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There Is No Good Faith When It Comes to Your Credit Score


As we’ve written about a few times recently, your credit score takes years to build and just one payment to mess up (at least for a little while). You have multiple scores, and not all accounts are reported to all the agencies. A single bill can affect your mortgage interest rate years down the road. It’s a big mess.

But when asking people about ways to rebuild credit, I’ve been struck by a few responses.

“We can all be on good behavior for short periods of time, but it takes a truly credit-worthy person to manage their finances well through life’s vicissitudes, including job losses or a decline in income,” Janet Alvarez, the Executive Editor of Wise Bread, wrote to me an email for this story about precipitous credit drops. “Making bad choices during a difficult time is an unfortunate reality for many of us (financial and personal stress can easily lead to mistakes), but it’s something we should strive to avoid if we want a credit score that portrays us as truly financially responsible-all of the time.”

I get what experts like Alvarez are saying—you’re not going to have good credit if you aren’t financially responsible. But to say that someone is only credit-worthy if she always pays off her bills, on time and in full, never applies for more than one credit card, and never goes over an “appropriate” utilization ratio as determined by the credit agencies—that’s just not realistic in any way.

Especially when credit agencies routinely make mistakes—more than one in five consumers has a “potentially material error” in their credit file, according to the Brookings Institute— and open up consumers to fraud.

And even minor issues can cause problems for years, as user What? Me Worry? wrote:

I once had a ton of credit card debt, went to a debt consolidation company to help (and they did!). However, when they paid off the balance of one of my cards, they (and I) didn’t take into account a tiny bit of interest that accrued between the time they got the payoff amount and the time it was actually paid off.

Fast forward a month and I get my statement. I think it’s paid off so I ignore it. Another month, and I do likewise. Fast forward a few more months and I get a nasty call from the credit card company. It turns out I was something like 5 or 6 months late on about a $2.00 debt, even though months prior something like $10,000 or so was paid off.

That blemish stayed on my credit score for years.

It makes less sense when you consider that even behaviors that should be deemed responsible—like paying off debts—can adversely affect your score, as brownieisdoingagreatjob relates:

This happened to me because my HELOC reached the end of its term and was closed. It had been paid off in full years prior. So my “available credit” dropped dramatically overnight, and my score dropped from the 800s to the 600s. It still hasn’t fully recovered over a year later.

Most importantly, there’s no way to opt out of the system. (The only way to do so, it seems, is to have no active credit accounts for at least ten years—not that this would stop any errors from appearing on your report.) You’re just in it. And the only measures you have to protect yourself from fraud that it invites are credit locks, freezes and monitoring—all provided by the agencies you never asked to be a part of, and all, conveniently, at an extra cost.

Commenter oddseth nails it:

At the end of the day, we all have to remind ourselves that the credit rating industry’s goal is keeping our credit scores as low as possible so they can make as much money as possible on charging us interest. That is why silly things like the number of credit reports pulled will affect your credit score despite regardless of whether or not you have an otherwise perfect credit score or why forgetting to make a $50 payment for more than 60 days will drop your perfect credit score by 100+ points, even though you have successfully paid off several cars, houses, etc. in a timely manner.

Ms. Alvarez’s advice seems excessive and defeatist until you realize she’s right. To have a perfect credit report, you can’t mess up, and it helps to have a head start (like a parent with good credit who opens in a card in your name or adds you as an authorized user to theirs when you’re young). This is just the way it is. It doesn’t matter what your day-to-day finances are, or how responsible you consider yourself. It depends on a lot of arbitrary rules and good luck. And there’s not much we can do about it except play the game by their rules.