I realize the algorithm is designed to be evaluate the risk of late payment, and perhaps even risk of charge off, but I think part of the calculus is the risk of the borrower discharging the debt in bankruptcy. My recent situation causes me to speculate about this. I have a 100% perfect payment history and a very high average age of accounts. I've had no inquiries for over three years. I had, however, run up a fair amount of credit card debt ($35k) and my scores dropped to the 730-740 range. A run up of debt in a relatively short time is a risk factor for bankruptcy. I then paid off a chunk of the debt and my scores climbed quickly to the 830 range. I still have too much CC debt ($15k) but by paying off a considerable portion I think it shows I have no plans to file bankruptcy. I feel my score is overly generous as I still have too much debt but looked at through the prism of risk of bankruptcy there is virtually no risk.
Starting Score (October 7, 2010): EQ: 698 TU: 709
@Sunnyside wrote:My credit score puts me in the excellent credit category. I'll admit I'm somewhat obsessed with always trying to raise my score a few more points. My only debt is a $63,000 home mortgage balance. My monthly mortage payment is only $317. I have nearly $200,000 equity in my house. I have no car payments or any other major obligations. I never carry a balance on any credit cards. The credit bureaus tell me my credit score could be higher if I had less debt. If I had no home mortgage payments due monthly and paid five times more than my mortgage payment to rent an apartment, the credit bureaus would grant me a higher credit score. So, are credit scores really a good measure of credit worthiness? If I had less cash liquidity and no equity in real estate, why should I have a higher credit score?
1. No it's not true that you would have a higher score if you had no mortgage. You're actually being rewarded for having a paid down mortgage.
2. No I don't think the scores are a good measure of creditworthiness. One of the things which I find absurd about them is that they do reward you for having a mortgage.
@Sunnyside wrote:So, are credit scores really a good measure of credit worthiness?
I ask myself that every time my score plunges! And it often does. It can drop from 'excellent' to 'good' just like that--and all because I actually USED a credit card! But I don't sweat it; I just ride it out, knowing it'll go back up with the next reporting cycle (having paid off the balance).
But it's weird, like, really? When my score is 827 I'm a wonderful credit risk, but the SAME PERSON with the SAME ASSETS, SAME PAYMENT HISTORY, SAME...everything actually makes use of a card and my score drops to 737, I'm now only a good risk? It's silly and arbitrary. But it's how it works, and we just have to accept it.
I'm a lot like you--I always think in terms of making my score even better, and it's annoying when something works against that.
@GatorGuy wrote:
Yet despite this, I opened one CC for 0% interest and it dropped my credit score 30 points from exceptional to very good. Obviously not life ending but absolutely nothing changed in the scheme of my personal finances. I had the cash to pay for the purchase and the monthly cost was immaterial to our income.
Yet, their algorithm viewed it as a significant change although innaccurate in my situation. But like with most statistics, they are accurate over a large number of people.
In my experience, it's just a temporary plunge. Your score should rebound pretty quickly; if it doesn't, then we're not talking about the same thing! 