There are three credit agencies that provide consumer reports. They are Transunion, Experian, and Equifax. They’re all addled. Below are the factors that they say they use to determine an individual’s credit score. Below that is what they really do.
Payment history
On-time payments is the number one factor credit scoring agencies use to assign a score.
How often are payments missed?
How long past the due date were bills paid?
How recently have payments been missed?
How many accounts have late payments?
Credit utilization
The second most important factor: is how much debt is owed versus how much is available.
Length of credit history
A long history of on-time payments and responsible credit usage raise a credit score. Credit scoring agencies often take the average age of each credit account. It’s important to maintain old accounts rather than closing them altogether when paying down debt.
Types of accounts, also known as credit mix
Maintaining a variety of account types reflects well on a credit history. Managing both credit cards and an auto loan demonstrates responsiblity for different types of credit.
Recent activity
Applying for a loan or a new credit card shows up a credit report as a hard inquiry. While hard inquiries like recent applications show up on a credit report, simply checking credit does not – this is considered a soft inquiry. A hard inquiry lowers one’s score.
Here’s how the credit tsars actually work. Suppose your credit limit on all cards totals $100,000. You decide to splurge and take an expensive cruise. It costs $35K. You put it on a card that has a credit limit above that amount. Your FICO Score (it ranges from 300 to 850 and indicates creditworthiness) is 820. You meet all the good criteria listed above. You pay the $35K as soon as your credit card statement appears rather than waiting for the due date which is typically three weeks after the date of the statement. You’re a credit ninja. The credit card reports your FICO score about a week after you’ve paid the card. It’s taken a 75-point hit. That you paid the big charge before it was due means nothing to the credit agencies. They saw a big charge and downgraded you. Never mind that you’re a credit ninja – you’re downgraded for prompt payment. Eventually, over about 6-12 months, your score will return to where it was assuming you buy nothing more expensive than bread and pencils.
But if you continue to make big charges that you promptly pay off your score will continue to plummet. Let’s also say you are very rich and that $35K is a small fraction of your net worth. The rating agencies don’t know and don’t care that you have a net worth north of Thule. The more you charge and the more you pay off the lower your FICO score.
Your spouse (you live in a community property state) who is as rich as you has two credit cards that he/she/it uses for groceries and trips to a spa. They each have a credit limit of $15K. His/her/it monthly charges never amount to $4K. The cards are automatically paid by a bank at the due date. His/her/it FICO score is 825 and will stay there until death do you part.
You on the other hand are making big charges every month which you rapidly pay off. No matter, your FICO score is dropping like the Dow Jones index on Black Thursday while your spouse maintains a god-like score. All three consumer credit agencies march in lockstep giving your life-easing spending habits no succor despite the rater’s claim that the more you charge and pay off the higher your score. When you try to lease a BMW which generates a hard inquiry your score is so low the auto dealer, despite your millions turns you down. You pay cash after the hard inquiry which further cushes your credit rating. Your gardener who is on food stamps has a better score. For all I know Elon Musk has a score lower than yours.
I don’t know much about the three musketeers who monitor the credit rating for corporations and countries – Fitch, S&P, and Moody’s. They likely have the same grasp of finance as do the gonifs who tag the little people. Consider that they only rank 10 countries higher than the USA despite the latter’s $36 trillion debt. Two US corporations, Microsoft and Johnson & Johnson have perfect ratings.
I don’t know if there’s a moral here other than use cash or go on the dole. Polonius likely had it right: Neither a borrower nor a lender be. I wonder what his FICO score was.
