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As crazy as Dave Ramsey can be about credit cards and FICO scores ...
Posted on 6/9/18 at 9:09 am
Posted on 6/9/18 at 9:09 am
I'm realizing he is right.
My credit score dropped 26 points since last month (according to Discover Card's free FICO report from TransUnion).
Why?
I have no car loan. I have no mortgage payment. I use my Discover Card monthly to pay for utilities and have it paid in full every month. Other than that, I have zero debt and have never been delinquent to any company that I have done business with.
And because of that, my score drops. It's truly an "I love debt" score as he says -- and obviously being in debt can provide a higher credit score number. It does not indicate one's wealth or financial income. Seems rather backwards in terms of logical thinking, but it is what it is and my post won't change anything.
My credit score dropped 26 points since last month (according to Discover Card's free FICO report from TransUnion).
Why?
quote:
What's hurting
Credit mix lacks different types of credit
There is either no recent activity or insufficient information about your installment loans. Having a loan along with other types of credit demonstrates that you are able to manage a variety of credit types.
I have no car loan. I have no mortgage payment. I use my Discover Card monthly to pay for utilities and have it paid in full every month. Other than that, I have zero debt and have never been delinquent to any company that I have done business with.
And because of that, my score drops. It's truly an "I love debt" score as he says -- and obviously being in debt can provide a higher credit score number. It does not indicate one's wealth or financial income. Seems rather backwards in terms of logical thinking, but it is what it is and my post won't change anything.
This post was edited on 6/9/18 at 9:11 am
14
Posted on 6/9/18 at 9:33 am to Will Cover
it's a risk signal to a lender. those without any debt may not be very good at managing it. may not want to give then a lot of money
Posted on 6/9/18 at 9:37 am to Will Cover
Dave’s method is good for a lot of people; it’s not for everyone.
Posted on 6/9/18 at 9:43 am to oklahogjr
quote:
it's a risk signal to a lender. those without any debt may not be very good at managing it. may not want to give then a lot of money
Shouldn't history carry more weight then?
I got warned about my credit score dropping (it's a small drop but still going down) after selling my house. We haven't had a car payment in 2 years. My wife's student loan was paid off 3 years ago. We sold our rental home and now have 0 debt.
But paying off two cars, a student loan, and paying down a mortgage should be a way to prove long term credit safety. Especially since we're paying our bills on a credit card and can show that we have no issues with managing money.
Posted on 6/9/18 at 9:47 am to Will Cover
Dem reward points doe.
Posted on 6/9/18 at 9:51 am to oklahogjr
quote:
it's a risk signal to a lender. those without any debt may not be very good at managing it.
Shouldn't one's history or experience be given more weight? I have 25 years of "credit history" -- and have never been late on a payment.
quote:
those without any debt may not be very good at managing it.
I would argue otherwise. Having zero debt, while having access to multiple credit card lines, in my opinion, demonstrates knowledge, will power, control and discipline.
Posted on 6/9/18 at 9:55 am to Will Cover
He's not crazy about credit cards - at all, so I don't know where that's coming from.
His investment recommendations are, like a lot of things, subject to a lot of critical view, as are his views on things like eschewing 401k matching funds until you work the snowball (which I understand from a program/psychological position, but financially, that's in the key of crazy, at the very least), retiring a mortgage (regardless of interest rates), and so forth.
But, the not borrowing money to buy groceries at Wal-Mart or cars (and not buying new cars) is rock solid advice.
It is no more crazy than telling folks not to set money on fire.
His investment recommendations are, like a lot of things, subject to a lot of critical view, as are his views on things like eschewing 401k matching funds until you work the snowball (which I understand from a program/psychological position, but financially, that's in the key of crazy, at the very least), retiring a mortgage (regardless of interest rates), and so forth.
But, the not borrowing money to buy groceries at Wal-Mart or cars (and not buying new cars) is rock solid advice.
It is no more crazy than telling folks not to set money on fire.
Posted on 6/9/18 at 10:34 am to Will Cover
quote:
Shouldn't one's history or experience be given more weight?
You would think so but these risk models are tested pretty heavily since billions of dollars are at stake.
For example, someone else with a 25 year credit history might be more at risk of stroke or senility or something else that suddenly causes problems, even if you aren't.
Posted on 6/9/18 at 10:38 am to Will Cover
quote:
I would argue otherwise. Having zero debt, while having access to multiple credit card lines, in my opinion, demonstrates knowledge, will power, control and discipline.
Start lending money at low rates to those with no debt history and see how it works out for you.
Posted on 6/9/18 at 10:44 am to Will Cover
I have around an 800 credit score, seriously. I also work 2 jobs and make on the high end about 65k a year while raising 4 kids and for the most part a stay at home wife, she just started working. I have no money, but a good credit score. Yes the credit score system is dumb. You damn sure don’t wanna be lending me much money unless it’s very small amounts.
Posted on 6/9/18 at 10:49 am to foshizzle
quote:The testing is still limited by data limitations, specifically for uncommon situations, which I would imagine is the case with the OP.
You would think so but these risk models are tested pretty heavily since billions of dollars are at stake
quote:This doesn't make sense in the context of the OP. He could have those same risk factors, but so long as he had more “loans."
For example, someone else with a 25 year credit history might be more at risk of stroke or senility or something else that suddenly causes problems, even if you aren't.
In fact, I think of all the common risk modeling credit scores are some of the most flawed since their data collection is terrible.
Posted on 6/9/18 at 10:52 am to oklahogjr
quote:
it's a risk signal to a lender. those without any debt may not be very good at managing it. may not want to give then a lot of money
In his situation there is nothing to alert the risk signal. He has a debt history and a history of handling it responsibility. The formulation is obviously not perfect.
Posted on 6/9/18 at 10:54 am to buckeye_vol
I haven’t had debt of any kind in 15 years other than 2 credit cards which I pay off monthly. My score has been over 800 until last fall when I upped my credit limit on the cards. Dropped to around 775 or something. Makes me no difference one way or the other.
Posted on 6/9/18 at 12:13 pm to southernelite
quote:
Dave’s method is good for a lot of people; it’s not for everyone.
From what I saw during my short stent working in banking Dave's method would probably be a better financial plan for 98% of working America, most have no plan at all.
Posted on 6/9/18 at 1:31 pm to EA6B
This is the truth. His ideas seem stupid to some on here, but this is a board for people who are (typically) discussing advanced financial concepts. What happens on this board is not the norm - except when someone shows up asking how to pay off a ton of consumer debt when they’re making 40k.
Posted on 6/9/18 at 2:02 pm to windshieldman
quote:
windshieldman
You are easily one of my favorite MB posters. You seem to be honest, hard working, and down to earth.
Wish you nothing but the best. Hopefully you can bump that up to $100k and get some breathing room.
Posted on 6/9/18 at 2:31 pm to Will Cover
Because the banks want to keep you in the system and punish you for being out of it.
Andrew Jackson had it right.
Andrew Jackson had it right.
Posted on 6/9/18 at 2:55 pm to Mingo Was His NameO
quote:
Start lending money at low rates to those with no debt history and see how it works out for you.
Don't confuse no credit history (a score that is not discernible) with a poor/low credit score = bad credit.
I think the biggest failing of the FICO model is that it ignores certain key inputs, namely income and (liquid) assets.
Although Dave is incorrect that the only way to have a high FICO score is to have paid thousands in interest to banks over the years (could be true, but it's not *necessarily* true), he is correct that places like Churchill, that do manual underwriting, or apartment managers that don't penalize people who've paid cash over the years and avoided debt, have a clearer picture of a person's finances IMO.
Although I wouldn't have a HELOC if you offered one to me with a Playboy Bunny on top, I do believe in having access to lines of credit for business reasons - but even then, I don't rely on them. And I do use credit cards for most purchases (that I could easily pay cash for on the spot), just because I see value in the rewards. Will that lead to riches? Nah! But over the years, they do add up. However, outside of extraordinary circumstances, if you're a person who ends up carrying a balance, you (IMO) need to stop and figure out where your budget got out of whack.
Posted on 6/9/18 at 3:39 pm to iknowmorethanyou
quote:
You are easily one of my favorite MB posters. You seem to be honest, hard working, and down to earth.
Wish you nothing but the best. Hopefully you can bump that up to $100k and get some breathing room.
Wow, thank you for that!! I wish nothing but the best for you also
Posted on 6/9/18 at 4:26 pm to Jag_Warrior
quote:
I think the biggest failing of the FICO model is that it ignores certain key inputs, namely income and (liquid) assets.
That is a failing, the problem though is that it's hard to get this info in a reliable way.
Fair Isaac gets credit and repayment information from lenders who don't have an interest in false reporting, they can be fairly confident that the information they're getting is good. They can't be so confident about income/asset information, so it is excluded from the model.
For example, mortgage lenders will have your two previous years of pay stubs but they won't have anything after the app goes through. Credit card lenders don't even bother. Sure, they'll often ask you how much you make but there is no attempt to verify it.
So without any way to assure that income and asset info is both current and accurate, I can't blame Fair Issac for not using it.
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