And the reason is because your mix of credit changes. The formula says your lower risk if you use more types of credit responsibly. Having a mortgage, a car loan, and some revolving credit is better than just two of the three.
Your credit score is NOT a measure of just “how likely are you to pay off your debt”.
It is a measure of how likely you are to earn creditors money rather than lose them money.
Successfully keeping up with 4 monthly payments indicates you’re a likelier source of profit than only having one line of credit you pay each month. You likely have more expendable income, you’re more likely to pay interest instead of paying down extra principle, you’re clearly accustomed to carrying debt, etc.
If that’s the case my debtless ass should have a much lower score. I’ve paid off a bunch of loans (mortgages, car, etc) and have <1% utilization now. Credit score just stays high.
This is a common misconception. Credit scores are actuarial risk, not profit utility. Having some debt load is a portion of that equation because it basically prevents dividing by zero. This is very basic actuarial science - you cannot produce a risk/utility metric without actually having priors, and within those priors there’s a concept of Fisher Information, which measures the likelihood that some sample of a random variable reflects true information about an unknown parameter. Simply put, the more information you have, the stronger the model. So the more debt you manage the more information about your debt management practices is available to the actuary. Up until the point that you have too much debt that it becomes very certain that you are high risk. If you have little credit history, but that history is perfect, you will still usually be in the lowest risk tier, but that might be like 780 instead of 850, or whatever, and that’s merely a reflection of certainly within the model, not your actual behavior.
I think it’s more accurate to say it’s a measure of risk , but it leads to the same result. Good, consistent repayment history means you are a known low risk. Without that consistent and recent history you are an unknown risk. Giving credit to low risk borrowers is where the profit is.
If you pay off a loan, your credit score will likely decrease. Why would someone who’s able to pay off a loan be considered a higher risk than someone who pays $x a month to slowly pay down the same amount?
It’s absolutely about potential profit over risk. In the latter situation, the bank makes way more money.
I received a letter that my capital one credit card account was going to be closed because I haven’t used it in a year or two. They don’t like people who don’t use the cards or pay them off every month. It ends up costing them money
You’re correct about the late payers and minimum payment
There are many paths to earning profit for a credit issuer. Debt traps are one of the more predatory paths. Some credit issuers want to issue high rated bonds that provide low, but safe, income over a long period. Some don’t get profit from interest at all, high-end reward cards, for example. I haven’t paid a penny of credit card interest in decades yet I’m issued cards that provide me with over $20k in benefits every year, these companies make almost all of their money off swipe fees charged to the merchants and partnership deals.
It absolutely is “a measure of how likely are you to pay off your debt”, because that is “a measure of how likely you are to earn creditors money.”
It’s not some grand conspiracy. It’s a record of previous behavior to predict future behavior to determine if you fit their business model.
Paying off a credit card will massively increase your score. From having a lower overall balance, having more available credit, and a lower credit utilization.
The formula says you’re lower risk if you use more types of credit responsibly.
And yet it says you’re higher risk if you had more types of credit, but eliminated one by paying it off. Literally doing the thing you’re meant to do.
And we all know that they can never alter the formula, so I guess that’s that.
We’re talking about why the formula is very stupid in certain cases, so “it’s like that because the formula says so” isn’t really an argument. Like… We know.
You’ve been saying the same bad advice up and down this thread.
If you reliably pay your credit card bills in full by the due date, your score climbs and climbs. Not instantly, over time. Reliability isn’t a one-off.
If you cancel your credit card, you have less evidence that other institutions are happy to lend to you, and your score could go down.
If you apply for a new credit card, your score can go down because that’s also what people who are running out of money do, not because your borrowing to limit percentage is low.
The highest credit scores are for people who have been loaned plenty of money, and who always make their payments.
Deliberately causing them to charge you interest just makes you poorer and does not show that you’re a good risk to loan to. It’s the front door for ballooning debt, and that’s what they want none of - people who get declared bankrupt or have other debt interventions are a massive loss to them, and what they want to avoid like the plague.
And the reason is because your mix of credit changes. The formula says your lower risk if you use more types of credit responsibly. Having a mortgage, a car loan, and some revolving credit is better than just two of the three.
I think it’s important to mention why this is:
Your credit score is NOT a measure of just “how likely are you to pay off your debt”.
It is a measure of how likely you are to earn creditors money rather than lose them money.
Successfully keeping up with 4 monthly payments indicates you’re a likelier source of profit than only having one line of credit you pay each month. You likely have more expendable income, you’re more likely to pay interest instead of paying down extra principle, you’re clearly accustomed to carrying debt, etc.
If that’s the case my debtless ass should have a much lower score. I’ve paid off a bunch of loans (mortgages, car, etc) and have <1% utilization now. Credit score just stays high.
This is a common misconception. Credit scores are actuarial risk, not profit utility. Having some debt load is a portion of that equation because it basically prevents dividing by zero. This is very basic actuarial science - you cannot produce a risk/utility metric without actually having priors, and within those priors there’s a concept of Fisher Information, which measures the likelihood that some sample of a random variable reflects true information about an unknown parameter. Simply put, the more information you have, the stronger the model. So the more debt you manage the more information about your debt management practices is available to the actuary. Up until the point that you have too much debt that it becomes very certain that you are high risk. If you have little credit history, but that history is perfect, you will still usually be in the lowest risk tier, but that might be like 780 instead of 850, or whatever, and that’s merely a reflection of certainly within the model, not your actual behavior.
I think it’s more accurate to say it’s a measure of risk , but it leads to the same result. Good, consistent repayment history means you are a known low risk. Without that consistent and recent history you are an unknown risk. Giving credit to low risk borrowers is where the profit is.
You’re missing their point.
If you pay off a loan, your credit score will likely decrease. Why would someone who’s able to pay off a loan be considered a higher risk than someone who pays $x a month to slowly pay down the same amount?
It’s absolutely about potential profit over risk. In the latter situation, the bank makes way more money.
It’s not just risk (negative income fot them), it is also the potential gain.
A guy that gets stuck in debt via overdraft all the time, but manages to scrounge just enough extra income to pay it off, is a gold-mine for them.
I received a letter that my capital one credit card account was going to be closed because I haven’t used it in a year or two. They don’t like people who don’t use the cards or pay them off every month. It ends up costing them money
You’re correct about the late payers and minimum payment
20+% interest is legal loan shark
They are a higher risk because they no longer have an active demonstration of reoccurring on time payments.
There are many paths to earning profit for a credit issuer. Debt traps are one of the more predatory paths. Some credit issuers want to issue high rated bonds that provide low, but safe, income over a long period. Some don’t get profit from interest at all, high-end reward cards, for example. I haven’t paid a penny of credit card interest in decades yet I’m issued cards that provide me with over $20k in benefits every year, these companies make almost all of their money off swipe fees charged to the merchants and partnership deals.
It absolutely is “a measure of how likely are you to pay off your debt”, because that is “a measure of how likely you are to earn creditors money.”
It’s not some grand conspiracy. It’s a record of previous behavior to predict future behavior to determine if you fit their business model.
Your mix and your average age.
Same as if you close a credit card.
Paying off a credit card will massively increase your score. From having a lower overall balance, having more available credit, and a lower credit utilization.
And yet it says you’re higher risk if you had more types of credit, but eliminated one by paying it off. Literally doing the thing you’re meant to do.
And we all know that they can never alter the formula, so I guess that’s that.
We’re talking about why the formula is very stupid in certain cases, so “it’s like that because the formula says so” isn’t really an argument. Like… We know.
You’ve been saying the same bad advice up and down this thread.
If you reliably pay your credit card bills in full by the due date, your score climbs and climbs. Not instantly, over time. Reliability isn’t a one-off.
If you cancel your credit card, you have less evidence that other institutions are happy to lend to you, and your score could go down.
If you apply for a new credit card, your score can go down because that’s also what people who are running out of money do, not because your borrowing to limit percentage is low.
The highest credit scores are for people who have been loaned plenty of money, and who always make their payments.
Deliberately causing them to charge you interest just makes you poorer and does not show that you’re a good risk to loan to. It’s the front door for ballooning debt, and that’s what they want none of - people who get declared bankrupt or have other debt interventions are a massive loss to them, and what they want to avoid like the plague.