I am pissed off. I carefully monitor my credit report and credit score. In fact I just refreshed my consolidated credit report again today and guess what, my score from all three credit bureaus has dropped. But the spread among all three is now 17 points different rather than the 19 points that it was.
Credit scores are not designed to show who is the smartest in managing their finances. If you never had any debt and paid cash for everything, you would have a credit score of 0. There would be nothing to score you on.
So what is the credit score designed for? I have to keep reminding myself, “It’s for lenders dummy.” The sole purpose of the credit score is to give lenders a cheap and automated way to make credit decisions and grant credit based on risk. That’s it. It is for their benefit, not yours.
Here is the description on the breakdown of my current credit score.
- There are too many personal finance accounts on your credit report. [TransUnion, Experian, Equifax] Having too much available credit can sometimes harm your credit score. Lenders may feel that you have the ability to spend more than you could potentially pay back. You might want to consider closing a few accounts or asking to have your credit limits reduced. Avoid closing too many accounts – especially the oldest accounts on your credit report – because it could harm your credit score. Closing the oldest accounts can damage your score by making the length of your credit use appear shorter.
I have five credit accounts, including my mortgage. A few months ago I closed a few that were still open but did not use.
- There are not enough accounts in good standing on your credit report. [TransUnion, Experian] Having credit available to you is a sign that you are able to manage your finances responsibly. Lenders like to see that consumers have a large amount of credit available to them, but not so much that they could spend more than they could afford to pay back. If you currently have multiple accounts open with high balances, try reducing your balances below 35 percent of your limits. If you do not have many open accounts, consider opening a new credit account or asking your creditors to increase your limits.
So because lenders have extended me high credit limits, I’m now being punished for being a risk? I have no history of delinquent or late payments.
- There are too many inquiries on your credit report. [TransUnion] When lenders review your credit report for the purpose of an application, an inquiry is placed on the credit report they checked. A few inquiries a year is normal, but multiple inquiries within a short time frame may cause a temporary drop in your credit score. If you have many recent inquiries, lenders may assume that you are having financial problems. Avoid unnecessary inquiries by only applying for credit cards or loans that you are sure you want.
I’ve had one inquiry in the last seven months from when I purchased my Verizon service for my new MiFi card, which I love. Before that in 2008 I had an inquiry by utility company when we moved, my bank when we got the mortgage, a bank when I closed one of our cards, and Honda when we bought our minivan in April, 2008. Nothing crazy or excessive here.
- There are not enough bank installment accounts on your credit report. [Experian] A healthy balance of credit and loan accounts is key to achieving a high credit score. It is important to build a record of responsible credit use over time with different types of accounts. Consider opening a new account to strengthen your credit report.
So since I don’t have a car payment now it hurts my score?
- There are not enough mortgage accounts on your credit report. [Equifax] A healthy balance of credit and loan accounts is key to achieving a high credit score. It is important to build a record of responsible credit use over time with different types of accounts. Consider opening a new account to strengthen your credit report.
How many mortgages should I have? It’s one for me.
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- There are not enough revolving accounts on your credit report. [Equifax] A healthy balance of credit and loan accounts is key to achieving a high credit score. It is important to build a record of responsible credit use over time with different types of accounts. Consider opening a new account to strengthen your credit report.
So Equifax says I have too many and then tell me that I don’t have enough. It’s one or the other, which one is the right answer?
I carefully looked over my reports and here is what I deduced. My score is being negatively impacted because I don’t have enough installment accounts and that my credit limits are so high. Here’s why I came to that conclusion.
It is my belief that my credit score has dropped because as lenders run for cover and attempt to manage their credit exposure and risk, customers with a lot of outstanding and available credit are bigger and bigger risks these days. See the irony here? Because I don’t carry balances I have a lot of available credit. It is very possible that if I did carry some balances below 35% of my limit (the borderline for slapping you for carrying too much) that my credit score would be higher.
I’d go ahead and reduce my credit limits but right now I’m just uncertain what lenders are going to do with the few cards that I have. Will some be reduced on their own? Will some be closed by lenders? I don’t know.
My logical choice is to do nothing right now, wait to see if lenders take action to reduce or close any of my cards, and in a month or so I’ll check my score again and see which way the trend is going and deal with it then.