The Catch-22 of Credit Scores

First, a confession: I have mediocre credit. I used to have actual bad credit, but it has risen to mediocre and remains there, hovering between 600 and 700.

I have been late on a bill only once in my life, but boy, it was a doozy. To make a long story short, in 2010 Mr. FP and I stopped paying the mortgage on a house we no longer lived in, and a few months later, we short-sold it, meaning that the bank agreed to settle our mortgage for less than we owe. We were underwater on the house; we owed more money on it than it was worth. (Perhaps next week I will tell you whole sordid story as a useful cautionary tale about the perils of impetuous homebuying.)

Anyway, as you can imagine, not paying your mortgage really dings the ol’ credit score, and so does settling an account (e.g., our mortgage) for less than you owe. I had a small student loan on which I kept paying, which helped me make up a little bit of ground, but the process is slow.

Despite our traumatic experience, we still want to consider owning a house someday, maybe in the next year or two if we really like Denver. To do that, I personally need to contribute two things: income from a real job (update on this front coming soon) and better credit. So I started researching ways to get my credit up. I seemed to have two main problems, aside from the house debacle: “too few accounts currently paid as agreed” and too little available credit. Any time I use my one card, I come too close to the limit, and apparently that’s bad. You should look like you are using only a tiny bit of the credit available to you–perhaps to demonstrate your restraint?

So I took two steps: I asked my credit union to raise the limit on my card, which they did, and I opened an Amazon Visa in my own name. I’m sure that will see a lot of use as we love us some Amazon, and instead of getting 1% cash back like with our trusty old Chase Freedom card, we will now get 2% back from Amazon. Plus I got a $60 gift card just for signing up, which is, as my father would say,  better than a nail in the foot. I’ll be able to use my account at Credit Karma to see whether it helps it go up. (Your Credit Karmas score is not exact, but it’s the best you can get for free, and should show changes over time.)

Credit Karma screen shot showing score of 674 and flat graph showing no change.

I just opened the account, so no change yet.

It all seems a little skeezy. Fake-borrowing money just to prove that I can be trusted to borrow money? And here’s where it gets really unfair: Mr. FP has better credit than me. And the reason is that he took out a loan we couldn’t afford. That’s right. Right before the skipped payments started to hit the credit reports, we realized we needed a second vehicle for a variety of reasons. So while I was at work, Mr. FP went out and financed a three-year-old Honda CRV. I wasn’t on the loan because I was at work, and anyway I disapproved. I thought he should get an older, smaller car.  Time proved me right and it is greatly to Mr. FP’s credit that he eventually admitted his error and sold the car. But that irresponsible decision boosted his credit to a remarkable and illogical extent. (Some of the difference in our scores is probably due to our joint credit cards being in his name, I think just because he was the one filling out the applications.)

I wish credit reporting companies had a better idea of your bill-paying abilities. I pay rent, daycare, all sorts of things that don’t show up. Am I the only one who finds it a little unfair that being actually responsible with credit does not necessarily lead to a good score?

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About frugalparagon

I'm a part-time librarian and mom to two small boys. I blog about striving for the long-term goal of financial independence while running a tight ship at home.

7 responses to “The Catch-22 of Credit Scores”

  1. Resy says :

    I find it very unfair and a very partial picture.
    For close to a decade I was a single parent raising a child paying all my bills on time. Rent? Paid. Utilities, day care, groceries, car costs, insurance, etc paid, paid, paid.
    Yet I have pretty bad credit that I am trying to fix (slow process indeed).
    Why do I have bad credit? Because before I became a single parent my (then) partner was irresponsible about his bills so everything went in my name. My only 2 credit cards were discharged (total of under $1000) because paying his bills and mine was unsustainable. *sight* I was just too young and naive to know better.
    Anyhow, now some things are dropping off but not all because some accounts I actually made payments on in the beginning of my single parent journey and that reset the clock on them so they still show up.
    Finally making progress but it certainly isnt easy. I wonder if this is what ex felons feel when they talk about having no second chances? Thats how I feel, “how can I prove I will pay you if you wont give me a card based on errors I made almost 10 years ago” type of a thing.

    • frugalparagon says :

      Ugh, that’s a tough one. It’ll take time, but it will go away eventually. We actually have friends who were able to buy a house only about 5 years post-bankruptcy! So I hope it won’t take as long as you might think.

  2. David says :

    The importance of a credit score is kind of unreal, but then again the reliance of our society on leverage is a bit insane as well.

  3. hollyatclubthrifty says :

    Yeah, it’s kind’ve a racket. I personally don’t like the games you have to play. I also think it’s silly that your credit score can go down if you don’t carry a balance on any of your cards. The system is set up to reward people who carry a balance and pay interest, yet make their payments faithfully.

  4. Bethany @ Journey to Ithaca says :

    Oh yes, bad credit is VERY frustrating! We did deed-in-lieu with our house, and we had difficulty getting a boat slip, even though it is less than 20% of our monthly income! I will be glad when the credit hit goes away next year.

    • frugalparagon says :

      We’re a few years out from that, but it will definitely be nice! I’ll say, though, that you and I were lucky. Some old neighbors of ours could not qualify for deed in lieu or short sale because they had rented out their house as a stopgap, and as a result they are now in foreclosure.

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  1. It’s Working! Winning the Credit Game, FWIW | The Frugal Paragon - January 16, 2015

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