The basic FICO score, which is the model most used by lenders, has a range that starts at a low of 300 and goes to a high of 850. VantageScore, the scoring model created by the three major credit bureaus, has the same range.
Getting a perfect 850 score — the equivalent of a grand slam — involves paying off your bills on time for decades, keeping your debt utilization low (if not at zero), and having a long credit history. You also need to show you can handle a mix of credit — such as having credit cards, retail accounts and mortgage loans. To get the top score, you also can’t be opening a lot of new credit accounts.
As with baseball, credit scoring is a numbers game. But, also like baseball, you can be a solid player without being perfect. Once you get in the mid and high 700s, you’re considered an excellent credit player.
However, a lot of consumers want to master the FICO game. The result is that they yell “foul ball” when they make a credit move that may lower their credit score, even if temporarily.
I recently wrote a column that debunked a credit myth. Some consumers incorrectly believe that you need to carry a credit card balance to increase your credit score. You do not. But the discussion about this myth turned to an irritation about something else in the credit game.
“I was paying off the previous month’s balance on my one credit card every month for years, and my credit score (per the bank) stayed in the high 700s, every month, for years,” a reader wrote. “Then recently I had to carry a balance for a couple of months, but still paid the minimum due, and my score shot up to the low 800s. Everything else had stayed the same except for this need to carry a balance. I believe my score increased because the bank was finally able to earn some interest from me, which turned me into a more lucrative, and therefore a more attractive, customer.”
Credit scores don’t reflect how much money you make for a financial institution. Keep in mind the models are trying to predict risk.
It’s possible that carrying a relatively small balance and then paying by the due date showed you to be a slightly better risk because you paid the bill on time, which is the factor that contributes the most to your credit score. Thirty-five percent of your FICO score involves your payment history.
But let’s say you paid off a mortgage or car loan and your score dropped. I could see how that would make you mad. It feels like a punishment for being debt-free.
FICO’s analysis shows that consumers who are actively managing different types of debt are slightly less risky borrowers than those who have only one kind of credit product or no active loans at all. Ten percent of the credit-scoring model looks at the mix of credit.
The models aren’t punishing you for paying off debt, which is a great thing for your finances overall.
