Credit scores: messed up
I'm having a hard time reconciling the information in this article to common sense. If I am looking at someone's credit rating, what I am essentially evaluating is the RISK of loaning that individual money, and I am doing that by looking at their past history. What confuses me is why I am a bigger credit risk after closing an account than before simply because my outstanding balance as a percentage of my total available credit has gone up. If it were me, I would be looking at the number of times (both aggregate and as percentage of total) that payments were late, and I would be comparing the outstanding balance total to their total income - like banks do. I would consider _opening_ a new credit card account to be WAY more of a risk than closing one!
When I go for a loan at a bank (if I ever do. I’m a cash-only-baby) then, the bank will take a closer look.
One, (the credit card company) want to know my credit-worthiness, in others words: how good am I at being a debt-slave, while the other one, (the bank) wants to know if I have the ability to repay the loan. Looking at my credit record is only a small part of sizing me up for a loan. Banks don’t like us to utilize all our available credit; the credit bureau does. The credit bureaus like to see us using and balancing,and paying on time, different types of debts. Credit card companies want us to run up our balances, while the credit-reportng bureaus like to see you stay within 10-12% of your available credit line. When you close an account --you aren’t balancing that debt anymore. You lost that line of credit. Banks don’t care about a closed account, but the credit bureaus do.
Either way, late payments DO affect your credit-worthiness, much more so than closing an account.
Your credit score, as shown in the diagram in the article, is comprised of several factors. But basically it comes down to what level of risk are you, the higher the score, the lower the risk. Credit isn't the only factor, as payments to utilities and some rental payments are also included even though they are not actually credit but merely recurring payments.
Other than a mortgage and HELOC, I've not carried a balance on a loan for a couple of decades. I put nearly every expense that I can on my Amex, which garners me a hefty rebate at the end of the year (free money!). Paying that off every month and not carrying a balance is the key (having a high limit and utilizing about 1/3 of it monthly also helps ;-)
The credit agencies won't divulge their algorithms, since then people would just go out and "game" it, but I can relate from personal experience that the store cards - the ones where you typically get a significant discount for the first purchase - that are cancelled immediately do not hurt your credit score. I've done that 3 times with Sears, and my score never changed (got an additional 10% off each time).
Happy New Year to all at FIT. Wish I were wintering there instead of here (though it hasn't been too wicked cold, yet).
It is a little dark today, but not rainy, and in the mid 70's here in Florida.
I just had my credit score raised eighty points for having three cards sitting in the drawer with zero balances on them, while the credit card companies for those cards are probably thinking if I don’t start using the cards soon, they will reduce my limits or close my accounts.
Time to go shopping or incorporate and be done with this game.
And I wonder if there’s also a connection to the fiat debt-based money system? If you spend $2k on your credit card, the cc company doesn’t lend you money they actually have. They just create it out of thin air and add it to their balance sheets. If you cancel a card the cc company loses that potential revenue stream.
Every year or so I chop off a majority of credit available to me (cancelling cards that have automatically increased limits). Hasn't seemed to hurt my rating.
But, banks don’t care about that when assessing your credit-worthiness.