@Anonymous wrote:July 5th report had EX @ 728. July 6th dropped to 718. The only meaningful change from one day to the next was my auto loan being reported as paid off. A couple of small student loans remain, as does a personal loan.
I assume the score hit is because while my overall installment debt has decreased, my ratio of debt owed to "open" installment loan amounts has increased?
I haven't run a 3-bureau report yet but I assume I'll get a 10 point drop there as well?
On the one hand I get it; on the other it seems silly. Today I have one less debt. My DTI has improved by a couple of percentage points. Yet my credit score says I am a poorer risk today than yesterday.
Are there other factors I'm not considering here?
In my view, paid off debt is not only equal to, but greater than, current debt as a sign of ability to handle debt.
Accordingly, if FICO 8 and 9 scores were concerned solely with risk avoidance, they would not penalize one for having paid one's debts down to zero.
It is reasonable to suspect that since financial lenders (a) are the main customers of FICO, (b) make no money from people who are not actively borrowing, (c) do not look at risk alone but look at risk vs reward, and (d) use FICO not only for making lending decisions but also for marketing purposes.... FICO has injected these little quirks -- namely the penalty for all revolving accounts at zero and the separate penalty for no open installment loans -- for the purpose of helping its customers find the more lucrative prospects.
So we shouldn't feel insulted when FICO 8 punishes us for being smart enough not to be debt slaves.
But if we want the Algorithm Monster to really, really like us... we have to throw a few bucks into the lenders' cages from time to time.
@Anonymous wrote:
As FinStar said, Once a debt is paid, its no longer a debt. Consequently if I allow my card to report a balance and then pay it off, I have no debt even though the FICO algorithm still thinks I do and still scores me with no penalty. So I do not have to be penalized for having no debt. Moreover another way to look at it is, you are given additional points for showing active use of credit, Not that you’re being penalized for the failure to use it.
Secondly, how can an algorithm predict credit risk if it cannot evaluate one using credit? Therefore if you’re not using your card and showing active management of credit, then you can only be assessed based on past use and past risk, not current risk.
If you stop actively managing credit, you suffer a penalty, just like if you stop practicing or continuing education in your field, your value to that field begins to decrease. Is it really silly? Would you rather have a doctor who has not practiced in 10 years or one who is currently practicing?
Not a valid analogy. Owing money is not a skill. It is not a ' learned profession'. (Although I have 'learned' it well).
Also, if 'recent' debt management 'skill' were the issue, (a) the penalty would come in after a year or two, not overnight, and (b) it wouldn't be based on your open balances, since the credit bureau reports recent activity as well as balances.
@Anonymous wrote:I used the term "silly examples" earlier, to which a member took offense. Perhaps the word silly wasn't the right choice and something more like "outlier" would be a better fit. What I'm referring to are SJ's referenced "quirks" (maybe that's the right word) of the Fico scoring system, the no revolving credit use penalty and no open installment loan penalty. Those that claim things like "Fico scoring loves debt" usually make that statement based on one of these two quirks. Relative to the rest of the algorithm though, these quirks are extremely small and one can reference far more examples of how Fico scoring does not love debt, such as outside of 0% vs 1% utilization the higher you go, the lower your score goes.
Fico scoring loves debt is simply a blanket statement that outside of a couple quirky examples doesn't make any sense. When risk goes up, 9 times out of 10 you're going to see score go down. I mean, that's the whole point of the system, is it not? The statement Fico scoring loves debt if used as a blanket statement suggests that someone with maxed out utilization would possess better scores than someone with ideal utilization.
I wouldn't say 'FICO loves debt'. I would say FICO loves to make money, which it does best by helping banks to make money, which it does best by helping them to pick out the most lucrative prospects on a risk vs reward basis.
And common sense tells me the (a) all zero revolving penalty and the (b) no open loan penalty both involve the reward side, not the risk side. Which tells me that attempts to come up with a workable risk-based theory for their existence, such as the demonstrably false statement that having a balance shows you have recent experience, are exercises in futility.
Barclays once posted an interesting article about their CLI and CLD practices in which they reported that people who made little use of their cards were denied CLI's and sometimes received CLD's because of the lack of profitability of their accounts, while those who made heavy use of their cards were also denied CLI's or received CLD's because of the increased risk of default. The "sweet spot" for CLI's was the golden mean where risk and reward were considered to be in balance. Although they declined to give the numbers for that range, it looked like 10 to 20% or so on their chart.
You can call me 'silly' if you like; I wouldn't report you 
@SouthJamaica wrote:You can call me 'silly' if you like; I wouldn't report you
LOL, thanks, I appreciate that 
I tend to use the term silly when something is irrelevant to the whole or vast majority. It's like if 99 out of 100 people are denied for Credit Card X with a score of 680 or less, but 1 person chimes in saying they were approved with a 640 score. If that person presents an argument suggesting that because they were approved with a 640 score that others will be approved as well, to me while it's factual that they were approved under a 680 score it would be a silly argument to make a blanket statement that people with a 640 score can/will be approved. Perhaps that example above is silly in and of itself, but hopefully my point comes across.