A curious thing happened to my credit score when I took on some debt

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For quite sometime, my credit score had been tottering at around 785, vacillating between a high of 803 to a low of 777. Here’s the thing. I had do debt. No student loans, no auto loans, no credit card debt. I have no explanation for the wild swings.

But then the inevitable happened. Decided to call a place my own and took on some debt to buy a home. The debt help came in the form of a mortgage. Guess what? Soon after signing up for a mortgage, the credit score shot up to an all time high of 814!

So, me with the burden of debt is more creditworthy, than my former debt-free self!

That’s like saying BofA with a ton of debt, is more creditworthy than Apple which has virtually no debt and sits on a pile of cash!

FICO score
I don’t care how many PhDs Fair Isaac has, if something eludes common sense, it is just plain wrong.

And if you think income plays a major role with credit scores, you are mistaken! It probably has little or no effect. How do I know? My other half decided to stay off the workplace for a while to take care of Jr. She constantly gets the uber-exclusive pre-approved Amex black card offers!

Some conventional wisdom on how credit scores are calculated and how it applies to me

The age of your credit card factors into your credit score. I don’t use my oldest credit card. Been a while since I last used it. The only reason I keep this card is because, I need that to get my free credit scores that my credit union sends periodically! If I did close this one, I suppose this could ding my score.

The provider of my most used card, stopped reporting the credit limit on my card to credit rating agencies. This is supposedly bad since it affects the total credit available needed to compute the credit score.

The reason they stopped reporting is because they removed the spending limit on my card. But I don’t think a credit agency would know that! I did chat with my card provider regarding this. They said they could report my previous limit if I insisted. I didn’t bother.

I don’t have too many cards. Once again, the combined credit limit plays a part in computing the credit score.

I don’t ‘time’ my payments! It is believed that if you have a low or no pending balance at the time a credit is pulled, it will reflect positively on your credit score! I don’t do that. In fact I keep the statement balance for the entire month, since my bank computes interest at the end of the month. All payments are made beginning of the next month.

My take

I think a fairer system would be ratings based on grades rather than absolute numbers. And that’s what a lender looks at anyway. It doesn’t matter if I have 800 or 810 when applying for a loan. Lenders go by thresholds. Why not apply the same to credit scores?

And maybe have a special grade to indicate a bankruptcy.

Having debt shouldn’t be a pre-requisite for a better score and that’s my rant for today.

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37 thoughts on “A curious thing happened to my credit score when I took on some debt

  1. Hah it seems like there’s very little sense to their calculations to me, too. People are doing different things with credit yet it doesn’t always seem to correlate with the change in their score.

    I have a score in the mid to high 700s and I don’t bother checking it too much since I don’t plan to take a loan soon and I know there’s some volatility anyway.

  2. It is not the debt, but the kind of debt that helped.In calulating your score, I believe the kind of debt is a factor and it should be. Don’t you think a mortgage should be treated differently than credit card debt?

    • Sure KC. But then in the same vein, shouldn’t someone who manages to live debt-free be treated differently than one with one with debt?

  3. Good rant! Take a second mortgage and you’ll have the max score.

  4. You know, the whole process now makes my skin crawl (figurately of course). It’s quite sad that people are punished for being debt free by FICO, but the only way to have a good FICO score is the play the debt game.

    • I prefer transparency in how the score is calculated. When S&P downgraded US debt, it enraged our lawmakers so much that they opened a case against S&P, the fallout of which resulted in the S&P chief resigning.

  5. Congrats on the increases. So ironic though hey- great rant. I too agree the whole thing is a mess and makes no sense. I have been working on boosting my score and since I am debt free it is taking forever.

  6. That reminds me, I don’t even know what my credit score is. I suppose I should find out…

  7. I don’t know my credit score either Well Heeled. I guess it’s important, but I don’t intend to refinance or take on any new debt. Fair Issac has quite a nice little scam going. But, I ignore them when making financial decisions.

    • Yes, unless you intend to borrow, the score doesn’t matter much. But do check your credit reports once a while to correct any erroneous entries.

  8. Great score. I believe the spike was due to the type of credit you took on. Mortgage debt is positively associated with stability, and this is a positive creditworthiness indicator…you’re less of a flight risk, congratulations.

  9. Take on more debt and get a higher score? Doesn’t make any sense. But I guess someone who is willing to take on debt is a better potential customer than someone who has none? The recession is what we get for our constant rewarding of dangerous borrowing!

  10. I like your rant, MC. The system is too slanted to on carrying debt.

  11. It’s intellectually confounding, take on more debt yet see a credit score increase. Those who hate debt, and don’t borrow, could have lower scores. It is what it is, and scores – while important – should be looked at with full context in mind.

  12. That’s a fantastic jump on your credit score! I have to admit I don’t know what mine is currently. I really have got to get an updated report. It’s been on my to do list for way too long than I want to admit. I check my bank accounts regularly to make sure there aren’t any fraudulent charges but I really should get an updated report. Thanks for the reminder! -Sydney

  13. I think the credit card companies and FICO people view “no debt” as sort of like someone with a driver’s license but has not owned a car in 10 years. Sure you have a clean driving record, but that is just because you don’t drive. Same thing with a home mortgage, if you don’t have one then they don’t really know your history of paying down a loan. I know it is not the ideal way to score someone because they are not giving you points for “not” getting a loan earlier in life that you could not afford. There is no credit given (excuse the pun) for being responsible enough to not take on debt….

    • You make a good point Neo. But I’m not a cash-only customer. I do use credit cards and pay it off in full. Surely that should count as responsible use of credit?

  14. I think you should buy a whole row of houses and watch your credit score skyrocket!

    It is no wonder our economy is so screwed up.

  15. Credit scores are a curious thing. My score was hovering near 700 until I took out a Macy’s credit card. Then it jumped up to the 750′s. Go figure! Supposedly the credit bureaus factor in the types of credit as well as everything thing else. They like seeing different kinds of credit on your report. I guess they deem you more credit worthy.

    • I do have credit cards that I’ve been paying off in full every month. I would think that would mean more than taking on a debt and paying interest.

  16. MC- I’m with you. I always thought it was a little crazy that your score could jump once you take on more debt. The same thing happened to me when I got my first mortgage. Seems backwards!

  17. Before trying to calculate your credit score it is important to learn how that number is determined. FICO scores are calculated through the information on your credit report. About the 35% of your score comes from your payment history. This is listed under each account. Late payments lower your score. If your account gets to the point of 120 days delinquent your score will take a massive hit. 30% of your credit score comes from your debt to credit ratio

  18. I was just listening to a thing on using credit card offers to get miles rewards and how some people do it to travel the world (first class!). I was surprised they’d wreck their credit like that, but evidently, it only dings a credit score like 3-5 points each time? I guess if I knew I didn’t need financing in the next few years and I wanted to hit Europe for free, that might not be a bad move!

  19. Your scores are great, even with the swings. I think credit scores should be looked at more in ranges than in absolute numbers. Your range of 750 and above is absolutely excellent!

  20. It’s good to know what matters to Fair Isaac. This game is so silly! I have way too high a debt and my credit score is in the 720′s..just because I’ve never paid anything late and have aged accounts.

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