More people have complaints with all zero penalites than losing points from paying off a mortgage. With paying off a mortgage you're effectively gaining bonus points when you're below 9% remaining on the balance, so there's not that much to complain about in that realm once people are made aware. I do however believe the all zero penalty is flawed. While I don't regularly experience an all zero situation and and don't play the AZEO game anymore, I think there needs to be differentiation between people who have zero balances because they aren't using credit versus those who have zero balances because they have paid before the statment cuts. The CRAs have that information and I can understand there being a penalty for non-usage. I'll use Equifax as an example since it was the last one I looked at on annualcreditreport.com. They have a last activity date on all of my accounts, not just the ones I let report a balance. If my statement cuts on the 10th and I pay the 9th vs the 11th shouldn't have any statistical bearing on the likelihood of becoming 90 days delinquient. That being said, FWIW I do think the models do a reasonable job on the whole despite my issues with how they handle all zero.
@Pppoolboy wrote:To rebut the inane assumption that FICO scores somehow penalize people with "all-zero" revolving balance reporting or after the completion of a loan payoff because "lenders can't make a profit off those people," I give you the following, from Forbes:
ECOA Compliance
Before a lender can use a credit score to evaluate applicants, the scoring model must pass a few tests. Specifically, it has to satisfy a federal law known as the Equal Credit Opportunity Act (ECOA).
The ECOA states that credit scores used for lending purposes in the U.S. must be empirically derived, demonstrably and statistically sound. Those terms mean that credit scores in the U.S. need to be built using a proven, scientific method (aka empirically derived). And they have to work (aka demonstrably and statistically sound).
A credit score is supposed to predict the likelihood that someone will pay a bill 90 or more days late in the upcoming 24 months. So, FICO and VantageScore Solutions have to prove that each credit scoring model they build does what it’s designed to do.
From https://www.forbes.com/advisor/credit-score/fico-vs-vantagescore-credit-scores-whats-the-difference/
Each scoring model has to prove to the Federal government that it has a fair objective and it uses statistics to fairly achieve that objective. Hence the use of scorecards. Pure machine learning would likely give marginally better predictive results. However, pure machine learning would likely also bias results in ways that are politically untenable. That is, racially.
Thus, theories that the FICO scoring model could "sneak in" algorithms that tweak the score in ways that don't comport with the model’s stated design objective... are simply wrong. I guess I chalk those theories up to odd conspiracy mentalities? I don't really know.
However, this also means that fully understanding the FICO scoring models is pretty **bleep** impossible, since they're "detuned" via scorecards, rather than using pure machine learning, in order to achieve less politically undesirable results.
This isn't to say that people are NOT penalized when they hit all-zero or after a loan payoff, but this is simply explained by the fact that those people are no longer able to be tracked via their monthly payments and are, hence, slightly riskier. The scoring algorithm would preferentially like to see how you are currently handling debt, even moreso than how you handled debt in the past. And the only way for the algorithm to see how you're currently handling debt is to see payments on open accounts right now. Not last month, not six months ago, right now.
If you are not currently handling debt, then you are riskier than someone who is, everything else being equal. It's really that simple. That is the explanation for the score drop when you pay off your only installment loan or have zero balances reporting across all your cards. They can't see how you are currently handling debt anymore. Any other conspiracy theories are just wacko. And, the more different types of debt you are currently handling, the better. As long as you don't seem to be overwhelmed by them.
That's it, this ain't rocket science. And anyone who comes in here and says differently will not be able to give you any evidence to the contrary because there is none. I don't understand why I've gotten such pushback on this analysis because it's the only logical analysis.
Since you're so convinced by what you read in Forbes, and anyone who doesn't see it your way is an illogical, wacko, conspiracy theorist, I can't see why we would need to discuss this further.
@FicoMike0 wrote:Well have to see exactly which data they trend. The fico8 model already trends payment history, big time. The claim is that 10t trends utilization, as well. This should get rid of the zero penalty, since it is based on utilization.I
The fact that the score algorithm is statistically derived, still leaves room for arbitrary choices as to how it's fit to each parameter.
Regardless of whether the all-zero penalty is logical, it is in fact very real; the following is a screen shot showing the AZ penalty I got a few months back; you see months of basically steady scores, then an dip when I hit all zero, and then a rebound back to the previous scores when one card reported a trivial balance.
In my opinion the real reason for the all-zero penalty and the no-open-loan penalty is that they are a simple way to weed out those who don't like to owe money, or are at least not presently interested in owing money. Banks are primarily interested in profit. And the profit equation includes not only potential risk, but also potential revenue.
I do not agree with the suggestion by many that the reason for the penalties is to determine whether a person has done a good job of managing credit, because the payment history and avoidance of overexposure are already the two biggest components of the scores.
Nor do I accept the statements by the FICO insiders that 'statistically' people who owe zero are slightly more likely to default than people who do owe money, because... well... because I was not born yesterday. Common sense tells me that people who do not owe money are less likely, not more likely, to default.
The statement by FICO insiders that zero balance consumers are 'slightly' more likely to default also makes no sense since the combined penalty, in the neighborhood of 54 points, is far from 'slight'.
OP's confidence in the Equal Credit Opportunity Act is misplaced in my view. I am sure the banking industry can afford to hire analysts skilled enough to convince a government examiner that the no-open-loan and all-zero penalties serve a benign purpose. If indeed the government examiner is even aware of the penalties. Outside of this forum, I have never even heard those penalties mentioned, let alone analyzed.