2012 Summed Up

Last year, I checked my credit score and was pleasantly surprised to see it was 778. At the time, I had about $18,000 of debt, including more than $5,000 of credit card debt. With a debt repayment plan in place, I was confident my credit score would go up every year, moving forward. So, you can imagine how shocked I was when I checked my credit score last week and found that my score went down 37 points, from 778 to 741.

Sure, 741 is a “fair” number… and it’s higher than 49% of the Canadian population… but why did it go down? I worked my butt off this year! I paid off more than $11,000 of debt in 2012, including all of my credit card debt and some of my loans. And look! Look at all these good months! Months of no missed payments and always, always, always paying at least the minimum, if not way more. So where did I go wrong!?

In a state of panic, I tweeted Gail Vaz-Oxlade with my concerns. What I love about reaching out to Gail is that she always replies. But what she had to say was incredibly disconcerting, especially as someone who is working hard to become debt-free. She said that paying more than the minimum and/or paying off debts altogether would actually hurt my credit score. Say what!?

I always knew that Gail hated the credit score system, but I never really understood why. Until now. After going through a number of posts on her site, I quickly learned that everything we do to become debt-free counters what the credit score system wants us to be doing. And in a post titled “Why I Hate the Credit Score,” Gail offers her insight, by listing some of the things we should all be doing to get better scores:

“The way to have a great credit score is to have access to lots of different forms of credit leaving yourself over-exposed to identity theft and fraud. You should also have nice high credit limits so you don’t ever get above the 50% mark with your spending, providing tons of opportunity to dig a huge debt hole. And you should make only your minimum payment on your credit, so you pay interest.

Knowing this, I’m terrified to see what my score will be next year. My goal for next year is to become debt-free and then start saving for a down payment and closing costs for my first home. To help make this happen, I plan on having a $0 balance on my credit card at the end of each month. This sounds like a fantasy life come true, for me. But is it going to leave my credit score at 741? Or worse, lower it even more?

When was the last time you checked your credit score? Have you ever been surprised by what you found?

  • The system really isn’t a fair way to determine someone’s credit worthiness. I think the number of various debts one has affects their credit score more than the balance they may have on those individual debts. If someone had less types of credit now than they did from a year ago then that may have hurt their score. Sometimes credit bureaus make mistakes so I go through the details of my credit report each time I order one. I pulled my score earlier this year because I wanted to get a second mortgage, and luckily, no surprises for me :D

  • Cait, the way I look at it is that it far better to be totally out of debt so that then you can concentrate on investing and making your money earn more money. That really is the only way to eventually get financially ahead. The smart thing is to not have too many credit cards but, using those that you do have, to always strive to pay the full balances off each month as soon as you are able to.

    So long as creditors see that your credit score is “reasonable”, that you use credit wisely and regularly, and that you promptly always pay off your debts in a timely fashion then you don’t have anything to worry about. Don’t over obsess over this one aspect of having a “perfect” credit score – since very few have them. Capiche? :-)

  • Wow that is pretty disconcerting and quite a bummer after all your hard work this year. However, like Rob said in the comments above, I can’t image you being faulted for this when you are going to buy a home. Everything you’ve done in the past year+ has shown your ability to pay off your debts in a timely and efficient way.

  • Bummer. I don’t know what my credit looks like specifically, but I know that it’s pretty darn good. It may take a bit of time, but once you have everything paid off it should go up again :-)
    Don’t worry about it too much, what you’re doing is great!

  • The same thing occured with my credit score as I was paying down debt but it shouldn’t adversely affect you if you are planning to get a mortgage or any other loan. I believe the bank would rather see that your debt ratio be as low as possible and having more assets instead of having a “higher” credit score. I agree with Gail…the credit scoring system is messed up!

    • Yea, I know debt service ratios are equally as important… I just don’t want my score to dip lower than it has, before that time comes. But Gail tweeted me some great tips, so I should be ok. Thanks!

  • That sucks, doesn’t it? I’ve been hit with ugly credit surprises before too. I logged in about 6 months before applying for my mortgage, and found out that the bank had screwed up and showed me 60 days late paying on a line of credit. It took a long time to get it rectified. There’s a mistake on it right now as well actually. You know how applying for credit is only supposed to stay on your credit history for ~2 years? Mine still shows applications from almost 10 years ago as being recent. Add on the number of incorrect addresses they have as “security questions” logging in, and you have a system that is royally screwed. Your score will probably go up when you’re done paying everything off, but in the mean time don’t worry too much about it. If you’re doing what’s right for you financially then you’ll be okay in the long run.

  • I’m not surprised by the information here, but I am sorry that it hit you like it did. :-( It’s VERY disappointing to work your butt off to better yourself financially only to learn that it doesn’t help your credit score.

    My problem with the credit score has always been that the formula is a secret. I don’t think it’s fair – it shouldn’t even be LEGAL! – to have this all-important formula that determines things like the rate we’re given on credit cards or the interest rate on our mortgages, and we don’t even get to know exactly what variables make it up. To me, especially when I’m in conspiracy theory mode, it seems that they (“they” being the credit-giving, banking, mortgage-granting industries) have every consumer in the palm of their hands. They get to charge us rates based on this formula that only they have access to. Why can’t we know it? What would be so horrible about publishing exactly what goes into this mystical number? And then all these rules – like, only having X percent of your available credit used at any given time because that number is somehow more attractive to creditors than Y number.

    I decided to check out of the system. I’m going to do what is best for us financially – and that means paying off our debt, saving money to pay cash for big purchases, paying off my credit card balance in full every month – whether or not it helps my credit score. The only time I can imagine the score affecting us (since we only have my one credit card and only because it’s a rewards card) is if we take out a mortgage, and I’m not playing their game for that reason alone. Good luck finding your own balance, Cait.

    • Good for you, Katie! And thank you for the detailed comment. I had never really thought about the secret formula before… but you’re right, that should be illegal! Gail ended up tweeting me some amazing advice on things I can do 6 months before getting pre-approved for a mortgage. I’ll scam the system, closer to that time ;)

      • Is there anyway you can share those amazing tips with me Im in exactly the same boat as you:)

  • First of all, congrats on paying down so much debt in 2012. Second of all, that stuff about your credit score is ridiculous! You would think lenders would be happy to see that you’re responsible… I guess you’re too much of a good thing in their eyes? What nonsense. Keep being too much of a good thing!

  • Gail is the Bomb! And she’s right in BOTH continents!

    There is no reason to “build” a credit score, just do the right stuff and things will be just fine. Pay your bills and debts on time and anyone can have a good score without having putting in any effort on “maximizing my credit utilization rate”. I’ve got better things to do.

    In the states you don’t even need a credit score to prove credit worthiness for a mortgage, as I talked about at Ignite FinCon 2012 during the Financial Blogger’s Conference (sorry I didn’t get to meet you, so many bloggers!)

    • No worries, Steve! And thanks for your comments. It’s interesting to hear how this is affected (/not affected) below the border.

  • I’m from the US, but I’ve also dealt with this. You’re much closer to being debt free than I am, but a month after paying off my first student loan I logged into my banks free credit report to see that my credit score dropped 10 points. This was because I now have “Less Credit Available.” uh…?

    It is totally stupid, but if you ever do decide to get a mortgage if you go through a credit union or similar private entity your credit score matters much much less. The bank I use does not do “Credit Based Lending.” They require 20% down to get a mortgage, but as long as your debt to income ratio can support your payments and you’re in good standing with the bank – you’re good to go. :)

    The credit system is severely flawed, but just keep doing what you’re doing, because you are doing GREAT!

  • That really sucks. My hubby checks our score/report every year to make sure there is no funny business. He hasn’t said anything so I’m assuming all is fine on that front. Although we’re debt free, and pay off balances every month so maybe our score is dropping too.

  • When I paid off a big chunk of debt at once, my credit score also took a hit. But then it eventually ticked back up, so I didn’t worry too much about it.

    I don’t care too much about the actual number; I just want it to be high enough that I can easily get a new loan if I need to.

  • It is a ridiculous system Gail is correct as it penalizes those that want to become debt free. I did a bit of research being new to Canada and all and well I moved here and I had NIL for a credit rating and what I learned is that having no debt is better than some damn system that is skewed. I had to open credit cards, spend money, lots of it and up my spending limits just to get a good credit rating. I only ever used the credit rating to buy this house and that’s all. I know what you mean that when the debt is gone and your score isn’t as high as you would like it. Damned if you do… damned if you don’t. Mr.CBB

  • This same thing happened to me…I paid off about $11,000 in debt over the course of a year including paying off about $5000 in credit card debt. I am currently sitting with a fully paid credit card (I try to use it a couple of times a month to keep it active, but always pay off the balance.) and zero loans (just a car payment, but that will be gone come July.)

    I haven’t checked my credit score, because I won’t lie, I don’t want to pay for it and haven’t thought to print out the forms to mail for a free report. But now I’m afraid to check! It seems wholly unfair that once you get a handle on your debt, you are penalized! Thanks for this info…I think I will be checking my score out sooner than I thought.

    • You should get a credit report done every year, anyway, to make sure nothing is incorrect on it. That’s just something I’ve learned from friends, bloggers, etc. who HAVE found errors (see Cassie’s comment above). Go go go! :)

  • Good post, C! For the Americans out there, the government requires the 3 major credit bureaus to give you a free credit report once each year. So theoretically you could check one every 4 months and always have a free report available. The website is http://www.annualcreditreport.com. To be honest, I have only used it once to check my score. And now that we’re debt free I’m sure my score dropped from 824 (!) to the 700s. Oh well. I would rather be debt free than have a ridiculously high score at this point in my life! I guess I’ll suck it up and check it today, just to see the damage that paying off my debt did to my score. What a screwed up system!

    • Adding: I just checked and they won’t give me my “score” (it costs $8) but I can see the report so I can check for any inaccuracies. My old credit card used to give me an updated credit score each month. I loved that!

      • Dang. Getting your score for free would be nice! But thank you for posting all of this info for readers, A! And for me to learn about how things work down south. :)

  • I hate the whole credit score system and mentality. My score is in the 750’s and the boyfriend’s was actually at 799, only for us both to pay off debt and see the score drop as well.

    I think Gail is absolutely correct in her statement about the scoring system, and I think its super awesome that she replies back to tweets. :)

  • I had no idea that paying down your debt like that would hurt your score. I was going to check my score this holiday but now I place a little less stock in it.

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