Why I Hate The Credit Score – Redux
Posted by Gail | Filed under Debt Traps
By now y’all know I’m on a rampage against the credit score and how it is used to screw up people’s lives. Yes, I get that there has to be a way to assess a borrower. What I hate is that a system that was developed as a marketing tool to focus on the MOST PROFITABLE customers has become a credit granting tool.
Let’s take the whole “credit-to-debt ratio” thing as an example. Under the credit scoring rules for having a great score, you should not use more than a certain percentage of your available credit. Optimally, according to “thems that knows” you shouldn’t have a credit-to-debt ratio (also referred to as your credit utilization) of more than 30% to collect the most points under the credit scoring system.
The credit-to-debt ratio is calculated like this:
Debt Used ÷ by Available Credit x 100 = Debt Load
So if you’re carrying a $600 balance on a credit card with a limit of $2,000
$600 ÷ $2,000 x 100 = 30%
Now here’s the kicker: Just because you pay off your balance in full every month does not mean that the credit scoring system will rank you as a good customer. Ya see, the point – from the lender’s perspective – is for you to carry a balance and pay interest. So despite the fact that you zero your card every month, the credit scoring system will penalize you if when it randomly checks your credit utilization you’re up too high.
No one can predict the exact point when your balance gets checked by the system, so you could be at or close to your limit just before you plan to pay off the balance and you’d lose points big-time.
All this means that if you have a card with a $1000 credit limit, you should never rack up more than $300 in charges in a month.
The credit scoring system looks at your credit utilization in two parts.
It scores the credit utilization for each of your forms of revolving credit separately.
It calculates your overall credit utilization by comparing the total of all your credit balances with your total credit limits.
If you’re over that magic 30% in either category your credit score will drop.
And now for my big question: What purpose do you thing the credit utilization or debt-to-credit ratio serves? Think about it for a minute. Why does this even matter, particularly if you pay your balance off in full every month? What the hell difference does it make what your debt-to-credit number is?
I’ll tell you why. If you have to keep your credit utilization at 30%, you’re going to have to get a higher credit limit. Yup, the credit card companies are laughing all the way to the bank.
And how does this credit score travesty hurt customers? Just ask all the folks who watch their limits arbitrarily cut (yah, they don’t even have to tell you), and their credit utilization sky-rocket. The next thing that happened was their credit scores dropped. And that justified credit card companies hiking their rates because those all-important credit scores had fallen.
The credit scoring system is racket designed by lenders for self-serving reasons. It not only identifies profitable customers, it can be used to make customers more profitable. Wow!
I’m not sure what it’s going to take for The Powers That Be to realize just how damaging the credit scoring system is to people. But until they do and legislate away some of this arbitrary power, lenders have their customers by the short-and-curlies.
August 30, 2010 at 7:55 am
I’d love to see a time when at least the math that is used behind the credit score is open and public. it is hard to debate a system that is hidden from public view. A system that is so ingrained into every individual’s financial lives should be completely open to view by the public, at least that way we can have real debates on what the credit score should tell and what should be used to achieve that score.
regards,
Jason
August 30, 2010 at 8:11 am
I agree with Jason. On the topic of credit reports, my last one had my address spelled various ways so it looks like I moved around a lot when I actually stayed put. Should I fix this or not bother?
August 30, 2010 at 8:44 am
Considering, however, that the existing credit scoring system is what we have to work with, there must be some ways to game the system and make it work to our advantage. Do lenders look at your score differently when applying die a credit card vs. a mortgage? I almost her the impression that for a credit card, they want a credit score that’s not too good (pay off everything on time on a variety of credit sources) as they can’t make too much off you, and not too bad (accounts are delinquent and no money is coming in at all to the banks in any form). On the flip side I get the impression a good score is great for a mortgage as there is a set number of years you have financed for and the lender has a harder time making you stretch it out.
August 30, 2010 at 8:46 am
…apologies about the previous post. Spelling and grammar go out the window when typing on a smartphone.
August 30, 2010 at 9:35 am
kinda confused….so then, when a credit card company cuts your limit, that is bad for the score? should you then get rid of that card? Our limit on a dept. store card (automatically given when purchasing furniture on a 1 year payment plan) was cut way back because they said we did not spend enough in the store. We just made the last payment on the items we bought, so wondering if I should now cancel the card?
August 30, 2010 at 9:48 am
@Terrie
The reason your score could drop when a credit card company cuts your limit is because this increases your balance – limit ratio, which as Gail said, should be maximum 30% for an optimal score. If you have a zero balance now on the card, it doesn’t matter all that much if they cut the limit. Cancel it if you want and if you have other, older cards with good histories but it won’t do any harm if you don’t cancel.
August 30, 2010 at 10:03 am
I think there’s too much fuss being made about amount of credit used and credit scores. If for some reason you can’t use debit and don’t have a cheque or enough cash on you, use a credit card and then go online or stop at the bank and pay the bill the same or next day. I suspect when I bought my first house years ago that my credit score would not have been great as I seldom used a credit card, except for travel, and had always paid it off in full. But I had a large down payment, a good job and solid work history and could easily manage the payments. The bank gave me my mortgage with no trouble. I don’t think my credit score mattered at all. I don’t “hate” credit scores because I don’t feel they’re that important. I do hate the banks making profit off of me so I choose not to pay them any interest of fees.
August 30, 2010 at 10:10 am
Jason has a very good point. This credit score has become a huge influence on our financial lives — why do we know nothing about it? It’s unfair that an “secret number” (do we know how it’s calculated? when? how often?) calculated by some organization has such an impact.
August 30, 2010 at 11:18 am
Gail,
You really can post some really funny pictures! Wish I could push the ‘like’ button on the page.
August 30, 2010 at 11:58 am
I so agree with the above posters – if people are going to be so heavily judged by a score – we should know the math behind it.
ps.
I use Chrome and the comment box is bigger (width) than the blog/comments themselves.
August 30, 2010 at 12:40 pm
My bank is currently doing the whole cut the limit down as I pay it off bit which is affecting my credit score.
Originally when I got my student line of credit I asked about turing it into a regular line of creidt when I graduate to aviod this issue. BUT when graduation finally came they told me I couldn’t convert it into a regular line of credit until it was paid in full. So now I pay a set amount each month and my “limit” is lowered to the amount I owe them each month. Therefore I appear to be maxed out every month on my LOC even though I make $350 payments on it every month. Oh and just to screw me a little more, when I needed an increase on my LOC back when I was in school, they just opened a second LOC instead of increasing the first. So technically I have 2 LOC’s that are “maxed” out and even though I have perfect payment history for the last 7 years my credit score is considered very week. When I confronted the bank about it they pretty much told me too bad so sad. So I’ve been unable to obtain credit for anything else since those accounts were “closed”. It’s been nothing but a pain in the butt for the last 3 years, thankfully I fully intend on paying both of them off in the next 6-8 months which means I have them paid off a whole year early. Oh and when I finally do, I’m switching banks and telling my bank too bad so sad with a big middle finger. I will never loan from that bank again.
August 30, 2010 at 12:59 pm
Wow, Amanda, that’s brutal. When I hear stories like that I think, this is the reason to get out of debt as quickly as possible. I think a lot of people don’t realize that they have less power and fewer rights than they think they do as borrowers. Realizing how easy it is for banks to change your situation in a way that benefits them and for you to remain powerless when it happens, just makes you aware of how important it is to avoid getting into debt and to get out as quickly as possible afterwards. The people on TDDUP who are really stubborn (like remember that one guy from the last season who wanted to accumulate more debt?!) don’t realize that when you are in debt, you are at the mercy of the bank.
August 30, 2010 at 1:51 pm
I was just recently looking to change my insurance agency and noted in their recorded message while I was on hold that they look also at your credit store to see if you are a good risk to get insurance from them as well. Seems not only are your bank rates and credit card rates affected by your credit score, getting insurance is also affected! I also noted that in a job advertisement recently they will do a “police check” as well as a “credit check” to see if you are job worthy! Imagine that…
August 30, 2010 at 2:10 pm
Eek!..not a fan of cats..not a pretty pic. for a Monday morn!
: P
August 30, 2010 at 7:55 pm
@Andrea– I love cats and that picture has me freaked out!!
August 30, 2010 at 9:16 pm
Cats scare me…this picture is how I see ALL cats…LOL…
p.s. I’ve been trying to post all day but my posts just disappear????…am I being told to cyber shut up??..lol
August 30, 2010 at 11:21 pm
love the cat!!! exactly how i felt after reading this blog. i so agree with what’s been said already; if i’m going to be judged by a “standard” i ought to, at least, be able to understand the flipping standard!!! and i really detest those cards who felt it necessary to drop my limit for no explicable reason that i could divine, other than i had not used the cards in such a long time they were probably all expired! grrrrr
amanda, that is indeed brutal and quite unfair. in the world there is little justice as far as the credit score goes. and to the one who mentioned a credit score being checked for insurance etc; my current employer now uses a credit check as part of the pre-employment screening. why? no one seems to know; it just is. makes me wonder…why is my company spending that money when we’re 1) in a hiring freeze and 2) can’t justify the expense when asked.
yup, i still detest the credit score. probably won’t ever change my opinion.
August 30, 2010 at 11:31 pm
That cat is scary! Eek!
August 31, 2010 at 12:00 am
What sorts of things is a credit score used for? I figure stuff like mortgages and purchasing a car. However I plan to never buy a house or a new car. Should I still be worried about my credit score? The only credit I have is a credit card I’ve had for 4 years (since I turned 18), I pay it off completely every month but the balance tends to run close to the limit, as I have a low limit on purpose. (My dad has instilled a deep fear of debt in me, so I’m trying really hard to never get into it!)
August 31, 2010 at 12:03 am
For those wondering about a job looking at your credit score…I had a friend who worked with an armoured vehicle company who did credit checks. He had a bad debt at the time and had to pay it off in order to keep his job. I guess they didn’t want anyone needing money to pay debt working at a job where you transport money back and forth to banks.
August 31, 2010 at 1:32 am
Brit–from the sounds of it, credit scores are being used for more than just cars and mortgages.
Getting your limit raised doesn’t sound like the best answer though, does it? It doesn’t seem right…
My friend worked for a certain bank at one time…apparently they wouldn’t hire you if you had declared bankruptcy at any point. I guess they didn’t trust people who couldn’t manage their money to be touching THEIR money…
September 1, 2010 at 10:38 am
I completely understand having a credit check for a job that actually deals with large sums of money, I get that. However I too have seen posts of employers doing credit checks for “normal” jobs like admin assistants or retail. Any employer that requires a credit check to employ me is not one I’m going to work for. My financial stability is none of their business and to be quite frank, is not indicative of how good at my job I am or how hard I work. I don’t think legally they are allowed to hire based on credit check (except in a few exceptions). If they ask to do a credit check say no. I don’t think they can refuse to hire you “legally” because you wont do a credit check (that doesn’t mean they wont). To me it seems they are doing it to see how desperately you need the cash ie how little can we get you for and based on your situation how long will you stay. As someone who has been turned down for a job I want for not having enough experience, and then turned away for having too much, I don’t need to give employers another excuse not to hire me. I simply think it’s an invasion of privacy.
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As for my situation, I was 19 years old when they approved me for a $15 000 student line of credit. Since my mom has never had credit or a mortgage she had no way of telling me what to expect. I feel the bank took advantage of a student in need of funds to finish university, and they should be held responsible for that. At least I got a low interest rate and I’m paying next to nothing in interest right now. Lesson learned. Once I have them paid off they will be knocking at my door looking to loan me more, at which point I get to tell them to go fly a kite. I’m learning to save and by next year I will have a pretty hefty sum for a down payment on my first house with my boyfriend, and neither one of us is planning to go through them (he’s been burned by them too). We will have the last laugh.
Say la vie!
September 2, 2010 at 10:49 pm
[...] Gail Vaz-Oxlade takes another run at credit scores characterizing them as a “racket designed by lenders for self-serving reasons”. [...]
September 3, 2010 at 12:10 am
This is why I pay off CC every month…I ‘hate’ making my CC companies money LOL. Great topis BTW Gail!
September 9, 2010 at 10:48 am
I was indifferent ot he credit scroe, but Gail has now made me detest it to no end. I totally have seen this happen, which is why I simply cancel any cards where they lower my limit. Screw you back. However, To add insult to injury, you get these higher limits on other cards and have no balance being good and then you are penalized for having too much available credit. It’s crazy. All for the banks to make more money