Wednesday, October 7, 2020

The Absurdity of Credit Scores - Continued


Your credit score is not really a very good indication of your creditworthiness.

I received an alarming message from Credit Karma the other day.   My credit score dropped 19 points!  It's down to 812!  How will I ever qualify for that sweet lease deal on a new Acura?   Oh, right, I would still qualify. Oh right, leasing a car is about as idiotic a thing as I could do.   Oh right, I need an Acura like I need a hole in my head.  Oh right, they're just overpriced Hondas.  Phew!  Dodged a bullet there!

I signed up for Credit Karma as an academic experiment - I am debt-free and don't even need a credit score, at this stage in my life, although they increasingly use these scores for things other than loans, including job applications, rental applications, and so on and so forth.   So it never hurts to pay your bills on time.  And if you do, your score should be good enough.

Credit Karma, by the way, had a feature asking me whether I wanted to check my voter registration, which I did, and it is in order.  I got a call from a political calling tree asking me if I was going to vote and if so, who for.  They also asked me if I had checked my voter registration lately - good thinking.  One way to tell if someone is serious about voting is to ask them this.

I recounted recently how my credit score shot up several points because I actually stopped paying my credit card off.  I usually pay my credit cards off daily online, when I log onto my credit card accounts and then enter all new charges in Quickbooks and balance the accounts - and then pay the balance.  Since my balance is nearly always zero, the credit agencies think I have these credit cards and am not using any of them.  Thus, my "credit utilization" was zero.   We were in the Adirondacks and away from the Internet for a few days and my balance at the end of the monthly closing period was a few dollars.  The computers think I am now using these cards for the first time and up my score!  It makes no freaking sense - other than all the banks report to the agencies is how much you owe at the end of the month, not how much you spent on the card.

But I guess that makes sense - after all, if you pay off the balance daily, you really aren't "borrowing money" are you?

By the way, anyone can pay off their credit card daily.  You have to pay off the balance eventually, either at the end of the month, or after years of struggle and massive interest payments.  You have the money, either way.  So this argument that you have to be "rich" to pay off your credit card daily is utter nonsense.  You will, however, be wealthier if you pay it off daily, as opposed to paying compound interest for years on stuff that you threw away or pooped away years ago.  Just a thought.

Anyway, the reason my score dropped so much is that some older loans fell off my account.  These were mortgages and credit card accounts that were closed years ago but showed up on my credit report, as current and paid.   After so many years (e.g., 7), the credit reporting agencies drop these off your report, so the average age of my accounts is now younger, as I don't keep older accounts active.   If only I had kept that Sears credit card I got at age 20 alive!   But from my perspective, keeping a dormant account active just for the hell of it makes no sense.  From my perspective, closing unused accounts is the more fiscally responsible thing to do.   But according to the credit agency computers, keeping dormant accounts alive is a better idea.

This is why I say the credit score isn't the end-all of humanity and why obsessing about it is short-sighted.  If you pay your bills on time, your score should be sufficient for most needs - renting an apartment, getting a mortgage.   Of course, no one is going to lend you more money than you can pay back - or at least they shouldn't.  So even if your credit score is 850, no one is going to write you a mortgage for a million-dollar home, if your yearly income is $50,000.  Common sense trumps nonsense computer-generated scores.

Of course, this doesn't matter in predatory lending - in such loans they expect you will never pay it back, but will instead pay more in interest over time before you throw in the towel and then they pick your carcass clean in bankruptcy court.   But you aren't about to sign up for a payday loan or a "miles" card with a staggering interest rate, are you?  I mean, that is to say, if you've been reading this blog for more than ten minutes.  Predatory lenders don't bother to check credit scores, and if they do, they see a low score as a bonus - the sign that the person they are lending to can be screwed badly.

But it is interesting how you can "game" your score to gain a few points here and there, and I suppose if you are a few points shy of the magic 770 and still at an age where you need a good credit score, it might pay to keep that old department store credit card active, or to let a small balance accumulate at the end of the month before paying it off.   But both are dangerous things to do.  Unused accounts can be hacked, of course, and are a temptation to spend yet more money.   Playing the "float" with credit cards can lead to intractable credit card debt - which you will spend years, if not a decade or more, digging yourself out of - as most Americans do at one time or another.

Funny thing that - that the actions that increase your credit score play into the hands of creditors, while risking your own financial ruin.

Funny thing!