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I’m currently enrolled in a credit monitoring service, getting periodic updates about inquiries into my credit, and small changes up or down in my FICO score. When we charged something on our American Express, I was notified of a balance change. When we applied for a consolidation loan, I was notified of the inquiry and of a slight decrease in my score. Everything made sense, until I read a notification that landed in my inbox last week.
My FICO score had increased by 24 points, and I couldn’t believe the reason why.
A few weeks ago, my wife was in need of some new clothes, and we had money budgeted for her to go shopping. She had a coupon that would save her some money at a specific retailer; unfortunately it would require her to use her store credit card. We have a history of credit card abuse, most recently noted in our failed attempt to participate in the credit card rewards game. We had decided that credit cards are simply not for us, therefore I didn’t want to even contemplate using the coupon. After some discussion we decided that we would use the line of credit and the coupon, but immediately pay the bill online when we returned home.
We executed our plan as discussed, and figured that was the end of it. I didn’t think about it again until I got that email from my credit monitoring system. As mentioned above, it was a notification that my FICO score had increased by 24 points. Here’s the reason given for the increase in my FICO score:
Dormant Card Activity: An account that has been inactive for more than 12 months has become recently active.
My credit score went up because we used a line of credit that had not been used in 12 months. This is the complete opposite of what I would expect. Let’s try a little exercise. Let’s say you were told to evaluate someone’s credit score based upon the fact that they just charged $200 (sample amount) on a line of credit that hadn’t been used in over a year. What thoughts would come to mind? Here’s what would be going through my head:
- Negative: The consumer has increased their amount of consumer debt.
- Negative: The consumer may be purchasing items they don’t have the cash for, as they have not used this line of credit for in over a year.
- Conclusion: This consumer’s financial situation may have taken a turn for the worse, thus their credit score should be reduced.
Seems logical, however, that doesn’t seem to be the way the folks at the credit score calculating think tank are looking at my recent spending patterns. I searched the internet to try to figure out why using a dormant line of credit would cause such a jump in my FICO score, and ran into a much bigger mystery:
It’s difficult to find a simple description of what a credit score really means.
I challenge you to bring up your favorite search engine and search for “what does a credit score mean” and read a couple of the top articles. Here’s what I found:
- The Range Definition: Many of the articles define what a credit score means by defining the ranges. You may have seen these as well, anything above 720 is excellent, etc, etc, etc. Then they go on to define all the good things a high credit score does for you, and all the bad things associated with a bad score. This definition only describes what you can do with your credit score, and NOT what it really means!!
- The Behavior Definition: Other articles will define a credit score by what actions a consumer can take that will result in an increase or decrease in your score. Paying bills on time will increase your score, racking up too much debt will lower your score. This definition only describes what spending behaviors you exhibited that led to your score’s calculation!
- The Big Words Definition: Finally, a few articles will define your credit score as a measurement of your credit worthiness. The article may mention that your credit score is an indication of whether you are more or less apt to pay your bills on time, or how you will handle a credit limit increase. This seems like a valid definition, until I try to apply this to my scenario. It doesn’t fit!
I took my example of using a dormant account, and applied it to these three types of articles I found searching for the meaning of a credit score and was left scratching my head. There was nothing about me using a dormant line of credit that seems to match anything that would lead me to believe that my credit score should be increased. It was at this point that the universe hit me over the head with the real definition of the credit score.
A credit score is a measurement of the likelihood that creditors will make money by extending you credit.
Think about these points:
- Charge Nothing: If you’re not using the account, creditors are not making any money.
- Charge a little: If you use your lines of credit but the balance is fairly low, it means that you are carrying balance from month to month paying absurd interest rates. But your credit utilization is not increasing; therefore the risk factor of you defaulting is low.
- Charge too much: Your utilization is high, and you are paying your bills each month, but you are obviously living beyond your means, thus the risk of you ditching your debt and leaving us holding the bag is high.
Now, apply my scenario to the above rules. For an entire year, this creditor made zero off of me. But now that the account is active again, the chance that I may continue to use it is higher. The chance that I will carry a balance from month to month and pay interest is higher. The chance that any creditor will make money from me is also now higher. My definition seems to more accurately describe why my credit score increased.
The thought I’m left with is this: If my credit score is a measurement of the likelihood that creditors will make money from me, that means they think I’m likely to be paying interest. If I’m likely to pay interest, then I’m overpaying for the goods and services that I purchase. Is a good credit score really a good thing?
Have you ever seen a change in your credit score that left you scratching your head? What do you think of my definition of the credit score?
Yeah, I think the way they calculate credit scores is extremely confusing and ass-backwards. Why on Earth would your credit score go up if you owe more money? Makes no sense at all.
Oh well. I try not to worry much about mine other than keeping it in the good or excellent range. I don’t like jumping through their hoops and I certainly don’t want to run up a balance to get in good standing. Craziness.
I’m thinking it’s not backwards, Holly….I think it makes perfect sense to THEM. It’s meant for their benefit and profit – not for the good of consumers!
While our credit score has been over 800 for years, I don’t put a lot of faith in them for the exact reasons you cite. Plus, my mom, who was a millionaire, had no credit score and couldn’t get a cell phone in her name because she always paid cash and had zero debt had no credit history. I’m sure there are a lot of people who have lousy credit scores but are able to get their own cell phone plan. So I agree, it is a test of how much money the companies can make off the consumer.
Your mom is a good example of businesses shooting themselves in the foot by using a credit score the wrong way. They use it as a determination as to whether your mom will pay her bill – which is what the cell phone company wants. But that’s not what a credit score is gauging….so the cell phone company loses out on a customer that could pre-pay her bill for eternity.
I have a good credit score but I’ve never, ever paid interest. Yes, I use my cards constantly, but I also pay them off immediately. It’s the best of both worlds.
You may not be paying interest, but credit card companies still make money off of you….with every swipe they get paid processing fees. Maybe not as much as the interest on revolving credit, but just by using your card you make them revenue. Thanks for sharing, Stefanie!
Sounds like you on track with your definition, creditors want that sweet spot where you’re carrying some debt/balance and they are collecting interest. Maybe that bump in score will keep some people coming back?
I think people could mistake a good credit score for using credit responsibly. I had a great credit score with over $100,000 in credit card debt. Makes. No. Sense.
If you never use credit, your credit score will be zero, which would seem smart that you’ve never been in debt, but you’ll get dinged on car insurance, if you try to rent a place, or maybe even by your employer. It is certainly not a fair system. The system assumes we’re all in debt and borrowing money.
As I mentioned in a previous comment, the examples you cite are incorrect applications of the credit score. If you read my definition, then attempt to use a credit score as a prediction of paying a bill on time…well, you can see how that would fail. Thanks for reading, Kim!
Yes, a credit score is just a measure of how good you are at getting into debt – even if it’s just for a little bit. I really don’t understand how the system works and I really hope it changes some day, but this is what we have to deal with now. Unfortunately lenders look at your credit score and not at your ability to pay so the best way to keep your credit score in good standing is to use your cards and pay them off at the end of the month. Use them but don’t pay interest. A silly way really, but I really can’t think of a better way.
Nobody really understands how it works, Aldo….and the credit industry likes it that way. Although if we change our perspective towards it being an indication of the probability that the creditor will make money from a consumer…..suddenly it makes a lot of sense.
Our credit scores are both the highest they’ve ever been, which is funny because we just churned 3 credit cards just last month. We were almost positive that we would take a hit because of the churning.
I’m not sure if that’s surprising, Michelle. I don’t know if you’re using your credit cards or not (I suspect you must be at least a little bit), but the key is that you’re showing a willingness to use credit….and they like that. 🙂 Thanks for stopping by!
I had an old negative item drop off and my score dropped. Not what I was expecting!
Now that is surprising, Tre…..unless there was something else associated with the account (assuming it was an account) that contributed to your score…OR if something else affected your score. It’s definitely a complicated animal.
Learn something new everyday. I stalk my credit online monthly. I have learned over the years how important it is to keep it clean. It’s amazing to me how people can go throughout their whole lives and never look at their credit report until they are about to purchase a home. I need to know….just saying.
Looking at your credit report (in my opinion) is far more important – I’ve read enough articles that say that very thing to make me agree with it. That’s actually why I am enrolled in a credit monitoring service. I want to ensure my report stays clean, and nobody is using my identity. I also want to ensure that incorrect information is not being reported regarding my finances. Thanks for your comment, Petrish!
I don’t think we have very good credit. I remember checking a few years ago and not being overwhelmed with our awesomeness. But we pay our credit card off every month, have always been offered the best mortgage rates and have no problem being offered more credit or loans. So I’m not sure why I’d even want a better score… I think the reason we don’t have great credit is that we don’t have car loans, student debt, etc. So ya, they won’t make much money off us.
Well, if you are offered the best mortgage rate, and have no issues getting credit should you need it (be careful!), then I would think your credit must be pretty good. 🙂 You can always check your Transunion score (not your official FICO score, but it does give you a pretty good idea of where you are) for free through creditkarma for free.
Credit scores are really confusing to understand. And sometimes they seem to punish those who use their credit wisely over those who don’t. I really wish there was a better system because I do understand why lenders need to understand our credit history but the current system paints an inaccurate picture in my mind. Wishing you and your family a wonderful Thanksgiving, Travis!
I actually think that it paints a very clear picture based upon my updated definition. 🙂 That being said, I think a supercomputer is sitting in a supercooled room somewhere that is required to calculate the credit scores of the world. I hope you and your family have a great Thanksgiving as well, Shannon……it’s my favorite holiday hands down!
I remember when I read Dave Ramsey’s book (The Total Money Makeover), he said that he had a credit score of 0 because he hasn’t used any form of credit for decades. I think you’ve hit this nail on the head, Travis. “A credit score is a measurement of the likelihood that creditors will make money by extending you credit.”
Can you imagine….to be so financially free that you never have to use credit? What a great goal.
I often wonder how I, with almost $90k in student loan debt, can manage to have great credit. But to look at your idea of what a credit score is, it makes me wonder if the whole credit score thing is in place to make it look like they care about consumers…because if they really wanted to make money, there wouldn’t be credit checks and they’d just lend you whatever you needed. (hmm, sounds like student loans) But that would be predatory. Then there’s the times you get dinged on your score when you’re applying for new credit…not sure how that would relate to your definition.
You get dinged by applying for credit…but only nominally. It would only be enough to really hurt you if you applied for a large number of new lines of credit in a short period of time. I would say that would be a red flag to creditors as an abuser of credit.
My definition of a credit score would be how likely you are to be able to pay back a loan.
No loan history = no credit; there is no way of knowing how you would deal with a loan.
History of not paying your bills, not paying back your lenders = bad credit score.
Good history of paying bills, managing your finances in a way that demonstrates you can borrow responsibly = good credit score.
As for your increase in credit score, I’m guessing that would have to do with your credit history length. If that was an older card, having it active brings the average age of all your accounts up. And the longer history of good borrowing leads to a better chance you will be able to pay back a loan = higher credit score.
In the end, no creditor has ever made a dime off my lending habits. In fact, with cashback rewards cards it’s quite the opposite. Yet I am left with an excellent credit score because I’ve proved that I am a safe borrower.
Ah, but here’s my question, Noelle….using the card should have altered my credit history length at all. It was (as per my credit report) still an active account. I still received communication from the retailer on it. It was marked as “dormant” by the credit reporting agency. Thus, if the credit score system is using how long ago you used an account as an input towards the age of the account…well…yet another shady and suspect criteria if you ask me.
It’s just a good reminder of who the credit score customer really is: companies who want to make money selling your debt vehicles. Nothing more. I can’t even stand the concept.
I have no idea what my credit score is and I don’t care because we don’t use debt vehicles when making purchases, whether it’s a car or a home. The only thing I use are credit cards for points rewards but I treat them like debit cards…so I could care less what the interest rate is.
Good for you for not needing to play the credit score game, Free to Pursue. While I hate the idea of a credit score….I did care what mine was when we refinanced our house earlier this year. But now that we have that out of the way, I could really care less as well. If I could go the rest of my life without seeing my score again, I’d be a happy guy. I do like the credit monitoring program though, just for identity protection thing. But…it’s a free trial, and when it’s over, I’m not spending the money each month to keep it. 🙂
Credit scores are mysterious, that’s for sure. As you observe, many actions that we lay people would intuitively think might make our score fall actually makes it rise. Sometimes I think the score sellers are in cahoots with the lenders!
Oh, I have no doubt they’re in cahoots with the lenders…..they’re certainly not calculating credit scores for the benefit of consumers! Thanks for stopping by, Kurt!
I really don’t check my credit score on a regular basis but the way a score is determined has always been a mystery. I’ve read the articles about how your score is calculated and all, but it never made sense why it went up sometimes after lowering my debt to credit ratio and up when I raised it. Your example makes perfect sense to me!
They certainly like that “sweet spot” of consumers using debt, Jon – that’s for sure! At this point checking my score becomes more of a novelty (other than the identity theft prevention) – what did I do that raised my score, what did I do to lower it. It’s almost comical to watch.
You raise a really good point. Credit scores have some really strange things that impact them (for better or worse). I would have never thought that using a dormant card would increase your credit score. I have a couple of dormant cards that haven’t been used in over 12 months. Guess I should use them? Haha. Strange stuff.
Hey, maybe if you use them all you could achieve the “perfect” credit score! That would be a fun experiment. 🙂
“Is a good credit score really a good thing?”
Possibly. You can have a good credit score without paying interest. If you get it that way, it’s a great thing.
Maybe you’re not paying interest, but it’s still a reflection of whether creditors make money on you. Even if you don’t pay interest, if you’re using your card, they’re making money off of your spending habits through the charges paid by retailers to support your method of payment. Glad to hear you’re not paying interest though, Rich B. You’re one of the small minority that can do that successfully – creditors know that given a large sample of people – generally those that use credit cards will at some point pay interest. Thanks for sharing!
Bingo! You didn’t actually think the invention of the credit score had the consumer in mind, did you?
They’d certainly like us think it was…..but we’re onto them. wink wink. 🙂 Thanks for stopping by, DealForALiving!
That’s a fascinating take. I’ve never thought about credit scores from that perspective but I think you may be on to something. I hate the way whole credit score process. There is so much about it that is just messed up. The fact I could inherit a million dollars and it doesn’t change my score one point but I use a dormant card and it goes up 24 points???? Which would really make me a better risk to loan money to. But then if I had a million dollars I probably either wouldn’t be borrowing or would be paying my bill in full each month which makes me a “deadbeat” in the credit card companies eyes, so what you are suggesting makes perfect sense. I really hate the way credit scores are used for things that have nothing to do with credit. The thought that I have to constantly put myself in debt just so I can get a better rate on my auto insurance is ridiculous beyond belief to me. Great article. You gave me some new things to think about. Well done.
That’s right Bob…..if you inherited a million dollars your risk factor goes WAY down, but so does their ability to make any money off of you. 😉 Glad you like the article, Bob!