Problem with Credit Score Ratings
Your credit score rating is an important one to potential creditors as they can give a good assessment of how likely you are to be responsible with your money. A lender will determine whether to extend credit to you or not, based on your score, and even the rate of interest you will be charged. It’s a fair system in that it never discriminates against someone for any other reason than their financial dealings.
The main problem within the Fico credit score rating system is that one size really does fit all, so what may appear to be a perfectly sensible and positive financial decision can in fact end up as a liability, causing a decrease in your score.
It is perfectly right that your payment history should be reflected accurately so that a lender can determine what kind of risk you pose from your previous financial dealings, just as it is fair that if you act as a guarantor for someone else’s loan it will reduce your own credit to debt ratio, as you have a good chance of ending up responsible for that loan. However, some of the aspects of the credit rating system, which are included for good reasons, do deter sensible moves by some borrowers.
If a person is struggling to do more than just keep pace with the minimum payments and interest charges over a number of credit cards, one of the most sensible things they can do is to transfer the current debts to a balance transfer card and take advantage of the initial free interest offer to try and get their debts into some sort of control before they become unmanageable. But,the Fico score system works against this as you will likely be closing older lines of credit as well as applying for new credit, both of which negatively affect your credit score.
Likewise, the most astute borrowers who are trying to keep their debts manageable but do still have interest payments to deal with are discouraged by the rating system from moving their borrowing around between cards with better offers to take advantage of much lower rates. This is actually the savviest way of reducing a current balance which carries interest charges, but if you do it your credit score will suffer. This is because this aspect of the Fico rating system was designed to monitor multiple credit applications yet penalises those who are not trying to get more and more credit, but make the best interest rate choices and keep their payments at a manageable level.
Your first credit card may not have been your wisest choice and you want to just cut it up and bin it as you now have other cards which offer better deals, such as a cash reward card. However, if you close the line of credit which you’ve held longest this is a detrimental score move, as the oldest card represents the length of time you have been managing credit, and the longer your history is the better for your score. Thus you have to hold onto a card you no longer wish to carry.
The other annoyance with the system is that you may well be an excellent and timely payer, aware of all the Fico guidelines to keep your score healthy, yet still feel the restrictions of following them. If you normally keep your debt ratio in the lower levels and always make your payments on time, it can still affect you if you make a one-off high card payment which takes you near to the maximum available credit on your card. A prime example is you have the cash in the bank to pay for a vacation, but know it is far more sensible to put it on a credit card for the insurance protection. Yet if you do so you make be using up a high part of your disposable credit and be penalised for it, even if you pay it all back in full.
On the whole, the Fico credit rating score is a fair system which treats everyone in the same way. It doesn’t penalise you for skin color or weight, but only judges you on the scoring criteria it holds for all. However, there are certain problems as outlined above which are a result of the one size fits all approach to scoring which can lead to a reduced score even though you are still being financially responsible.
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