Americans Obsessed With Perfect Credit Learn to Game the System
(Bloomberg) -- It took Stan Kelman three years of monitoring and tinkering to muscle his wife’s credit score to a perfect 850. “It’s a personal achievement,” says the 44-year-old business analyst and data scientist. “I’m very proud of it.”
Anna, his wife, let him direct the strategy for managing her accounts—whether to apply for new credit, when to ask for higher limits, how much of those limits to draw on. Her husband, a self-described credit card-obsessive, was also working on his own record. Six months ago, when some big credit blemishes finally dropped off his report, his score reached as high as 842. Within a year, Kelman thinks he can reach 850, too.
Some 200 million U.S. consumers have FICO credit scores, while just under 3 million, or about 1.4%, have perfect 850s. That’s according to Fair Isaac Corp., the company behind the 28-year-old scoring model used by lenders to predict whether you will pay back a loan. But over the years the number has become much more than that—it’s now an American totem of success or failure, hope or despair, security or risk. While there are competing models, almost anyone with a credit card knows that a number typically ranging between 300 and 850 holds huge sway over their financial life.
Or does it? America may finally be approaching what could arguably be called peak credit score. This year, the average national FICO number is 700, just above where it stood in October 2006, before the run-up to our most recent financial collapse. The ranks of “super-prime” consumers—those with scores of 800 and up—have steadily increased since 2010, and now number over 41 million, more than consumers with scores of 600 or below.
A big reason for this is that American consumer finances are generally in good shape. While the overall level of household debt has returned to its pre-recession peak, it remains low when compared with income, says Mark Zandi, chief economist at Moody’s Analytics. Debt service—principal and interest payments as a percent of income—is at an all-time low, helped by mortgage refinancing over the past decade.
It used to be that your credit score was a big mystery, or you had to pay to see it. Now credit card companies can’t wait to show you your score, for free. But those three-digit numbers you get every month aren’t necessarily the ones lenders use. In reality, you have dozens of scores, some based on previous versions of FICO scoring models and others developed by the three big credit bureaus. And your score will vary by the lender’s industry—mortgage, auto loan, credit card, and telecom services.
It’s possible all this transparency has fueled our pursuit of creditworthiness. What has definitely helped is a steady decline in payment delinquencies of more than 90 days, especially in real estate loans. All those negative credit entries earned in the recession have also started to disappear from reports thanks to the seven-year rule that helped Kelman. Meanwhile, automated bill payments are removing human error from the equation. A lull in the growth of new subprime accounts from early 2012 to early 2014, and a lingering reluctance on the part of consumers to seek new credit hasn’t hurt, either. (Applying for more credit temporarily dings your score.)
To be fair, some experts see U.S. credit consciousness as being at a post-recession inflection point. Rather than dodgy mortgage loans, however, these days the risk factor is subprime auto loans, where delinquencies have been rising for four years.
While late credit card and mortgage payments are also starting to tick up, Zandi believes those measures “are simply returning to historical norms.” Looser underwriting and hard-hit consumers in energy patches like Texas and the Dakotas are driving some of that. But there’s a third possible explanation: The weakening predictive power of credit scores as consumers learn how to game the system.
“The scoring models may not be telling us the same thing that they have historically, because people are so focused on their scores and working hard to get them up,” Zandi says. Those score-fluffing strategies are “mucking with their relationship to the underlying credit risk.”
Ethan Dornhelm, vice president for scores and analytics at FICO, said the company sees “no evidence of score gaming.” Recent increases in credit card delinquencies is on the banks, he said, since more low-scoring consumers are obtaining credit as lenders “aggressively compete for new card volume.”
We know our credit score sets interest rates on what we borrow, sure. But many may not realize that it also affects what card offers you get, what deposit utilities require, what your insurance rate will be, whether you get that rental apartment, or what your installment plan is for a mobile phone. In our society, it’s a three-digit number that can open or shut doors. Not surprisingly, many hyper-competitive consumers obsess over it. And when Americans obsess over something, they start looking for an edge.
“We’ve all been raised using a grading and evaluation system from school through work,” says John Ulzheimer, a credit expert who has worked at FICO and Equifax Inc. “You want to do as good as possible, and as good as possible in the credit scoring world is 850.” The only number that may be more important is your cholesterol count, he says.
The quest for the perfect credit score is “part of our western competitive edge,” says Sarah Davies, senior vice president of analytics and research at VantageScore Solutions, which has a scoring model that competes with FICO. “Here’s a way not to keep up with the Joneses, but to get ahead.”
Your credit score has become such a popular character-meter that there are dating services based on them. A 2015 academic study found that “quality in credit scores, measured at the time of relationship formation, are highly predictive of subsequent separations.” The research suggested “credit scores reveal an individual’s relationship skill and level of commitment.”
As if you needed another reason to boost your score.
Members of the 850 Club can be broken into two groups. There are the super-knowledgeable tacticians trying to crack scoring algorithms, and the naturally prudent. Some are prepping for a loan. Others are just credit-score hobbyists. Paul Chua, 40, who works at San Carlos, Calif.-based Helix, a startup focused on personal genomics, is one of the tacticians.
It’s almost like a video game, he says, “where people are trying to get a good score.”
Chua learned about credit the hard way. He ruined his score by running up debt in college. He read up on how to fix it, went on internet forums, and eventually got his credit into good shape—then he landed a job at consumer credit firm Credit Karma. Even with all that effort, though, the big reason for his success was simple: He didn’t miss a payment for seven years. He also used at most 5% of his credit limit, since scores can be hurt by high “utilization rates.”
Chua had an 850 score for about two months, he says, but it dropped to the 800s because he applied for a few rewards cards. Trying to get multiple cards in a fairly short period is interpreted as a sign of potential financial trouble, but if you’re looking for a big-ticket item like a mortgage, scoring algorithms will assume you’re only trying to buy one house when several lenders check you out.
So let’s say you’re a good consumer, you’ve never paid late, never did anything credit rating agencies might consider naughty. Why do you only have an 810? Getting to the big leagues, let alone the magic 850, usually requires a little more effort. In some cases, it might even help to have screwed up your credit at some point.
All those credit cards from college that initially hurt Chua, for example, helped him down the line. That’s because he never cut them up, creating a longer credit history and a higher average age across his accounts. Both of those numbers feed into the 15% or so of a FICO score based on the length of your credit history. A virtuous cycle develops when you have good credit, says Chua. More companies offer you credit, which raises your total credit limit, which means you can make bigger transactions but still use the same percentage of your total credit.
Chua used to work with Kelman, our FICO score-obsessed husband, whom he calls his “credit-card mentor.” Kelman was Credit Karma’s lead analyst in data sciences, able to crunch a huge pool of anonymous information. “I had access to the credit reports of millions of people, and you just correlate the variables,” says Kelman.
Kelman’s own credit saga is much more complicated than Chua’s, and involved a lot more gamesmanship.
His family had arrived in America from the former Soviet Union a year before he started college and got his first credit card. He was dumbfounded by the concept. He described the card as a potent symbol of capitalism, “a rectangular bundle of joy” that at the time seemed to signal a “crowning achievement.” For about 17 years, he had great credit.
It might have stayed that way had he not charged the cost of a move from New York to Silicon Valley. In 2010, he decided to default on four credit cards, plotting out a high-stakes strategy: He would stop paying his cards and then try to negotiate with issuers just before hitting 180 days of non-payment. Accounting rules require credit-card companies to write off bad debts at that point, and he figured they don’t like doing that.
Through perseverance, well-rehearsed tales of woe, and the unplugging of his land line to avoid collection calls, Kelman reached settlements averaging 30 cents for each dollar he owed. His credit score, however, fell below 600.
His rebuilding effort was assisted by his diligence in paying down student loans while keeping credit card companies at bay. It also helped that a few older cards survived (though his limits were cut dramatically), keeping his long credit history intact.
Going forward, Kelman charged very little on his cards, using less than 5% of his overall limit across cards and less than 30% on each one. He sometimes paid his balance more than once a month, disputed minor inconsistencies in reports, and asked issuers for higher limits. He rarely applied for new credit.
After two years, he had a credit limit of $40,000 and a score in the low 700s. When the seven-year-old negative information fell off his report, his numbers jumped into the low 800s. By July 12, his FICO score was just 8 points short of perfect.
While all this strategizing can pay off, the reality is that it’s a lot of effort. And what does a perfect 850 bring you? Very little that you couldn’t get with a lower score, it turns out. “There is no incremental value to having an 850 score over, say, a 760 or 780,” says Ulzheimer.
Credit card expert Jason Steele contends that a stellar credit score did help him obtain an “ultra-low rate” of 2.875% on a 5-year adjustable rate mortgage. But that’s about it.
To get there, Steele didn’t apply for new credit in the three months before seeking the mortgage as he knew banks would be sensitive to any fresh applications. He also began paying off his card charges before the statement close date, since that’s when balances are reported to credit bureaus—a big deal since they’re considered long-term debt. He also charged less on his cards.
There’s additional disappointment awaiting perfectionists who want an 850 in perpetuity: Credit scores fluctuate from month to month. Steele compares their obsession with the desire to keep a new Jeep or truck spotless. Good credit is meant to be used just like off-road vehicles are meant to get dirty.
“You’re kind of missing the point,” he says of 850-worshippers. “The point is for you to use your great credit to apply for really high-end premium cards with excellent sign-up bonuses, and get the lowest possible rate for other loans.”
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