I never expected the credit bureaus to be complicit in that arrangement.

 

Here is the text for the reason:

 

1) No recent revolving balances

Your credit report shows no recent balances on your revolving accounts. Your FICO® Score was hurt because you are not currently demonstrating active revolving credit management.
 
 
My thoughts.....Does not the fact matter  that I have credit lines over 30 years old, over 50k in open revolving credit, never lates, paid-as-agreed on all my accounts?
So if I want a higher score, I have to carry credit card debt.   It just seems wrong.   Very wrong.
 
TW=825, CB=819, TU=946
16 REPLIES
Community Leader
Senior Contributor

Re: FICO scoring hurts those who don't carry debt

Hi Annalog.  Glad to see you here on the forum! 

 

You use the word carry twice: in your subject line ("FICO scoring hurts those who don't carry debt") and in your closing paragraph ("So if I want a higher score, I have to carry credit card debt").

 

You also use the word debt a few times, e.g. "We all know the banks want us in debt, but I never expected the credit bureaus to be complicit in that arrangement."

 

Just to clear a possible misunderstanding: you don't have to be in any significant debt to get the optimized score, and you certainly don't have to carry it.  To carry debt means to owe a credit card company money but not be paying it off each month.  Example, your credit card statement shows that you owe $300 and you choose to pay only $50 of it.  You are carrying $250 of debt onto the next statement cycle and are typically paying a lot of interest on that $250.  If you had paid the full $300, however, then you would not owe even a penny of interest.

 

Credit cards used in this way (where you pay in full each month) are functionally no different from debit cards.  You are simply making purchases that end up going back to your bank account.

 

If you use even one card this way (paying in full) and if you make as little as one charge for a few dollars a month, then this FICO scoring penalty you refer to is avoided.

 

Lastly, even if for some reason you make no credit card purchases for an extended period of time -- say you go backpacking in the Andes for four months -- while it is true that you'll experience a mild scoring penalty, that penalty will vanish once you buy a cup of coffee when you get back to civilization.  (Though technically it might take a month until your CC use begins to be reported again to the bureaus.)  In brief, if you are completely cut off from the modern world, you will take a (moderately small) score hit -- but while that is the case, you really didn't have a need for a perfectly optimized FICO score, right?

 

I just wanted to clear up what was likely a misunderstanding.  There isn't a big conspiracy between the banks, the CRAs, and FICO to force you deep into debt.  It's just that the FICO algorithm wants to know that you are alive and kicking, and all that's needed there is what any person living in the modern world already does: using a card of some kind to debit his bank account for a purchase now and then.  If a person is willing to use a debit card, then there's no reason he can't do the same thing with a credit card.

 

Hope that helps.  Best wishes!

Member

Re: FICO scoring hurts those who don't carry debt

Dixie,

Thanks for replying to my post. 

I'm not sure if you're missing what I'm saying here.

 

Even if I use my credit cards daily, and I do, if I pay off my balances before my cycle date and bill out with a zero balance, a zero balance gets reported to the bureaus.

 

If a zero balance gets reported to the bureaus on all your accounts, and this just so happened last month, even though I used my cards all month, your score DOES take a hit.   If you have no revolving credit balances "reported,"  Your score drops a minimum of 8 points.   In my case it was 18 points because my score was so high.

 

It is TRUE that the FICO scoring model penalizes you for not having balances on any of your revolving accounts.

 

Try it yourself and see.  I know this to be true and a fact.

 

 

TW=825, CB=819, TU=946
Community Leader
Senior Contributor

Re: FICO scoring hurts those who don't carry debt

Yup, there's no doubt that a person will experience a mild score hit when he has all of his cards reporting $0 to the bureaus.

 

What I was observing is that there is no need to have all of your cards reporting $0 to the bureaus.  As a matter of fact, you really have to work at it to make that happen.  Either a person (a) has to refuse to use any of his credit cards at all for an extended period, or (b) he has to go out of his way to pay each one down to zero before each one reports.  In your case it was (B).

 

That required effort on your part.  The lazier and simpler method is to just let at least one of them report and then pay it in full.  You don't even have to watch it.  You can just set it on autopay.  For example, I use my BOA Better Balance card to pay my recurring Netflix bill of $30.  That's all that card ever does.  A nice side effect of that is that BOA pays me $120 in tax free rewards just for doing that.  That's 33% cash back!  But the point is that I just set it up once and let it go.


So I was just explaining that there is no practical need for anyone to get tied up into a knot over this.  From a practical perspective it doesn't have to be an issue; nor do we need to postulate a requirement to carry debt.  Many of us here never carry a penny of debt.

 

But if you are curious about it in a more relaxed way and from the perspective of pure theory -- i.e. why does the FICO 8 model have such a penalty built into it? -- that's not hard to explain.

 

For most of FICO's history, the only data that credit bureaus collected on credit card balances was the last reported balance.  There was no record in the CRA database of previous reported balances, just last month's.  Nor was there any record of when you might have made payments and if so for how much.  Thus FICO had no way of telling, when it saw that Bob had all $0 for reported balances, whether he actually used his cards a lot or whether he has not made a single transaction for ten years.  If he uses his cards a lot, or even occasionally, then his lack of late payments shows responsibility and low risk, because he must be making perfect payments.  If he hasn't used them for ten years, he's far riskier.

 

But about 4-5 years ago, the three CRAs began to start collecting a much richer set of data.  These are called today trended data.  TD includes your reported balance every month for the last 24 months or perhaps much longer.  Furthermore it shows a list of all the payments you made during those 24 months and the date of each payment and the amount of each.  (TD includes more still than even this.)  With TD, therefore, a scoring model could tell whether a person uses his cards occasionally (but just pays them to zero).  And no doubt future scoring models will do just that, whether it is Vantage 4.0 or FICO 10 or whatever.

 

But in the case of FICO 8, which is the score you saw drop, that model was built in 2006-2008, well before there was ever a hint that credit bureaus would be collecting trended data.  So FICO 8 has no ability to detect that you are an actual frequent CC user but that you always go out of your way each month to pay to zero before your cards report to the bureaus.

 

So you can expect that eventually you can PTZ (pay to zero) all of your cards every month and the scoring algorithm will still figure out that you are a fairly frequent user, because it will be able to see a record of your frequent payments.  But until such models are built, released, and come into widespread adoption, it's worth just allowing one card to report a balance once a month.  It will actually require less work to do that than you put in now.  And you will still be carrrying no debt and paying no interest.

Member

Re: FICO scoring hurts those who don't carry debt

Right On Dixie. 

You're obviously a very credit educated man!

I do PTZ before cycle, because I utilize almost 80% of my credit line on one card each month - and I surely don't want THAT being reported.  It's far too dangerous to my score.   I do have CapOne card that I have a few auto-payments going to - and I probably should just let that one cycle since it's less than $100.

 

I dunno.   There's just something really nice about pulling your bureau and seeing a big fat Zero for how much you owe in revolving debt.
Glad to hear they will be including TD in the new models for those debt-avoidance people like me.   LOL
I do see TD when I pull Experian.

 

TW=825, CB=819, TU=946
Community Leader
Senior Contributor

Re: FICO scoring hurts those who don't carry debt

Yup, I sure get the appeal of the line of zeroes!

 

Hey, I see that your signature indicates a TransUnion score of 946.  What model is that?  Most FICO models have a ceiling of 850, though the Auto and Bankcard flavors can run as high as 900.  And Vantage 3.0 has a ceiling of 850, just like FICO.

Member

Re: FICO scoring hurts those who don't carry debt

It's a proprietary TransUnion score that tops out at 990.   Range is different.   I think it was 450 to 990.   I know it's not FICO or Vantage.
If I'm not dating myself, I believe the proprietary TU score is called "Empirica"

 

I still refer to Experian as TRW so, yeah,  I'm dating myself.   LOL

TW=825, CB=819, TU=946
Community Leader
Senior Contributor

Re: FICO scoring hurts those who don't carry debt

Ahhhh.  OK  :-)

Member

Re: FICO scoring hurts those who don't carry debt

Ok.  I pulled up the PDF of my TU score from Jan 22, 2016.    The score range is 501 to 990.    My score was 978.   (credit ranks higher than 98% of nations population)

I would paste the image in here but there is no way to do that.    :-(

 

TW=825, CB=819, TU=946
Senior Contributor

Re: FICO scoring hurts those who don't carry debt

I don't look at it as FICO scoring hurting those who don't carry debt... I look at it as FICO scoring rewarding those with respect to the utilization sector of FICO scoring (35%) for showing revolving usage.  Without showing revolving usage (allowing a single small balance to report) the scoring model can't see that you are using your revolving accounts.  If you aren't using them (in the model's eyes) you can't get maximum benefit in terms of scoring.  If you look at it this way, it's pretty easy to understand.

 

CGID put a ton of good info out there above on how simple it is to get around this 15-20 point "hit" without it costing the card holder anything and without him "carrying" any sort of balances.