Why did score drop when I pairs off all my credit cards?

[Anonymous]

I had less than 5% credit usage and ended up paying off all my credit cards and my credit score dropped. I don't have any other debts on my credit report. Please help me understand this.

[pipeguy]

FICO scores reflect future risk of default based on present and past factors. While that seems simple enough, if there are ZERO current credit usage factors, meaning no accounts currently in use (aka zero percent usage) the so called risk goes up and your scores go down. I know it sounds counter productive, but as far as FICO, if you are not currently using any credit, the formula can not judge your current risk, just your past. Scoring is also based on different types of credit such as revolving (credit cards) installment (car loans, etc) and secured property loans such as a mortgage.

Just an example to help explain (very simplistic one), lets say an "excellent" risk would be a 3 rating, moderate risk would be a 2 and poor risk would be a 1. Using this model with a rating of excellent (3) times the 3 types (revolving, installment, mortgage) a perfect score would be 9, but change the revolving from 3 to 0 (or null) because that factor shows no usage, and your perfect 9 goes to a 6 (3+3+0) and you'd be rebucketed to a "moderate risk" with an average 2 rating.  

The good news is FICO scoring has no menory per se, let one card report a slight balance each month and you'll get credit for your excellent management of credit usage and scoring. 

[takeshi74]

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@Anonymous wrote:
I had less than 5% credit usage and ended up paying off all my credit cards and my credit score dropped. I don't have any other debts on my credit report. Please help me understand this.

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You always have to carefully compare reports from before and after a scoring change to detemine the causes of the change.  While reviolving utilization has a significant impact is it not the only change with a scoring impact.  We can't account for all possible reasons without access to your reports.  We can only provide some general info.  Consider all the standard scoring factors:

http://www.myfico.com/crediteducation/whatsinyourscore.aspx

If all your cards reported 0 balances then there is a scoring hit for that. -- explained above.

If you can share enough for us to understand everything that changed between the time the last score was generated and the current score was generated we can certainly provide feedback.  What score are you looking at?  Which CRA is it based on?  Which scoring model?

[Kevin86475391]

Yep, sounds like a small hit from allowing all $0 balances to report. Don't worry, as stated above, if that's the cause it'll rebound fully next month if you allow 1 card to report a small balance.

It does seem counterintuitive to many people, but 1% utilization reporting is better for your score than 0% utilization reporting. Note that this doesn't mean you have to pay interest to maximize your score. Just allow a small balance to report on 1 card and PIF by the following due date while you're still within the grace period. Then next month allow a small balance to report on another card and repeat the process. It's usually also advised that you alternate cards and make sure each is reporting a non-zero balance at least every few cycles. This shows active use of the card.

IMO it's only worth worrying about if you're planning to apply for new credit soon and need to maximize every point. Generally I just PIF regularly according to the routine I've estabilshed and let stuff report however it's going to.