@Anonymous wrote:
One of the things I don't get-and I'm sure there's a wiz on this blog who could- but why all three credit bureaus like to say " Your current balances are too high compare to the original amount" as a way to negatively grade your credit, BUT at the same time if you pay off the debt then you still get punish for it.
FICO likes it best when your revolving debt is paid down to a small amount but not entirely off. Same for installment debt (though not all FICO models care about installment balances -- FICO 8 does care).
With revolving debt that is easy to achieve. Just pay off all debt and then allow one credit card to report a small balance.
With installment debt, paying it to a small amount and then keeping the loan open for a long time can be trickier. You typically have to find a lender that will permit that. We know of a few lenders that work that way -- the technique most people use who have no "real" loans is something called the Share Secured Loan Technique.
As to why FICO likes you to have a small positive CC balance rather than $0 across all cards, this is most easily explained as an artifact of how credit bureaus worked a long time ago. When all cards were zero, FICO could not distinguish these three cases from each other:
(1) Bob has not used any cards for the last three years.
(2) Bob does use his cards, but in the last 40 days he hasn't used them.
(3) Bob uses his cards but always pays the balance to zero before the statement prints.
Scenarios 2 and 3 reveal the ability to regularly manage revolving credit and still have no lates. Scenario 1 is far less encouraging, since it doesn't reveal the ability to manage cards and pay them off regularly and on time.
Because FICO could not distinguish any of those three cases, it assumed #1 was the case and imposed a penalty. Remember that FICO 8 was created a long time ago, and the mortgage models were created longer ago still. (The Experian FICO mortgage model was created 20 year ago.) Recent changes to how the credit bureas collect data (google Trended Data to learn more) may enable future FICO models to distinguish these three cases, and thus we might see the all zero penalty dropped in FICO 10.
Why does FICO 8 like to see open loans that are mostly but not entirely paid off? The statisticians who helped design the model apparently saw that consumers with such a profile tended to be lower risk. Personally I hope that future scoring models will do a better job and analyzing a person's past history of managing loans that are now closed, and weighting that more heavily than installment utilization. But in the meantime the SSL Technqiue certainly offers a painless solution to the problem.
