The irony

As I paid off and dumped my credit cards, my credit rating dropped.  Well, I have great news, I just bought a car.   By going in debt with a secured load my credit rating has taken a jump upward.  

Yeah, a good credit rating is useful in all sorts of ways but the method of calculation is a bit of a joke.

The algorithm loves a big credit space and a small utiization of that space. I keep a big fat line of credit secured against my house as a last ditch contingency fund. The balance has always been zero, but it does nice things for my "credit utilization ratio."

People forget that the best time to ask for credit (at a very low interest rate) is when you absolutely don't need it. I have to make sure I pay one bill on the line of credit around Christmas, and pay it back immediately, to keep it from going dormant.

The credit game in the US is rediculous, I mean its nuts that going into debt makes one's score go up.  In my opinion the proper way to calculate credit score, and what they do in some countries, should be that the less you use a credit card the higher your score is.  That's what I want.

Making ones credit score going up is not a concern when being debt free.

Anne Miller wrote:Making ones credit score going up is not a concern when being debt free.

Perhaps. A credit rating also impacts other financial products such as insurance -- they view it as a a reliability index, a way to evaluate high vs. low risk customers and adjust premiums accordingly.

I don't find it necessary to go into debt to maintain a good credit rating. Many of my utility bills go on to a credit card (for the travel points) but I treat it the same as a chequebook -- the money has to be in the bank. It's paid off in full, on time, every month. Result: high credit score.

John,

My wife and I have really excellent credit.  And it’s not because we don’t have debt—quite the contrary.  When I married my wife, I also married her student loan debt.  That debt was more than our first house which cost about $95k.  All of that debt was med school debt, but nonetheless, it was a lot of pennies.

Just before I got married, I was about $20k in the black.  I was very, very frugal with my spending habits.  And after saying “I do” I all of the sudden owed a huge amount of money.

And of course we added to this because we eventually bought land and built a bigger house.  And cars.

But we scrupulously paid every penny on time.  And our credit reflects that—that we have a significant amount of debt but we can be trusted to pay it back.


It’s a weird system.



Eric

Hi Eric,

I am generally where you are. I watch my credit rating more out of amusement.  My house is paid off. My truck is paid off.  I do, now, have a car loan. But my history with car loans is that I pay them off quickly.  And yes, it has been decades since I have had a late payment. So, looking at future needs based upon past experience, it will be 10 years before I will have any use for my credit rating.   I suspect, at 86, I might be more interested in purchasing an electric golf cart or e-bike than a car.

Douglas Alpenstock wrote:

Anne Miller wrote:Making ones credit score going up is not a concern when being debt free.

Perhaps. A credit rating also impacts other financial products such as insurance -- they view it as a a reliability index, a way to evaluate high vs. low risk customers and adjust premiums accordingly.

I don't find it necessary to go into debt to maintain a good credit rating. Many of my utility bills go on to a credit card (for the travel points) but I treat it the same as a chequebook -- the money has to be in the bank. It's paid off in full, on time, every month. Result: high credit score.

It is not necessary to go into debt to raise your credit score.

Just get lots of credit cards that you pay off every month.

I use my credit cards like cash.  All the credit cards are on bank draft to make sure the cards paid in full each month.

With the wife and I both retired and are on fixed incomes, I figured credit score was not a big deal.  In the US it still is. as it effects insurance rates.

We have no debt.  We do travel at least once a year, been to Antigua, US Virgin Islands, (St Croix, one of our sons lived there for awhile), Costa Rica, Mexico and of course Hawaii.  (Had a credit card cancelled while in Hawaii a year and a half ago.  The company said it looked like suspicious travel. lol).
I think Belize in next on our agenda.  ------------- not sure why I threw in this last bit ----------------

Our score is still high, but down a bit from when we were working and had debt.

What we do is get a new credit card every other year.  We currently have 3 cards.  Costco, Airlines and just one other for backup.  We use them at least once a year or more, but pay them off each month.

I think using the cards helps keep the score up there, maybe, maybe not.

Dennis Barrow wrote:......but pay them off each month.

I think using the cards helps keep the score up there, maybe, maybe not.

Truthfully, I've not looked that much into how credit scares scores are produced, but the frugality of both self and wife have helped keep it generally high when needing to get a rare loan.  I was not aware of the impact on insurance rates.....thanks for that info!!   What I was curious about with respect to the clipped statement is whether most pay their cards off themselves or have their bank/credt union do it for them.   One of my earlier credit cards from a credit union set it up so that for an annual $5 fee, they would pay off the card each month when due.  My main credit card today does the same, but may not even have an annual fee (need to check again).  If having that paid off on time by the credit union helps to maintain the credit score, I consider a small annual fee worth the expense. Outside of the house mortgage, long since paid off, all other loans to date were tractor/UTV purchases (new) at 0% financing and paid off on time or early.

Hi John,

I am gradually shifting to automatic payments.   I first went with the auto payments for phone, electricity, water, and internet.   My thinking was that if I had a health crises, it would be one less headache for my wife.  A few years ago she had a mild stroke, and I am trying to assure that she is able to handle things with as few problems as possible.

John Weiland wrote:What I was curious about with respect to the clipped statement is whether most pay their cards off themselves or have their bank/credt union do it for them.  

I wasn't aware that was an option. I pay off our cards manually using online banking. It works well because the due date is around the end of the month and a few other things need to be paid at the same time.

For anyone (re)building their credit score, a credit card with a very low limit and auto-payoff every month could be a very good approach.

Douglas Alpenstock wrote:

John Weiland wrote:What I was curious about with respect to the clipped statement is whether most pay their cards off themselves or have their bank/credt union do it for them.  

I wasn't aware that was an option. I pay off our cards manually using online banking. It works well because the due date is around the end of the month and a few other things need to be paid at the same time.

For anyone (re)building their credit score, a credit card with a very low limit and auto-payoff every month could be a very good approach.

Everyone has the option to sign up for bank draft, whether it is to pay on bills like credit cards, utilities, insurance, etc.  

Just ask the provider for "Bank Draft."

I’m with Douglas on this, I still prefer paying them off manually every month through online banking. It just forces me to actually look at my statements and see where the money went. Relying on auto-pay makes it too easy to forget what you're spending

Building on Douglas’s comment on insurance rates. Quite by chance, I got into a conversation today with the President of a tiny insurance company.  His company is pretty specialized, but he stated that there can be around a 30% mark up for bad credit in the industry in general. Now, he also made it clear that the thinking behind it doesn’t always go in a straight line.  One example he used was that if you are seeking insurance for the first time and you have a bad credit rating, you are probably in trouble.  If you bought a policy when you had  good credit and now your credit is not so good, you will probably not see so much of an impact. Of course, each company has their own practice.

Excellent information -- very interesting. Thanks JFD!

Anne Miller wrote:Making ones credit score going up is not a concern when being debt free.

Unless your insurance company uses credit score to base your premium on.

Basing insurance on credit scores across the board has bad consequences. A husband dies. His former income is no longer attached to the wife's score. Her score drops. Her house insurance increases. This from a company that they had been paying for a couple decades.

Joylynn Hardesty wrote:Basing insurance on credit scores across the board has bad consequences. A husband dies. His former income is no longer attached to the wife's score. Her score drops. Her house insurance increases. This from a company that they had been paying for a couple decades.

I don't think household income is measured, really. As long as her debt payment history continues to be solid, her credit score should not change in a massive way. As John F suggested, long-term insurance providers would take multiple factors into account, not just a credit score.

In this particular case, credit score was the reason the company gave for the increase. The only change in the credit history was debt income ratio.

Joylynn Hardesty wrote:In this particular case, credit score was the reason the company gave for the increase. The only change in the credit history was debt income ratio.

Hey Joylynn, I didn't understand you were talking about a specific case. Gawd, how can we be so cynical that we beat up on a widow to make a buck?  

 Having taught at the college level for 15 years, I have been shocked at the lack of a moral compass too many of my adult students have had. …out of fear of heading into Cider Press, I will stop with that comment.

I have often wondered is there a way I could just destroy my credit so I would have zero rating?

I guess I could fake my death, but that brings up other problems LOL.

The credit agencies are so easy to hack, it makes me sick we have no real protection.

For whatever reason I have been keeping a closer watch on my credit rating.  Sort of like quantum physics, it seems that merely watching it impacts it.
I have also noticed that my pr-approved credit card requests have dramatically increased.

It's not quite parasitism, not quite symbiosis, but the lending institutions have an interest in you both being reliably in debt and reliably able to pay your debt back.