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

[BuckyB]

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.

[Thomas_Thumb]

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

[markbeiser]

Nah, it is just a penalty for being a bad debt slave, you can't be going around not owing banks money!🤪

[BuckyB]

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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!  😛

[Horseshoez]

Not buying your explanation either.  Reviewing my most recent credit report from each bureau I see a notation for "Last Payment Made" and a date for each of my accounts; looking at two cards, one which is a daily driver (DD) and one which is in the proverbial sock drawer (SD), I see the following:

• DD: Last Payment Made: 22-Dec-2023
• SD: Last Payment Made: 15-Jun-2023

So yeah, the bureaus can easily see whether a card gets usage regardless of whether it has reported a recent balance no balance at any time.

[BuckyB]

Ok, well, you guys figure it out then.  I'm sticking to my explanation because it makes sense to me. ¯\_(ツ)_/¯

[Pppoolboy]

well I dont see anyone else offering any good explanations so Buck's is it AFAIK

[GZG]

I'm just willing to take it at face value that FICO has determined when borrowers don't have open loans or balances on their revolving accounts, they are slightly riskier borrowers, it's nothing personal, just what the math says.

[Thomas_Thumb]

Fico absolutely penalizes for no recent revolving activity. No recent activity translates to less predictable future behavior. CRA data over the years as statistically analyzed by Fico using ANOVA and other methodologies indicated it was significant. 

The big flaw is that many profiles tagged with no recent revolving activity have recent revolving activity. Using a zero balance as a designator of no activity is a false indicator for many accounts. Specifically those where balances were paid to zero before statement cut date.

Using payment data in combination with balance amounts could accurately determine activity. The problem is monthly payments are not required to be reported and often just show $0. Therefore that field can't be used as a sign of activity.

@BuckyB 

You were on the right track with your reasoning. If you do a search you would find this topic has been discussed ad nauseam in years past. I would just explain it differently - Go Hornets!

[Horseshoez]

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@Thomas_Thumb wrote:

The big flaw is that many profiles tagged with no recent revolving activity have recent revolving activity. Using a zero balance as a designator of no activity is a false indicator for many accounts. Specifically those where balances were paid to zero before statement cut date.

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My profile more or less fits the scenario you mentioned about twice per year; I just looked and in 2023 I ran about $18,000 through one card and another $10,000 through another; the first card usually has a balance of about $50 reported monthly, the second card has never had a balance reported on it during the nearly three years I've had it.  And what happens those other two months?  The first card reports a zero balance because the latent charges which typically get reported before the statement cut showed up a day or two later, and my scores took a 20+ point hit for a month.

With the above said, and as I mentioned in a previous post, the CRAs have enough data to know a card isn't really dormant.