Friday, May 23, 2014

Does Credit Score Really Mean Anything at All?

If you are debt-free, you'd think your credit score would soar.   You'd think that, anyway.

Recently, two credit card companies, Capital One and Barclays, offered to give me "Free Credit Scores" and credit monitoring.  Now this is a service they usually want $30 a month for, and it is utterly worthless.   But they said, "No, really, free."

So I read the terms of service, and actually called the company to confirm this, because, let's face it, we're all used to getting fucked by credit card companies with their "gotcha" offers and come-ons and fine print.  "Free" - right?  Then they charge you.  That's how that works!

Well, it appears it really is free, which is interesting, as maybe the credit card companies realize that (a) it doesn't cost them bubkis to display your credit score on a website, and (b) maybe they can get some business this way.   In the information age, the price of information is going down all the time.  And tossing the plebes a freebie now and then might generate some business.

Either that, or they have some really, really fine print and I'm going to get bent over on this deal later on.

We'll see.

So I signed up for this (and so far, they have not charged me for the service) and the interesting thing is, my credit score is pretty low.   Not like 450 low or something, but in the mid 700's - below the fabled 760 that you need to get those come-on 2.9% offers for car financing.   They even have a little calculator so you can change aspects of your financial situation and see how it affects your credit score.

Take that, "Sooze" Orman!   Your $49.95 "FICO Kit" is now FREE if you have a Capital One card!  (Oh, how will she make the payments on her yacht?).

I have a house worth nearly a half-million dollars that is paid-for.   I have well over a million dollars in savings and Real Estate.   I have no real debts other than a balance on my credit card I use for Patent Fees, which are reimbursed by clients.   You'd think I'd have a score of 800 or more, right?

Well, wrong.

The system doesn't recognize that I own a home free-and-clear.  Moreover, they have no idea what the home is worth (although a zip code search could tell them something - but my zip code covers the ghetto on the mainland as well, so maybe not).   Moreover, in bankruptcy, a home might be protected (particularly in places with "Homestead" laws, like Florida).  So it really doesn't "count" to the folks at the Credit Card companies.

Ditto for IRA and 401(k) plans.  They have no way of knowing the balance of these to begin with.   And they are protected in bankruptcy, so they are not attachable assets.   From the credit card company's point of view, they don't "count".

All they can look at is your credit limits, your payment history, and the balance on your credit cards, relative to the limits.   Since I keep my credit card limits low, this is problematic.

In the past, the credit card companies would keep raising the limits, to the point where I had three credit cards with $20,000 limits (!!!).  Theoretically, I could buy a new BMW and put it on credit cards - although that would be a bad idea.

When an unexpected capital gains tax bill came, I put it on these credit cards, and quickly realized that you can never pay off a $20,000 balance on a "miles" card at 25% interest.

So today, I have low interest rate cards (7.15%, 7.25%) with low limits ($5000).  And right now, thanks to some large Patent maintenance fees, one of those is near the limit.   So this dings your credit score.  When my client pays me, in a couple of weeks (let's hope), I can then pay this off.   But until then, the credit agencies think I am a credit risk.

This illustrates how pointless the credit score really is.   It really doesn't provide any indicia of how wealthy you are or whether you are financially solvent.   My credit score was over 800, on two occasions, when I paid off a mortgage in full - when I sold a house.   The system showed that I had made this monster payment, and rewarded me by saying I had great credit.   Of course, if I was buying another house, I would have gone right back into debt again - negating the entire transaction.  The credit score, euphoric over my paying off my bills, was really only spotting a singular even in my life, not an overll trend of creditworthiness.

Of course, the scoring system does work, after a fashion, if you are an utter deadbeat.   You go delinquent on a mortgage and are 90 days late on all your credit cards, the score will quickly decline to the low 600's.  Have a judgement or bankruptcy, and it will drop into the 500's - or less.

But let's say you declare bankruptcy, and afterwards, inherit a big chunk of money from your parents.   The system still shows you as deadbeat - based on your past history and not some instantaneous event.   As an accurate indicia of your creditworthiness, it leaves a lot to be desired.

And yes, you can "game" the system to score a few points here and there.   I had a Sears credit card that I opened in 1982, to buy some tires for my car.   I closed this account as I no longer used it (I wasn't aware it was even open!).   If I had left that account "open" it would have added a few points to my score, as my active credit history would be longer.

But not a lot of points - maybe 5 or 10.  Not 100.

Similarly, when I pay off the balance on this one card, when I get paid by my client, well, the score will boost up to the magic 760.   So you can affect your score a few more points by paying off debts.

The main thing, of course, is to have a "clean" record, showing no delinquencies whatsoever.   If you have this, your score should be in the high 600's or low 700's.

But again, the scoring system is dumb.   Keeping an old department store charge account open isn't "smart financing" but dumb, dumb, dumb.  But the system would reward me if I kept that account open.   Open accounts can be hacked and cause trouble.   Department store charge accounts have staggering interest rates and should be avoided.   The system often rewards you for making financial mistakes, and punishes you for financial acumen.

Of course, the answer is to not give a rat's ass about your credit score.   Or at least work toward that goal.   When you are young and buying your first house, yea, you need a good credit score to get a decent mortgage.   But as you age, you should be less and less dependent on banks to loan YOU money, and you should be the one with the money that is being loaned out (invested) to others.   If you are over 50 and worried about your credit score, something is seriously wrong.
Which makes me wonder why I bothered signing up for this.  I guess I was curious as to how being debt-free would affect my credit score.  But in terms of actual functional use to me, for the remainder of my life, my credit score is really a nullity.   I have no need to borrow money, so I really don't care what come credit agency's computer thinks of me.