topic Re: Why are the credit bureaus penalizing me for paying down my balances? in Understanding FICO® Scoring

Why are the credit bureaus penalizing me for paying down my balances?

Anonymous — Thu, 29 Sep 2016 14:02:57 GMT

I had some unexpected expenses a few months ago and have been trying to pay down all my balances to below 25% of the available credit; however my score goes DOWN anytime Equifax or Experian learns that my balances have gone down. Why is this? If I'm getting penalized for using over 25% of my available credit, why am I also being penalized for paying it down?

Re: Why are the credit bureaus penalizing me for paying down my balances?

Anonymous — Thu, 29 Sep 2016 16:04:55 GMT

Hi BSublime! Welcome.to the forum.

It sounds like you are a subscriber to the myFICO 3B Monitoring product, which gave you an alert that you are trying to describe for us.

The alert is describing a way your report has changed. (In this case, one of your credit card balances went down.) When an "alertable" event occurs, the MF 3B monitoring product pulls your score again.

The message is explaining what the alertable event was. But there are a lot of events that are not alertable. What must have happened (with 100% certainty) is that something else changed on your report, either on the same day or in the previous several weeks. That other thing is what is causing your score to go down. It's just that this other thing apparently wasn't alertable, so your score wasn't pulled at the time.

Again, it's really important to understand what these alerts are and what they are not. Most of us assume that when our score changes then MF sends us an alert telling us why. This is not what the alerts are. What the alerts do is tell you -- in a very limited set of circumstances, not all the time -- when the report has changed. The alert is telling you what alertable event happened.

You should congratulate yourself that you are coming to understand scoring well enough to realize that a credit card balance going down would never cause your score to go down. (The only exception would be if you had paid all your cards down to $0.)

Some people find an "alert" based system confusing and unhelpful, since it cannot be relied on (even most of the time) to explain why your score has changed. Such people switch to a system like CCT, which enables you to control when your score is pulled or (like me) they just use free tools to get their monthly FICO score and credit reports.

Some things are definite gray areas in credit scoring, where nobody knows for sure how FICO is working. But CC balances are not one of them. All credit profiles are optimized when having most of the credit cards reporting at $0 and a small positive balance on one. So keep paying down your cards. In fact, you can and should pay them all to $0, Just be sure that you continue to use at least one card since you want one at least one card to report a positive balance.

Best wishes!

Re: Why are the credit bureaus penalizing me for paying down my balances?

Anonymous — Thu, 29 Sep 2016 17:16:23 GMT

On this note, can I get some hope for improved scores given the following scenario?

I have just under 10k in revolving credit lines, spread out over 6 cards of various credit limits. As it stands, one is reporting as $233 utilization out of $1450, one $32 out of $1200 and $300ish out of $5000. If I pay the smaller balances to zero and lower the other to under 5% utilization, I should see my best possible score, yes? Any idea how much I could expect fico 8s to go up or is that too speculative? Will my mortgage scores be similarly impacted? Thanks!!

Re: Why are the credit bureaus penalizing me for paying down my balances?

Anonymous — Thu, 29 Sep 2016 17:37:50 GMT

Your plan is sometimes called the All Zero Except One approach (AZEO). The only small caveat I'd make is that it sounds like you believe that the one card with the positive balance must be < 5% of its individual credit limit. That is not true. FICO does have penalties based on individual credit limits, but they are very generous. A number of us are convinced that you wouldn't see even the beginning of a tiny penalty until you hit 50% (as far as individual utilization). Some people think it doesn't start until even higher.

The key utilization metric to keep ultralow is total utilization, not individual. There's probably no extra value in anything lower than 8.99%, but your goal of 5% total utilization is fine.

One last tweak: make sure that the card reporting a balance is a true credit card and not a charge card. Also make sure it is a card in your name and not an AU card.

You are correct that this will optimize your score given whatever existing derogs, inquiries, account age, etc. that you have. It will also optimize it across all FICO models: mortgage scores, auto enhanced, the generic FICO 8 score, whatever.

One final note it is that if you have no open installment loans, there is another (somewhat) quick change you can make to your profile that will get you a lot of points. Let us know if you want to know more about that.

Re: Why are the credit bureaus penalizing me for paying down my balances?

Anonymous — Thu, 29 Sep 2016 18:03:30 GMT

This was very helpful, thank you!!!