I finally understand why scores drop at all-zero or when loans are fully paid

[Thomas_Thumb]

Perhaps, but we know for certain Fico uses account balances as the recent revolving activity indicator. We also know charge cards are excluded. AU accounts tend to be excluded as well.

An account designated as having no recent activity is often not classified as dormant.

[Zoostation1]

Im 100% in favor of using another measure besides having a statement balance for determining "activity". Would it help if we had standardized reporting from lenders to the CRAs? Right now different lenders treat  "high balance or high credit  (labeling depends on CRA) differently. Capital One uses the highest posted balance at any time, while Amex and Discover only use the highest statement balance (cant speak for most others). Also, I noticed some cards seem to not report at all if there's no statement balance for an extended period of time (even with usage).  Maybe all cards regardless of lender that report to the big 3 should report the same data.

[SouthJamaica]

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@BuckyB wrote:

After a ton of reading I finally grok it.  It's simply because lenders are no longer able to monitor the consumer's behavior.  When you're paying down a loan, you're giving your credit reports a constant flow of information about you.  Each time a statement posts, it's a recent "check in" with the consumer which gives lenders a limited but important view into the person's financial circumstances and, indeed, mental state through his ongoing payment behavior. 

Once everything is paid down to zero and there's no more activity on those tradelines, there's no way to monitor the person.  He's now essentially a black-box with no behavioral data coming out so who the hell knows what's up with him? Might be good, might be bad, you just don't know.  And it's this lack of information that causes the risk increase and the score drop.  It's not that "people who just paid off a loan are more likely to default in the future," it's simply the fear of the unknown.

It's like if a hornet flies into your open car window as you're driving on the highway.  It's a stressful situation but if you can see the hornet walking around on your dashboard, at least you know what it's doing.  If it flies into the back seat area and suddenly you can't see it and you don't know what the hell it's up to, it's much more stressful for you.

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That's not it. A few years ago we had a detailed report from FICO insiders and they justified the all zero penalty by claiming that statistics show that people with no reported balances are slightly more risky than people with small reported balances:

"The data shows that having 0% utilization is slightly riskier than having a low utilization. Having low utilization is an indication that you have credit and are using it responsibly.
https://ficoforums.myfico.com/t5/Understanding-FICO-Scoring/We-re-Tom-Quinn-amp-Tommy-Lee-FICO-Score...

"Analysis on millions of credit files indicates that there is more risk associated with those with zero balance than those with small balances. So, the FICO Score considers consumers with a small balance more favorably than those with zero balance.
https://ficoforums.myfico.com/t5/Understanding-FICO-Scoring/We-re-Tom-Quinn-amp-Tommy-Lee-FICO-Score...

I don't believe this is the honest reason for the all zero penalty. I have my own theory. I tend to agree with @markbeiser that it's a penalty for not being a good debt slave.

[Kforce]

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@BuckyB wrote:

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@Thomas_Thumb wrote:

Not sure I would use your logic as an explanation but, my highschool mascot was a hornet. Go hornets!

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Can't say I'm surprised, you haven't agreed with me once on these boards!  😛

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You have to start getting it right, first.

[mgood]

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@BuckyB wrote:

After a ton of reading I finally grok it.

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Not saying I agree or disagree with you on this topic, but anyone who uses "grok" in a sentence is alright. Such a great word that should get used more.

Thanks Robert Heinlein.