Microblog Memes

ITT I’m seeing a few common misconceptions repeated by many otherwise correct and knowledgeable commenters without remediation. I’m addressing them here, because understanding financial systems empowers everyone, whether they wish to use them, change them, or burn them to the ground.

1. Lenders only see your credit score. Mixed truth. Lenders can order specific scores to get a quick idea of credit-worthiness, but for most credit decisions a credit report or ordered. (This is often called a hard inquiry, and indicates a credit was applied for. A single inquiry is basically ignored by most scoring models. Many inquiries in a short timespan can be considered risky.) Regardless, the report is the same one you see when you order it directly from a credit bureau.
2. Your credit score is universal. Mostly false. Credit scores are just someone’s guess of your risk to a lender based on data reported by previous lenders. Good guessers can make money guessing, but none are perfect, and some are only good at guessing risk for specific contexts. Who are they? First, there are the bureaus. They have various branded scores that they sell as products to lenders (for credit decisions) and borrowers (for credit building). Next, there are numerous companies who exclusively develop and sell scoring models. Finally, some lenders such as larger banks develop their own internal scoring models. All the above are adjusted regularly and tailored for specific industries and debt classes. I say “mostly false,” because it’s true that many scores use similar scales and the same records, which means they tend to rise and fall together. That’s why lot of people, even financial wellness advocates, often talk about “your score” as if it’s a single agreed-upon value, but the reality is scores are numerous, distinct, and variable.
3. Credit reporting agencies use personal information for scoring. Mixed truth. Many bureaus have affiliated entities that broker financial data for ad revenue, but the information they are allowed to distribute in credit reports is tightly regulated in most countries. (Exceptions: there are alternative scoring model providers who fill a gap of niche debt types sought by applicants with no credit history, such as LexisNexis’ “RiskView” which can use more personal details like address stability and online purchase history to determine risk.)
4. Credit history is permanent. False. Negative records like late payment, non-payment, and bankruptcies have expiration dates by law in most countries. Aside from when accounts were opened and closed, generally nothing in a credit report is permanent, and the scores can be extremely variable in practice.
5. I should worry about my old credit score. False. Credit scores are used and discarded. New score overwrites old. The only thing that persists would be a credit decision, if there is one. Most scores are partially based on transient data and thus can bounce around wildly. For example, VantageScore 2.0 can dip by over 150 points because a large transaction put a card slightly over the limit but then rebound 150 points after the balance is reported within the limit. Similarly, FICO 8 can jump by 100 points just because the applicant was added as an authorized user to a card with a long payment history. Likewise, most scores can rise and fall drastically based on credit utilization (which is usually reported based previous statement balance, meaning even if you pay off cards every month your credit score will fluctuate in proportion to variance in monthly spending).
6. Banks like credit card debt. ~False~ True. (Corrected by @[email protected]) Banks love it when you carry a balance. The interest accounts for the majority of their revenue.

The volatility of scoring is the most important takeaway, I think. The temporary nature of scores can be exploited pretty easily. If you understand how they work, you can often get the score you need at a particular time with a bit of planning. And the rest of the time, when you aren’t using your scores for anything, they’re vanity numbers at best.

Anyway, if I missed something or am wrong, please point it out.