topic Re: 10 Point DROP After paying off Citibank in Understanding FICO® Scoring

10 Point DROP After paying off Citibank

Goodfella — Mon, 21 Sep 2020 16:50:41 GMT

Why would my Equifax score drop 10 points (832 to 822) after paying off the only credit card with a balance? I went from 4% credit usage to 0% credit usage after making a $1,400 payment to CitiBank. No other change to my credit report. What gives?

Re: 10 Point DROP After paying off Citibank

Slabenstein — Mon, 21 Sep 2020 16:55:36 GMT

There's a point penalty for having all cards report a zero balance. You said that the Citi was your only card with a balance before you paid it off, so that is likely why.

Re: 10 Point DROP After paying off Citibank

SouthJamaica — Mon, 21 Sep 2020 17:20:11 GMT

@Goodfella wrote:
Why would my Equifax score drop 10 points (832 to 822) after paying off the only credit card with a balance? I went from 4% credit usage to 0% credit usage after making a $1,400 payment to CitiBank. No other change to my credit report. What gives?

It's the all zero penalty, and it occurs whenever all your revolving accounts report a zero balance. If you have one card reporting a small balance the penalty goes away.

Re: 10 Point DROP After paying off Citibank

sxa001 — Mon, 21 Sep 2020 17:37:21 GMT

There were some really good answers around this in the AMA last week, while it may seem counterintuitive that paying off debt would make your credit score drop, the credit score is an indicator of how responsible you are with credit and when you don't have any accounts you are paying on they aren't able to accurately calculate based on their algoritms how responsible you are with credit.

In the end, one of my favorite saying here that I see from time to time is finances before FICO. If you have a single credit card and you don't carry a balance, I wouldn't worry too much about the 10 point drop, if you have a clean file there are tricks to get your scrore up if you need to get a boost such as the SSL trick where you get a secure loan from your bank and pay it down below 9% off the bat so you have an installment loan to get you a little boost.

At the same time, if you aren't in the market for any new credit/loans I wouldn't stress about it.

Re: 10 Point DROP After paying off Citibank

SouthJamaica — Mon, 21 Sep 2020 17:45:23 GMT

@sxa001 wrote:
There were some really good answers around this in the AMA last week, while it may seem counterintuitive that paying off debt would make your credit score drop, the credit score is an indicator of how responsible you are with credit and when you don't have any accounts you are paying on they aren't able to accurately calculate based on their algoritms how responsible you are with credit.

In the end, one of my favorite saying here that I see from time to time is finances before FICO. If you have a single credit card and you don't carry a balance, I wouldn't worry too much about the 10 point drop, if you have a clean file there are tricks to get your scrore up if you need to get a boost such as the SSL trick where you get a secure loan from your bank and pay it down below 9% off the bat so you have an installment loan to get you a little boost.

At the same time, if you aren't in the market for any new credit/loans I wouldn't stress about it.

Personally I didn't find the answers on this so great. They were clear, and for that I am grateful. They made it clear that FICO intends to penalize people for all zero balances. I.e., it's no accident, but by design.

However, the rationales given make no sense to me. If someone has a strong record of using credit and paying it off, the fact that they have zero balances on any given day should not affect their scores.

I have a hunch that there is an ulterior motive for the penalty, one which they dare not mention. I have a hunch that it's simply in there because people who pay things down to zero may not be currently profitable for the banks.

Re: 10 Point DROP After paying off Citibank

Slabenstein — Mon, 21 Sep 2020 18:03:02 GMT

@SouthJamaica wrote:
@sxa001 wrote:
There were some really good answers around this in the AMA last week, while it may seem counterintuitive that paying off debt would make your credit score drop, the credit score is an indicator of how responsible you are with credit and when you don't have any accounts you are paying on they aren't able to accurately calculate based on their algoritms how responsible you are with credit.

In the end, one of my favorite saying here that I see from time to time is finances before FICO. If you have a single credit card and you don't carry a balance, I wouldn't worry too much about the 10 point drop, if you have a clean file there are tricks to get your scrore up if you need to get a boost such as the SSL trick where you get a secure loan from your bank and pay it down below 9% off the bat so you have an installment loan to get you a little boost.

At the same time, if you aren't in the market for any new credit/loans I wouldn't stress about it.
Personally I didn't find the answers on this so great. They were clear, and for that I am grateful. They made it clear that FICO intends to penalize people for all zero balances. I.e., it's no accident, but by design.

However, the rationales given make no sense to me. If someone has a strong record of using credit and paying it off, the fact that they have zero balances on any given day should not affect their scores.

I have a hunch that there is an ulterior motive for the penalty, one which they dare not mention. I have a hunch that it's simply in there because people who pay things down to zero may not be currently profitable for the banks.

To me it made some sense. They said that historical data indicates that a person who is not actively managing credit card debt is slightly riskier than someone who is (or something to that effect, iirc). Since util is a snapshot of our accounts at that time and has no memory, it's only looking at that month and sees that slight risk. We may have strong records of historical cc use, including paying down that debt, but since it only looks at that moment and not at those records, it doesn't factor it in. It sounded like it was the flipside of the reasoning for the much larger point drops on high util. If I have had 2-8% util for two years, report 90% util one month, and then pay it back down to 2% the next, I'll still see a large score drop that one month at 90%, and then get back those points the next, b/c it's only concerned w/ what's on the cards at the time of reporting. Intuitively, scoring that took util history into account would be more predictive (and that's what 10T is supposed to be?), but to me the AZ penalty doesn't seem to be an anomaly in how util works in the current FICOs, given their explanation of why it's there in the first place. Ofc most of their answers in that AMA were pretty vague, so this is just my take.

Re: 10 Point DROP After paying off Citibank

Anonymous — Mon, 21 Sep 2020 19:24:36 GMT

The analogy given that I liked for the AZ penalty was, you might be the fastest runner in the world, but if you don't race, no one will know.

Trended data will likely do away with the AZ penalty, but until then you have to show a small balance on one card to avoid the penalty. As stated, scores are a snapshot in time based on part on your usage at that instant. If you're not managing a balance at that time, the algorithm can't assess your ability to do so. Ergo, you're riskier than someone who does have a small balance because the scoring system can see they are handling their access to credit well.

Re: 10 Point DROP After paying off Citibank

SouthJamaica — Mon, 21 Sep 2020 19:37:29 GMT

@Slabenstein wrote:
@SouthJamaica wrote:
@sxa001 wrote:
There were some really good answers around this in the AMA last week, while it may seem counterintuitive that paying off debt would make your credit score drop, the credit score is an indicator of how responsible you are with credit and when you don't have any accounts you are paying on they aren't able to accurately calculate based on their algoritms how responsible you are with credit.

In the end, one of my favorite saying here that I see from time to time is finances before FICO. If you have a single credit card and you don't carry a balance, I wouldn't worry too much about the 10 point drop, if you have a clean file there are tricks to get your scrore up if you need to get a boost such as the SSL trick where you get a secure loan from your bank and pay it down below 9% off the bat so you have an installment loan to get you a little boost.

At the same time, if you aren't in the market for any new credit/loans I wouldn't stress about it.
Personally I didn't find the answers on this so great. They were clear, and for that I am grateful. They made it clear that FICO intends to penalize people for all zero balances. I.e., it's no accident, but by design.

However, the rationales given make no sense to me. If someone has a strong record of using credit and paying it off, the fact that they have zero balances on any given day should not affect their scores.

I have a hunch that there is an ulterior motive for the penalty, one which they dare not mention. I have a hunch that it's simply in there because people who pay things down to zero may not be currently profitable for the banks.
To me it made some sense. They said that historical data indicates that a person who is not actively managing credit card debt is slightly riskier than someone who is (or something to that effect, iirc). Since util is a snapshot of our accounts at that time and has no memory, it's only looking at that month and sees that slight risk. We may have strong records of historical cc use, including paying down that debt, but since it only looks at that moment and not at those records, it doesn't factor it in. It sounded like it was the flipside of the reasoning for the much larger point drops on high util. If I have had 2-8% util for two years, report 90% util one month, and then pay it back down to 2% the next, I'll still see a large score drop that one month at 90%, and then get back those points the next, b/c it's only concerned w/ what's on the cards at the time of reporting. Intuitively, scoring that took util history into account would be more predictive (and that's what 10T is supposed to be?), but to me the AZ penalty doesn't seem to be an anomaly in how util works in the current FICOs, given their explanation of why it's there in the first place. Ofc most of their answers in that AMA were pretty vague, so this is just my take.

Actually, the credit report does show if the person was actively managing the account that month. It has nothing to do with the balance on the reporting date.

And the FICO algorithm does take into account historical data. In fact it looks back many many years, at such items as oldest account, average age of accounts, dates of negative items, dates of inquiries, dates of newest accounts, etc etc.

Re: 10 Point DROP After paying off Citibank

SouthJamaica — Tue, 22 Sep 2020 15:25:32 GMT

@Anonymous wrote:
The analogy given that I liked for the AZ penalty was, you might be the fastest runner in the world, but if you don't race, no one will know.

Trended data will likely do away with the AZ penalty, but until then you have to show a small balance on one card to avoid the penalty. As stated, scores are a snapshot in time based on part on your usage at that instant. If you're not managing a balance at that time, the algorithm can't assess your ability to do so. Ergo, you're riskier than someone who does have a small balance because the scoring system can see they are handling their access to credit well.

As I pointed out in the AMA discussion thread, the foot race example was a false analogy, since the credit reports show exactly what races we've run and exactly how well we performed in each of them.

Re: 10 Point DROP After paying off Citibank

Slabenstein — Mon, 21 Sep 2020 20:48:55 GMT

@SouthJamaica wrote:
Actually, the credit report does show if the person was actively managing the account that month. It has nothing to do with the balance on the reporting date.

And the FICO algorithm does take into account historical data. In fact it looks back many many years, at such items as oldest account, average age of accounts, dates of negative items, dates of inquiries, dates of newest accounts, etc etc.

Yeah, but afaik it doesn't seem take that stuff into account for how it scores util or %/# of account with balance metrics, except maybe for weighting. I understood the AMA comments to mean that the AZ penalty works similarly, whether or not any of it should work that way. But that was just my reading of their vagueries.

Re: 10 Point DROP After paying off Citibank

SouthJamaica — Mon, 21 Sep 2020 21:04:22 GMT

@Slabenstein wrote:
@SouthJamaica wrote:
Actually, the credit report does show if the person was actively managing the account that month. It has nothing to do with the balance on the reporting date.

And the FICO algorithm does take into account historical data. In fact it looks back many many years, at such items as oldest account, average age of accounts, dates of negative items, dates of inquiries, dates of newest accounts, etc etc.

Yeah, but afaik it doesn't seem take that stuff into account for how it scores util or %/# of account with balance metrics, except maybe for weighting. I understood the AMA comments to mean that the AZ penalty works similarly, whether or not any of it should work that way. But that was just my reading of their vagueries.

Precisely.

But the absence of utilization at a given moment has no bearing whatsoever on your proven ability to properly manage credit. It may, however, reflect a desire on your part to avoid owing money. Which may make you a less profitable type of bank customer.

As between two completely equal, 100% financially strong and totally creditworthy customers, the one who likes to borrow is more profitable than the one who prefers to avoid it.

Looking at it from the perspective of risk v. reward

-it has no meaning in terms of 'risk'

-it may indeed have plenty of meaning for 'reward'

Barclays once put out a blog post, for its Ring card customers, which demonstrated how CLI and CLD policies were based on a risk vs reward strategy. People with too little utilization were as likely to be denied CLI's as those with too much utilization. Barclays was looking for the sweet spot, where people were borrowing, but not too much.

Re: 10 Point DROP After paying off Citibank

Anonymous — Tue, 22 Sep 2020 21:41:18 GMT

I don't really buy it SJ. The amount/percentage of people that PIF monthly and offer no profit (from interest) to banks is not directly correlated to AZ penalties. Plenty of people that PIF, in fact most get their statement, pay it off and go on with life without thinking for a moment about their reported balance and/or impact of it on their Fico scores. These people often in just naturally using their cards and not micromanaging them like many on this forum do will report non-zero balances monthly. The AZ penalty therefore IMO wouldn't serve the purpose of what you suggested earlier. To me I'm perfectly fine in the absence of TD usage saying that the penalty is due to the algorithm seeing no revolving credit use at that moment in time. If with the introduction of TD in Fico 10 the AZ penalty goes away it just further proves this.

Re: 10 Point DROP After paying off Citibank

Kforce — Tue, 22 Sep 2020 23:32:48 GMT

@SouthJamaica wrote:

Personally I didn't find the answers on this so great. They were clear, and for that I am grateful. They made it clear that FICO intends to penalize people for all zero balances. I.e., it's no accident, but by design.

However, the rationales given make no sense to me. If someone has a strong record of using credit and paying it off, the fact that they have zero balances on any given day should not affect their scores.

+100

CR's shows 3 houses paid off 600-700k each.

Five car loans paid off (25-50k) each.

10 credit cards, with nice CL's

40 years of history.

Why a penalty for not posting one card with $2 balance ?

"Really" -- Another motive is at play, they have more than enough info.

It is about them making money

Re: 10 Point DROP After paying off Citibank

Anonymous — Wed, 23 Sep 2020 01:10:14 GMT

Right and the use of TD will in theory "fix" the issue. But, without TD being used, I don't see why it's all that difficult to understand where Fico is coming from. A single moment in time snapshot whether you're a Transactor or not doesn't differentiate between between someone that's at AZ for the first time in years or someone that's been at AZ for years. If those at Fico have determined that individuals that are at AZ for extended periods of time (clearly not using credit) are statistically slightly more likely to default than someone that reports small balances there's no reason they shouldn't be scored as such with an AZ "penalty" as it is called around here. If a single moment in time snapshot of another individual that just happened to report AZ results in the same penalty, it is what it is considering the current algorithm.

If Fico 10 "fixes" this issue by using TD and this penalty goes away, what will the narrative change to then? That it used to be about banks making more money, but all of a sudden they don't and that motive is gone? That sounds a bit silly to me.

Re: 10 Point DROP After paying off Citibank

SouthJamaica — Wed, 23 Sep 2020 04:45:30 GMT

@Anonymous wrote:
Right and the use of TD will in theory "fix" the issue. But, without TD being used, I don't see why it's all that difficult to understand where Fico is coming from. A single moment in time snapshot whether you're a Transactor or not doesn't differentiate between between someone that's at AZ for the first time in years or someone that's been at AZ for years. If those at Fico have determined that individuals that are at AZ for extended periods of time (clearly not using credit) are statistically slightly more likely to default than someone that reports small balances there's no reason they shouldn't be scored as such with an AZ "penalty" as it is called around here. If a single moment in time snapshot of another individual that just happened to report AZ results in the same penalty, it is what it is considering the current algorithm.

If Fico 10 "fixes" this issue by using TD and this penalty goes away, what will the narrative change to then? That it used to be about banks making more money, but all of a sudden they don't and that motive is gone? That sounds a bit silly to me.

FICO algorithms use trended data all the time. Their "snapshot" knows how old every reported account is, what its month by month record is, how old the inquiries are, how old any negatives are, etc. And it even knows whether your account had activity this month, regardless of whether it has a balance on the reporting date.

Your assumptions as to how people use credit cards do not take into account the wide swath of behaviors in the world. Some people use credit cards but don't use them every month. Some people use Chase cards, which report a zero balance whenever it occurs. Some people pay the charges they've made before the statement cuts.

And folks who use a lot of credit cards every month -- and don't pay them off before the statement date -- even if they always pay in full, are losing points for the number of accounts with non-zero balances and for the percentage utilization.

You keep defending FICO's all-zero penalty and no open loan penalty, even though the representatives from FICO have basically admitted that there is no logic behind them other than data showing a low balance is "slightly" less predictive of risk than a zero balance.

https://ficoforums.myfico.com/t5/Understanding-FICO-Scoring/We-re-Tom-Quinn-amp-Tommy-Lee-FICO-Score-Experts-Ask-us-anything/m-p/6137466#M176974

https://ficoforums.myfico.com/t5/Understanding-FICO-Scoring/We-re-Tom-Quinn-amp-Tommy-Lee-FICO-Score-Experts-Ask-us-anything/m-p/6137485#M176981

https://ficoforums.myfico.com/t5/Understanding-FICO-Scoring/We-re-Tom-Quinn-amp-Tommy-Lee-FICO-Score-Experts-Ask-us-anything/m-p/6137503#M176990

https://ficoforums.myfico.com/t5/Understanding-FICO-Scoring/We-re-Tom-Quinn-amp-Tommy-Lee-FICO-Score-Experts-Ask-us-anything/m-p/6137543#M177009

Well, in case you haven't noticed, the typical 30 point penalty for having no open loans, and 20 point penalty for having all zero revolving accounts, total 50 points on average, which is not "slight" by anyone's definition.

Re: 10 Point DROP After paying off Citibank

SouthJamaica — Wed, 23 Sep 2020 05:00:39 GMT

@Anonymous wrote:
I don't really buy it SJ. The amount/percentage of people that PIF monthly and offer no profit (from interest) to banks is not directly correlated to AZ penalties. Plenty of people that PIF, in fact most get their statement, pay it off and go on with life without thinking for a moment about their reported balance and/or impact of it on their Fico scores. These people often in just naturally using their cards and not micromanaging them like many on this forum do will report non-zero balances monthly. The AZ penalty therefore IMO wouldn't serve the purpose of what you suggested earlier. To me I'm perfectly fine in the absence of TD usage saying that the penalty is due to the algorithm seeing no revolving credit use at that moment in time. If with the introduction of TD in Fico 10 the AZ penalty goes away it just further proves this.

Of course the penalties would not really serve the purpose of insuring profitability, and are easily gamed. I didn't say they were smart. In fact I think they're stupid. The avid MyFICO'er who doesn't want any installment loans or credit card bills knows to take out a meaningless unneeded loan and then pay it down to 9% or less to avoid the no open loan penalty, and to let their Netflix bill report on one bank card each month to avoid the all zero penalty.

This is what I know and what I don't know.

I know

1. there is an all zero revolving balance penalty.

2. there is a no open loan penalty.

3. FICO's publicly stated rationale for these penalties is that low balance accounts are slightly less risky than zero balance accounts.

4. their publicly stated rationales do not stand up to scruting.

I do not know that there are ulterior motives for the penalties, and if there are ulterior motives I do not know what they are. On these I am only guessing.

Re: 10 Point DROP After paying off Citibank

Anonymous — Wed, 23 Sep 2020 14:48:25 GMT

@SouthJamaica wrote:
FICO algorithms use trended data all the time. Their "snapshot" knows how old every reported account is, what its month by month record is, how old the inquiries are, how old any negatives are, etc. And it even knows whether your account had activity this month, regardless of whether it has a balance on the reporting date.

Right, but it doesn't use TD with respect to the AZ penalty, which is what we're talking about. My question was that if Fico 10 "fixes" this what happens to the bank profit narrative? Those that believe that (or some spin on it) will then say that banks suddenly don't care about the extra profit?

Also let's clarify the "30 point penalty" for not having an open loan. The ~30 points is related to going from an almost-paid-off loan to no open loan. Aside from those gaming the system with the SSLT, you'd figure that with naturally paid down loans, around 90% of people would have their loan sitting above the sweet spot break point and 10% of people below... give or take. That being said, I think the "30 point penalty" is over stated ~90% of the time.

And "no logic" for the reason penalities shouldn't be used in the same sentence with anything about risk as predictive risk is the logic and frankly what the entire scoring system is about anyway.

Re: 10 Point DROP After paying off Citibank

SouthJamaica — Wed, 23 Sep 2020 15:25:25 GMT

@Anonymous wrote:
@SouthJamaica wrote:
FICO algorithms use trended data all the time. Their "snapshot" knows how old every reported account is, what its month by month record is, how old the inquiries are, how old any negatives are, etc. And it even knows whether your account had activity this month, regardless of whether it has a balance on the reporting date.

Right, but it doesn't use TD with respect to the AZ penalty, which is what we're talking about. My question was that if Fico 10 "fixes" this what happens to the bank profit narrative? Those that believe that (or some spin on it) will then say that banks suddenly don't care about the extra profit?

As I told you, my theory on the ulterior motives is purely a guess.

Also let's clarify the "30 point penalty" for not having an open loan. The ~30 points is related to going from an almost-paid-off loan to no open loan. Aside from those gaming the system with the SSLT, you'd figure that with naturally paid down loans, around 90% of people would have their loan sitting above the sweet spot break point and 10% of people below... give or take. That being said, I think the "30 point penalty" is over stated ~90% of the time.

Not in my case. In my case it exceeded 30 points. 30 points was my attempt to provide an average.

And "no logic" for the reason penalities shouldn't be used in the same sentence with anything about risk as predictive risk is the logic and frankly what the entire scoring system is about anyway.

If you're satisfied with the explanations given in the AMA thread, fine. To my mind they make no sense whatsoever.

Re: 10 Point DROP After paying off Citibank

NRB525 — Wed, 23 Sep 2020 17:24:08 GMT

FICO 8 penalizes scores when all revolving accounts are zero. The points penalty is profile specific. It is just a fact.

Why ask why?

Re: 10 Point DROP After paying off Citibank

Anonymous — Wed, 23 Sep 2020 18:01:59 GMT

@NRB525 wrote:
FICO 8 penalizes scores when all revolving accounts are zero. The points penalty is profile specific. It is just a fact.

Why ask why?

Is it profile specific? I have not heard of someone not incurring an AZ penalty on revolving accounts.