Yes, it is. There’s a difference between something which is irresponsible, something which is related to something irresponsible, and something that is related to something irresponsible on a statistical basis only. Imagine that people who go to Wal-Mart sales on Tuesday are more likely to be unemployed and thus to default (people with jobs go on weekends). Being unemployed by no choice of your own is not irresponsible, and even if some unemployment can be caused by not being responsible, the association of it with going on Tuesday is only a matter of probability, not a certainty. If you go on Tuesday, it still lowers your credit score; you’ve done nothing irresponsible, but statistically, you are in a category which is a higher risk.

Of course, the credit companies could try to distinguish unemployed Tuesday shoppers from employed Tuesday shoppers, but that may end up costing more than what they would gain from defining the category more narrowly. (This is a contrived example, so you can ignore the fact that it’s fairly easy to tell if someone is unemployed.)

Ben P: I think the mistake is that you’re not considering the audience. I don’t think your FICO score is really intended to be useful to you. More, I think it’s a score that’s supposed to tell prospective lenders how likely you are to be profitable for them. A person who carries a balance is going to be more profitable than a person who does not, and a person who keeps inactive accounts is a drain on the creditors resources (administration etc) without bringing in any income. Likewise a person with high debt and even higher credit is likely to have a “higher” credit score than a person with low credit, but a large pool of assets, because the person who’s willing to incur debt is more profitable.

I think you are wrong about the “audience” and the purpose FICO scores (there are more than one) are supposed to serve. A mortgage lender is not going to profit any more (or less) from a borrower who carries balances on their credit cards than from a borrower who pays in full each month. What is going to affect a mortgage lender’s profits is how many defaults they experience, and they look to the FICO score as one predictor. (Mortgage lenders look to more than FICO scores, including one’s assets and source(s) of income, which FICO scores don’t.) And credit card companies don’t know from FICO scores or credit reports whether you are going to carry balances and generate a lot in interest income for them.

I wonder if credit card customers who always pay their balances in full each month, ever “cost” the credit card issuer money other than what it might have cost to sign them up. They may not be nearly as profitable as those who generate lots of interest income and fees, but so long as they never default, do they really cost the credit card company money?

neurodoc:
They are supposed to predict your likelihood of you defaulting on any of your debts. Is that really different from “a measure of responsible financial behavior”? And why should it adversely affect your FICO score if you decide to no longer stay with one of your credit cards and close it with no history of missed or late payments? The longer your history of timely payments on any debt, the more that may boost your score, but what difference should it make if you keep open inactive accounts?

I think the mistake is that you’re not considering the audience. I don’t think your FICO score is really intended to be useful to you. More, I think it’s a score that’s supposed to tell prospective lenders how likely you are to be profitable for them. A person who carries a balance is going to be more profitable than a person who does not, and a person who keeps inactive accounts is a drain on the creditors resources (administration etc) without bringing in any income. Likewise a person with high debt and even higher credit is likely to have a “higher” credit score than a person with low credit, but a large pool of assets, because the person who’s willing to incur debt is more profitable.

Kenneth Anderson: I recently tried to convince my wife that the XBox was necessary as a capital investment in my academic in robots, war, and cyberwar.My wife is something like the Domestic CBO, ruthlessly scoring fiscal impacts.

Does that mean you didn’t and won’t get the XBox?

PubliusFL: It is deductible, the cap is just low ($2,500 IIRC). On the plus side, it’s above the line, so you benefit even if you don’t itemize deductions.

If that is true, then so much the better, and still less reason to repay early very low interest loans. (I assume that cap refers to a limit on the amount of interest that can be deducted, not a limit on the amount of principal eligible for a tax deduction of the interest paid.) I’ll ask our accountants.

Ken Arromdee: Because you’re thinking of a credit score as a measure of responsible financial behavior on your part. That’s not what a credit score is.

They are supposed to predict your likelihood of you defaulting on any of your debts. Is that really different from “a measure of responsible financial behavior”? And why should it adversely affect your FICO score if you decide to no longer stay with one of your credit cards and close it with no history of missed or late payments? The longer your history of timely payments on any debt, the more that may boost your score, but what difference should it make if you keep open inactive accounts?

Gramarye: I’d actually be interested in knowing what Ramsey would say about going into debt for professional school

He’s big on getting in-state tuition rates at state schools.

BTW, my parents followed an approach very similar to what Ramsey now recommends — live frugally, avoid debt, save a lot — and as a result I was able to attend a world-class engineering school without incurring any debt.

Using a credit card is fine if you’re going to be able to pay it off every month.

Absolutely, and that’s what I do. But the credit card companies are threatening to jack up fees on people who don’t carry a balance — if that happens I’ll be making a lot more use of debit cards instead.

David Nieporent: For another, other people pull credit reports besides lenders. Landlords. Employers. Insurance companies. A poor score can cost you money, a residence, or a job.

Yes, I think many people are unaware that FICO scores are looked at by those “non-lenders” and low scores can have unhappy consequences.

The interesting thing to me about FICO scores is that they take no notice of your net worth or liquidity, matters that a bank would certainly take into account before making a very substantial loan.

Mahan Atma:

he counseled staying invested even when the market was looking particularly bleak earlier this year.

What was his counsel when the market was at its peak?

Exactly the same. Avoid debt and invest for the long term.

Ben P: I think what Fico Victim posted is correct. I’ve occasionally reviewed credit reports through work. When you get a credit summary you’ll see different kinds of debt which includes “revolving,” “current,” “0–30 days overdue,” “30–60 days overdue” and “90 or more days overdue.” Your statement comes and it says it’s due on Dec 15th, you lose the statement for a week or two and Dec 15th passes. The morning of the 16th that payment goes into the “30 days overdue” Column. Realistically, the credit card company is perfectly happy to charge you $25 (or whatever) for the privilege of making your payment a day or two late, but it still gets reported to your credit score as overdue.

I disagree. My understanding is that the credit reporting bureaus classify their late payment categories as 30-59 days late, 60-89 days late, 90-119 days late, and 120+ days late. See, for example, the TransUnion Credit Report Training Guide. So a 30-day late means you paid at least 30 days but less than 60 days past the original payment due date. Some creditors sometimes misinterpret the categories as “up to” rather than “at least,” though. That’s another good reason to check your credit report regularly. If you get a 30 day late for paying less than 30 days late due to a creditor’s misunderstanding of the credit bureau’s payment status categories, that’s a derogatory item that’s ripe for dispute.

I’ve occasionally reviewed credit reports through work.

When you get a credit summary you’ll see different kinds of debt which includes “revolving,” “current,” “0-30 days overdue,” “30-60 days overdue” and “90 or more days overdue.”

Your statement comes and it says it’s due on Dec 15th, you lose the statement for a week or two and Dec 15th passes. The morning of the 16th that payment goes into the “30 days overdue” Column. Realistically, the credit card company is perfectly happy to charge you $25 (or whatever) for the privilege of making your payment a day or two late, but it still gets reported to your credit score as overdue.

in other words:

month 0: balance of $0.00
month 1: balance of $20.00 due to new charge of $20.00
month 2: balance of $25.00 due to late penalty of $5.00
month 3: balance of $0.00 due to payment of $25.00

and I got a “30 days late” ding for month 1.

Can you win your own thread? I think I’ve just seen it happen.

Well, Wretchard does it all the time over at Belmont Club, albeit in the Serious Commentary genre rather than Humor.

I think 30 days late means you not only missed the payment due May 1 but you didn’t make it up in the payment due June 1 — you’ve missed 2 payments. That’s in the real world, anyway.

@Ken, what is a credit score? One might think it’s an actuarial measure of an individuals likelihood of defaulting. We think the borrower who has been more responsible in the past is the better risk; in the perfect world Fair Isaacs has determined that closing an old account while charging a purchase at WalMart on a Tuesday precedes defaulting to a statistical significance. In a cynical world they’re a mysterious means to justify putting almost everyone into the lending equivalent of the assigned risk pool.

A poor score can cost you money, a residence, or a job. Does anyone have numbers? Suppose someone has $X,000 unsecured debt. Paying it off has (by definition) a NPV of $X,000 (or more because the interest rate on debt is higher than what’s earned, if they can’t pay it off all at once.) Nuclear option, a Chapter 7 bankruptcy (with so much protected in a homestead) will cost the filing costs and fees, plus $Y,000 over the next decade in higher interest rates on a car loan, higher rents, worse jobs: What’s an estimate for Y? I suspect that Y might be quite a bit less than a bad pile of consumer debt, even factoring in that something worse happens in the following 7 years and the homestead has to be liquidated (compared to having liquidated it now to avoid the bankruptcy and the same bad thing happening anyway.)

At the tactical level, and especially with the current credit card environment, failing to make a minimum payment can be relatively expensive for someone carrying a balance.

I was particularly interested to see that the better your starting credit score, the bigger the hit in points for each event.

Seriously? A fire causes more damage to a mansion than to a wooden shack.

If you have a better credit score, you have a lot further to fall if/when you screw up.

Also, what’s with recommending something to your daughter that you wouldn’t do yourself?

Anyway, the more I read McArdle the more I come away with the impression that she’s pretty wet behind the ears. I have a hard time taking financial/economic advice from someone who needs the help of a personal financial program aimed at people with the mental age of a seven year old.

neurodoc: Just too bad that the interest on school loans isn’t tax deductible.

It is deductible, the cap is just low ($2,500 IIRC). On the plus side, it’s above the line, so you benefit even if you don’t itemize deductions.

David Chesler: But I’m surprised a lot. I’ve just had a credit card I didn’t use very much closed for derogatory information and “length of time accounts have been established”. The derogatory information is correct, but it was three years before I got this credit card four years ago. I intend to call them during business hours to find out if the length of time is too long or too short.One’s mileage may vary. It was my wife who led me to that derogatory situation. After a bout with cancer in her early 20s she lived every day as though it might be her last, and one day she was right. You can take it with you if it’s personal unsecured debt, and she did. (The credit card offers come to the wage-spender, not the wage-earner, so the cards were in her name.)If you’re debt-free and intend to remain that way (including for house mortgages), what difference does your FICO number make?

People need to learn to pay as they go, and not just to use credit. They also need to learn how to use it (house, car, etc, not PF Changs).

I’m also somewhat confused that more loans make you more trustworthy and that closing credit card accounts can actually be bad if they’re old credit cards.

Because you’re thinking of a credit score as a measure of responsible financial behavior on your part. That’s not what a credit score is.

BenP: It seems to me Dave Ramsey is very much a “dry drunk” sort of person.

Funny you should say that, as there are 12 Step programs for people with financial issues. The “dry drunk” is the one who isn’t in recovery but doesn’t engage in the behavior anymore.

If you’re debt-free and intend to remain that way (including for house mortgages), what difference does your FICO number make?

Well, for one thing, the fact that you ‘intend to’ remain debt-free doesn’t mean your life will work out that way.

For another, other people pull credit reports besides lenders. Landlords. Employers. Insurance companies. A poor score can cost you money, a residence, or a job.

SuperSkeptic: Shameful and pathetic, too, beacuse most of the rest of us know it — and know how to say it — without plodding or practice.

She means saying it to her friends. It’s easy for anybody with discipline to say it to herself. But when your friends are all doing something, and try to include you, and you can’t, that’s harder.

On the other hand, I have no plans in the next couple years to avail myself of a good credit score (mine could take a good knock or two and still be in decent shape if it had to), so perhaps I shouldn’t even worry about it.

And “maxed out” on a credit card? If you charge the full amount allowed on a given card, then pay it in full, there’s a ding to your FICO score?

I understand the “concept” of late payments and spending to the very limits of one’s available credit lines, but I wonder if the criteria are really these. What does it say about one’s creditworthiness if they max one credit card but have a great deal more untapped credit remaining on other cards, credit lines, overdraft protecction, etc.? I have “maxed” a card to take advantage of special offers (e.g., double miles for using card to pay taxes, so miles at <1.245 cents each and extra benies too) and seen no damage to my FICO scores.

And some other things like dings for closing accounts that are not in arrears seem strange. There is some negative implication to that? (Yes, I know there regression analyses must point to some correlation with likelihood of default on debt, but why should there be any correlation? Opening new accounts can result in dings too, I believe.)

Mahan Atma: You’re seriously asking?Because the investment return I’m getting on my salaried money is greater than the interest I’m paying on the loan.

I have directed my daughter not to accelerate repayment of her 3% interest rate loans from law school. If they were 5% or higher, I’d probably tell her to pay them off and be done with them, but not at 3%. Just too bad that the interest on school loans isn’t tax deductible.

I’m surprised if the FICO formula is all that secret. It wouldn’t be hard to run regressions on enough credit histories. (It also wouldn’t be hard to reproduce Coke.)

But I’m surprised a lot. I’ve just had a credit card I didn’t use very much closed for derogatory information and “length of time accounts have been established”. The derogatory information is correct, but it was three years before I got this credit card four years ago. I intend to call them during business hours to find out if the length of time is too long or too short.

One’s mileage may vary. It was my wife who led me to that derogatory situation. After a bout with cancer in her early 20s she lived every day as though it might be her last, and one day she was right. You can take it with you if it’s personal unsecured debt, and she did. (The credit card offers come to the wage-spender, not the wage-earner, so the cards were in her name.)

If you’re debt-free and intend to remain that way (including for house mortgages), what difference does your FICO number make?

he counseled staying invested even when the market was looking particularly bleak earlier this year.

What was his counsel when the market was at its peak?

If the degree has paid for itself already, why are you still paying interest on the loan that financed it?

You’re seriously asking?

Because the investment return I’m getting on my salaried money is greater than the interest I’m paying on the loan.