Dear Liz: In my younger days, I thought it was a smart practice to pay my bills late so I could keep my cash earning interest as long as possible. After having difficulty with a home purchase in the early 1990s because the late payments showed up on my credit report, I changed my perspective and built my credit score to 816 as of October 2008. At that time I had a home mortgage, an auto loan and three credit cards with limits totaling $35,000 and balances that were paid in full monthly.
Recently, I opened a new account to purchase a computer and I paid down my auto loan by $6,000. After these transactions, my credit score dropped 23 points to 793, even though my total debt has dropped and my credit limit has increased. It took 15 years to increase my score by 150 points and just days to drop it by 23 points. Where is the fairness in this system?
Answer: Let’s cut to the chase: If your FICO credit scores are over 760 or so, you really have nothing to worry about, since those scores will help you qualify for the best rates and terms.
But you do have some misconceptions about credit scores and how they work. For example, you don’t have one credit score, you have many, and they change all the time.
The FICO is the leading scoring formula used by most lenders. Each of the three major credit bureaus sells its version of the FICO to lenders. Experian has stopped selling FICO scores to consumers, but you can get your FICO scores for the other two bureaus at www.myfico.com.
Your FICO scores typically won’t drop if you pay down debt. In fact, they usually rise. What probably caused the drop in scores was an increase in the balance on one or more of your credit cards. Even though you pay your cards in full, the balance that’s used in calculating your credit score is typically the balance reported on your last credit card statement. If you ran up a big balance, you hurt your score.
As to your last question, FICO scores weren’t designed to be fair. They were designed to help lenders predict the risk that a borrower would default.
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