When you need to obtain credit then it is right that lenders evaluate your risk and make an assessment of your likelihood to pay it back. They do this by calling up and paying for your credit score from Fico. However Fico scores now have too much power in too many areas of your life and people are scrambling to stay on top of their Fico score at all cost, and Fair Isaacs are the ones to benefit.
It is no longer possible to just go through life without your credit score having some impact. Not only that but you have to play the game and use credit as the Fico scoring algorithm dictates. This may well be against your better judgement on how you would like to use credit.
If one looks at a responsible person who has paid their mortgage off in full and sees no need to live on credit, unless they continue to use credit their score will suffer and they will see a reflection in higher insurance premiums. They may be perfectly responsible, have savings in the bank, and a regular income. Yet without the all important credit score they could end up paying more for their auto insurance payments, even with a clean driving record, than someone who uses credit monthly.
Consider the person who uses credit wisely and to their advantage. They pay their monthly balance in full on their credit cards and obtain a cash back card as they have a good credit score. If they then decide to put all of their monthly spending on the card in order to rake back the highest cash back, they may use more than 30% of their available credit. Doing so gives a ding in their credit score.
There is the scenario where someone was offered lots of credit some time back and took it. They realise that they don’t need so many credit cards and only use one or two. If they close the unused ones it has a negative impact on their credit score. Even worse they could now be charged for inactivity on the older card unless they start to use it again, but they don’t want to as they want to put everything through their cash back card. Having too many credit cards can come back to haunt you.
Then there are the ‘rate tarts’ that wisely swapped cards to keep abreast of the best interest rates on their credit cards and swapped lenders frequently. By doing so they opened too many lines of credit which impacted them negatively, yet their judgement in chasing the best deals was wise. Now they are encouraged to stay on a less than exciting interest rate as if they move again it will have a negative impact.
It is vital now to maintain a good credit score which necessitates conforming to the Fico scoring algorithm. This is completely constraining for those who know the wisest way to use credit to their own advantage. They are not able to do so, as the wisest way is not necessarily the Fico way. Using credit wisely can have a negative impact on your credit score.