They’re not even subtle about it. The system directly rewards you for being in enough debt to always be paying someone interest but not enough that you might file for bankruptcy.
You don’t have to be in debt, but you do need open credit lines. Having debt on them actually makes your score worse.
Her score likely went down because she closed out a credit line, i.e the open loan, so technically the “i have an open 5yr loan ive been paying on diligently” is no longer part of her score. The fact that she did pay it off is part of that score, but its weighted differently.
If she instead had 40k of credit cards she had open for 5yrs, with zero debt on them, her score would have gone up. Just having the account open, even not using them, shows a high “credit to debt usage” ratio and “a long time open loan.” Both of those make up about 45% of your “credit score.”
So no, you dont have to use a CC every month to keep a high credit score. If you want a high score, you want to open a credit card or 2 for their max value until you get about 30k-40k of total credit, and then don’t use them at all. Not a bit. Never close them. The “long time accounts” + “high amount of debt not in use” + “never delinquent” is roughly 80% of your score. You can sail into the 700s/800s if you dont have any other credit hit.
While this is all technically correct it’s still dogshit that your score goes down when you do the thing you are supposed to do with a loan.
Your options are:
Take out a loan and pay it off: score goes down
Take out a loan and don’t pay it off/default: score goes down
Remember that your credit score doesn’t exist for you. It’s not for your benefit. It’s for the benefit of lenders, and they don’t give a damn how unfair the system is.
Seriously. “I rarely take on debt, regularly save aggressively, and pay off my debts as quickly as is convenient” means I’m bad to loan to in their eyes when if you had evidence of all that as an ordinary person I’m exactly who you’d want to loan money to.
Your second option is 2 options. You dont need to default, just never finish paying it off.
You do have to use them a little bit though. It wasn’t a great surprise to learn that my credit score evaporated right when I was looking to buy a house because a credit card I hadn’t used in 7 years was turned off due to not using it. Having no debt, lots of savings, and decent income apparently counts for nothing.
Having no debt,
This is the only part the credit reporting agency sees. In that situation they have to make the lending score base on your history, which tells them nothing of your current situation.
lots of savings, and decent income apparently counts for nothing.
The credit reporting agencies don’t see any of this. There is no component in a credit score for your savings or income.
I don’t know why this dude is getting downvoted. This is basically what I do. And I have a great score.
Yeah I dug into all this a while back while I was trying to raise my score. Turns out the most productive thing I did was just ask my current cards to up my limit. A couple of them doubled, so it dropped my utilization way down, which shot my score way up. I think I was around 675 and went up to 750 just with that trick. I got into the 800s by paying off the credit cards.
Its an annoying metagame you have to play to get the “good interest rates,” but those little tricks can save you a fuckton of money over time.
I feel like you meant this sarcastically, but the answer is probably yes.
The trick is to not use them though, which so many seem to struggle with. If you’re someone who struggles to manage debt, then getting more credit cards WILL BE DISASTEROUS.
So, sounds like a skill issue /s
I’m not American, but a credit card means that you owe a bank money, right? If I owe my friend money I’m in debt with him. How is having a credit card not being in debt?
Just having a credit card doesn’t mean you’re in debt. Its a line of credit. You can choose to use it and carry debt, but there’s no requirement you do so. The long term consequence is that a bank may choose to close your credit card account if you don’t use it for a long time. The shortest time I’ve had a bank threaten to close an unused card of mine was 5 years. Even then, you can by a $5 sandwich on the card, pay it off immediately, and reset that timer of non-use for another 5 years in that case. I have other cards I haven’t used for 15 years and the accounts are still active.
I should partner up with someone who does that while I do the consistent thing and we cover each other.
The system directly rewards you for being in enough debt to always be paying someone interest but not enough that you might file for bankruptcy.
The only interest I pay is a mortgage, but my score is over 800. It must be rewarding for something else too.
It’s been a bit since I took personal finance, but I think it takes into account your assets too.
Sorry for the negative vote, but credit score does not take into account your assets. I just dont want folks to think that might be the case. Personal assets will come into play when a creditor considers you for a loan/line of credit/etc along side your actual credit score.
Edit: Well. This is turning into a wall of text.
Credit score is based on several things:
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Ratio of debt available to debt used. I’m trying to remember where the sweet spot is, but it’s somewhere around 10% to 20%. If your credit cards have a cumulative limit of $20k, aim for a maximum use of $2-4k. Pay off your previous balance so you don’t get hit with interest and you’ll gain credit.
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On time payments. At the very least, pay the minimum each month, but really one should be budgeting to pay it off each month to avoid interest.
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Oldest account. I don’t like or use my first credit card, but I still have it. Note: cards must be used periodically to keep them active otherwise they won’t be considered, I want to say every 3 months. So even for my oldest card, I have a small subscription on it that hits monthly. This gives me an active, old credit line.
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There are “good” forms of debt where on time payments is the name of the game. These are car loans, mortgages, etc. If you have the resources, set up auto pay on these so you never have to worry. Paying them off asap will save you on interest, but it could harm your credit as that is no longer an active line. It’s likely still in one’s benefit to pay them off, but then we get into a discussion of interest vs cost of money. That’s a different rabbit hole.
Uh, there’s other stuff, but my thumbs are tired. Hope this helps someone.
To play devil’s advocate, I wouldn’t trust a parachute that’s never been deployed or one that’s deployed every day for the last year. I want the parachute that was used maybe a dozen times over the last few months so that it’s not brand new but not overused so I know it works but isn’t a significant risk.
I have no idea how to calculate reliability, that’s just what monke brain thinks.