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Reverse logic in scoring

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Anonymous
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Reverse logic in scoring

I have a large amount of credit card debt, not being used, just paying slightly above minimum each month. Paid off car installment loan couple months ago and score dropped 47 points, supposedly due to a lack of 'mix' in the type of debts I have. That alone is already stupidity at its finest. Now I received notice today that one of my credit card balances has decreased (like I do every month for each my four cards) and my score has dropped 8 more points. Because of a $160 balance DEcrease amidst heavy credit card debt in general. I'm getting awfully sick of this lack of common sense with FICO scoring. Why in the WORLD would this cause a drop instead of a gain, if anything?
Message 1 of 11
10 REPLIES 10
Anonymous
Not applicable

Re: Reverse logic in scoring


@Anonymous wrote:
I have a large amount of credit card debt, not being used, just paying slightly above minimum each month. Paid off car installment loan couple months ago and score dropped 47 points, supposedly due to a lack of 'mix' in the type of debts I have. That alone is already stupidity at its finest. Now I received notice today that one of my credit card balances has decreased (like I do every month for each my four cards) and my score has dropped 8 more points. Because of a $160 balance DEcrease amidst heavy credit card debt in general. I'm getting awfully sick of this lack of common sense with FICO scoring. Why in the WORLD would this cause a drop instead of a gain, if anything?

Hi AimeeLynn.  Can you tell us a bit more what you mean by receiving notice?  My guess is that you have a credit monitoring service and that this is what sent you the notice.  Is that right?  And if so, can you tell us which CMS it was? 

 

With the $25/mo myFICO service, for example, you will typically get notified when a significant change happens with a credit card balance (sometimes even a small balance change).  The alert is triggered by the balance change, and then it updates you at the same time with your FICO score.  But you can't at all conclude that the score change was CAUSED by the balance change.  The score change could have easily happened earlier, caused by something else, and you are now finding out about it because an alertable event occured (the CC balance change).

 

I believe that's how it works -- somebody else who uses CMS services can correct me if I am mistaken.  You are right that paying down your credit card debt could not in itself cause a drop in your score.

 

If you feel like getting a bit more advice, another helpful thing for us to know is how the car loan was paid off.  Was the balance at the time a fair chunk of change -- more than a few payments -- and then you paid it off early in one big payment?  Or did you pay it off simply by making the last scheduled payment? 

 

Message 2 of 11
Anonymous
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Re: Reverse logic in scoring

Correct, I subscribe to FICO scorewatch. I have all the alerts set to a sensitive level so any slight decrease or change shows up. As for the car loan, I had owed a couple thousand (originally 8,000, monthly payments only for length of loan) and paid off the last couple thou with tax refund. It was the only installment loan I had, leaving me with just four credit cards, which is apparently not a varied enough mix of credit. So according to credit experts (such as yourself), that warranted a 47-pt decrease. Other than that everything is always paid on time, monthly payments, no charging. Pretty basic cookie cutter activity. Nothing else goes on with my stuff aside from slight decreases in credit card balances every month. Seems no matter what kind of progress I think I'm making, FICO comes up with some crooked reason to send me the opposite direction. I was at 698 and now like 636.
Message 3 of 11
Anonymous
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Re: Reverse logic in scoring

There are a whole lot of us that agree with you. Being penalized for reducing debt by paying off a loan is silly.

Message 4 of 11
Revelate
Moderator Emeritus

Re: Reverse logic in scoring


@Anonymous wrote:
Correct, I subscribe to FICO scorewatch. I have all the alerts set to a sensitive level so any slight decrease or change shows up. As for the car loan, I had owed a couple thousand (originally 8,000, monthly payments only for length of loan) and paid off the last couple thou with tax refund. It was the only installment loan I had, leaving me with just four credit cards, which is apparently not a varied enough mix of credit. So according to credit experts (such as yourself), that warranted a 47-pt decrease. Other than that everything is always paid on time, monthly payments, no charging. Pretty basic cookie cutter activity. Nothing else goes on with my stuff aside from slight decreases in credit card balances every month. Seems no matter what kind of progress I think I'm making, FICO comes up with some crooked reason to send me the opposite direction. I was at 698 and now like 636.

FICO 8 wants open loans, and it wants them at pretty utilization when it comes to installment (and revolving too).

 

There's a pretty easy trick to fix that, just get a small secured loan for $500 with a 5 year term from Alliant, and then pay it down to some minimal balance (I used 9% personally) after it reports and get all the benefits that you had with that pretty auto loan tradeline, for pennies per year for the next 4.5 or so years.  Cheap, easy, silly reindeer game to play.  I agree it's kinda dumb from a consumer perspective, but that was part of the pattern that FICO found in the consumer data in aggregate.  

 

My own drop was only 30ish points across the FICO 8 algorithms when it came to installment utilization when I paid off my auto loan and also a smaller personal loan, but I also had 2 open installment loans as well; might've been 45 like you experienced if I didn't have anything on there, don't know TBH as we don't have good datapoints yet for someone without installment history adding one.  I'd love if you went and added a line as you have prior installment history (which counted for mix of credit under FICO 04 as we understand it), and see what it did to your FICO 8 scores discounting possible AAOA changes.

 

Full gory details:

 

http://ficoforums.myfico.com/t5/Understanding-FICO-Scoring/Installment-tradeline-utilization-thread/m-p/4055989#U4055989




        
Message 5 of 11
Anonymous
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Re: Reverse logic in scoring

Learning how all this stuff works can be hard, I know it!  I really respect the way you are not giving up and still working steadily at it.  I promise it will pay off gradually.

 

As you can probably see (and hindsight is 20/20, right?) the best choice was not to pay off the car loan, for three reasons.  First, you lost an open installment account where you were steadily making progress every month, showing FICO (and actual humans who look at your report) that you can handle that kind of loan over a long time.  Second, the interest you paid on the car loan was (I am fairly certain) less than at least one (probably all) of your  credit cards.  Paying off lower interest debt before higher interest debt causes you to pay more in interest and to take longer to pay off all your debt.  Third, that same $2000, had it been applied to lowering your credit card debt, would have increased your credit score a lot, since CC utilization is a hugely powerful factor for FICO and Vantage scores.

 

Those three points are not criticisms -- I sure know how this stuff can be surprising and nonintuitive.  How were you supposed to know?  But still, it's crucial to take situations like this and turn them into "teachable moments" for yourself, so you can avoid a mistake in the future.

 

The best thing you can do is to keep doing what you are doing, which is always making all your payments on time and continuing to get your credit card debt paid off.  I'd add too that you are doing great by keeping your spending down and avoiding the trap of opening more and more cards, which will just cause your average age of accounts to go down.  Big goals for you are letting your accounts age and getting your CC debt down.  Good luck!

 

PS.  There are a few little things you can try, which will probably help you substantially.  They are "tricks" but they are pretty painless.  I am thinking here about adding a share secure loan for $500 to your profile.  Let us know if you want some guidance on that.  Overwhelmingly, however, you need to just do the smart stuff you are doing now: payments on time, no new cards, and gettinging your CC debt paid off.

 

 

Message 6 of 11
Anonymous
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Re: Reverse logic in scoring

I see Revelate has chimed in (while I was writing my reply) on the Share Secure loan.  Good.  He knows all about it.

Message 7 of 11
Anonymous
Not applicable

Re: Reverse logic in scoring

Excellent, excellent info and perspective from both of you. A) I see the concept behind having, say, $2,000, and choosing to pay off a lower-rate car loan versus higher-interest credit. (I did it to kill off the $190/month payment). Again, interesting perspective though, thanks! B) The first thing I thought of after that whopping credit score drop was that I obviously need to take out a personal loan and at least transfer one or two of my measly cards to it ($800 and $500). However, with a now-score of 636, I don't know how I'm likely to be approved for anything. I wouldn't even qualify for a signature loan through my credit union. And my mom is a director there! Lol. So yes, any advice on obtaining would be so appreciated! I'm dead set on keeping this number up after divorce several years ago. I was so close to 700, then I do what I think are good things and I screw myself. As of right now I still can't even get my electric in my name without a huge deposit, it's ridiculous! And selling my house and downsizing, won't happen. Thanks again you two.
Message 8 of 11
Revelate
Moderator Emeritus

Re: Reverse logic in scoring


@Anonymous wrote:
Excellent, excellent info and perspective from both of you. A) I see the concept behind having, say, $2,000, and choosing to pay off a lower-rate car loan versus higher-interest credit. (I did it to kill off the $190/month payment). Again, interesting perspective though, thanks! B) The first thing I thought of after that whopping credit score drop was that I obviously need to take out a personal loan and at least transfer one or two of my measly cards to it ($800 and $500). However, with a now-score of 636, I don't know how I'm likely to be approved for anything. I wouldn't even qualify for a signature loan through my credit union. And my mom is a director there! Lol. So yes, any advice on obtaining would be so appreciated! I'm dead set on keeping this number up after divorce several years ago. I was so close to 700, then I do what I think are good things and I screw myself. As of right now I still can't even get my electric in my name without a huge deposit, it's ridiculous! And selling my house and downsizing, won't happen. Thanks again you two.

The beauty of the Alliant secured trick is you tie up $500 temporarily, you get a 100% loan-to-value secured loan against it, then you turn around and pay like $460 (or even $480 or $490, just opt out of the automatic payments) which frees up the bulk of the cash and you pay pennies on it.

 

Basically all you have to do is pay a very small amount on the order of once a year so as to not get an inactivity fee, but beyond that, it's no credit check, and pretty much no cash outlay (once you get it mostly back again) and pennies in interest over 5 years... for pure FICO 8 goodness (and FICO 98, still matters as 1/3 mortgage scores underwrites on that).

 

It does take time to rebuild a credit file, but there are little tricks like this which can boost you along even without getting old derogs deleted.  I still have another 2 years to get clean so I can empathize Smiley Happy.




        
Message 9 of 11
Anonymous
Not applicable

Re: Reverse logic in scoring

Like I said, R is the go-to man for the share secure Alliant trick.  He can walk you through exactly what to do.  In a couple months you end up with a mostly paid off installment loan on your profile that you can keep open for a number of years.

 

You mention that you are paying $25/month for the myFICO service.  Many people on the forum do that.  But when you are really tight for money, and already paying a lot in credit card interest, it's worth considering whether you might want to drop it and put that $25 per month toward paying down your CC debt.  You can still sign up for a pure FICO based service say once a year, grab a bunch of FICO scores, and then cancel it.  That approach is much cheaper than paying $300 a year for a service that frankly seems to be more of a source of frustration for you than anything else.  Using a free Vantage based solution (e.g. Karma + Credit.com) still enables you to track whether you are generally making improvements as time goes on -- just be sure to compare your TU Vantage score (for example) against itself rather than assuming it will be the same as your TU FICO 8 or your TU Auto (etc.).

Message 10 of 11
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