Everything is going great in the relationship, or so it seems — until one day, that loyal bank customer closes their account and vanishes without any explanation.
According to a new FICO survey, that’s exactly what’s happening with a lot of millennial banking customers. In fact, the survey found that this demographic is two to three times more likely to close all accounts with their primary bank than people in any other age group.
“The increased volatility in this 25-34 year-old age group can be a costly exercise for incumbent banks, due to the increased marketing and operational costs required to win new customers, especially if they are only replacing the ones that have left,” Joshua Schnoll, FICO’s senior director, said in a press release.
Why They’re Going
The FICO survey discovered that 45% of these millennials (ages 25–34) and 36% of younger millennials (18–24) are closing their accounts and taking their money to another bank because of fees, whether from ATMs, low balances, or any other type of fee they may get charged.
“Banks will need to address millennials’ sensitivities to bank fees and a desire for convenience in order to arrest churn and build loyalty,” Schnoll said.
Beyond that, having a negative experience after missing a payment was the second reason millenials took their banking business elsewhere, followed by inconvenient branch locations and too few ATMs. Younger millennials also noted that having a negative fraud-related experience was another reason that caused them to switch banks.
To gather this information, FICO surveyed about 1,000 U.S. consumers (over the age of 17) online in October and November 2015. Data was weighted by age and region to reflect U.S. Census data.
If you are unhappy with your bank, whether because of fees or something else, it never hurts to shop around for a new one. Just make sure that you’re still paying your bills on time while doing so and/or switching, as not doing so can cause you to pay more in the long run via late payment fees and can even hurt your credit. (To find out how your payment history is affecting your credit, you can see two of your credit scores for free, updated each month, on Credit.com.)
When you think about it, credit scores have a lot in common with the SATs: They stress people out, involve tough-to-answer questions and play a huge role in determining whether your applications (albeit for financing) get denied.
There’s another notable similarity, too, which you may not know about: When it comes to credit scores, you can’t get a zero.
The Lowest Possible Credit Score
Most major credit scoring models, including standard FICO and Vantage Scores, have a range of 300 to 850, with 300 representing the lowest, or worst, possible score and 850 representing the highest, or absolute best. (You can learn more about what constitutes a good credit score here.)
Some specialty scores, including the FICO Industry Option scores, have a lower minimum (250), but, generally, no matter what model we’re talking about, “you don’t start at zero and, let’s say, work your way up to a respectable score over time,” Barry Paperno, a credit scoring expert who worked at FICO for many years and now writes for SpeakingofCredit.com, said in an email.
You also don’t really start at a 350. That’s because until you meet a model’s minimum criteria, you won’t have any score at all. In that case, the credit bureaus will let a lender (or landlord or cable company or anyone else requesting your credit as part of their application process) know that you’re score-less.
“When a score can’t be computed because the credit report doesn’t meet the minimum scoring criteria, an alpha or numeric ‘exclusion code’ is transmitted to the requester indicating one, that no score can be calculated, and two, a general reason why the credit report didn’t meet the minimum scoring requirements,” Paperno said.
No Panic Necessary
Thin-to-no credit can certainly make it harder to secure a loan, but there are lines of credit specifically designed to help people in that demographic (see secured credit cards, student credit cards or credit-builder loans) establish a credit history. And, after you get ahold of some starter credit, it shouldn’t be too long before a model is able to calculate your score. For instance, the minimum criteria for the FICO scoring models, Paperno said, generally includes:
At least one account opened more than six months ago
At least one account reported to the credit bureau within the past six months
No indicator on the credit report that the consumer is deceased
Moreover, once you meet this criteria, you could conceivably find you have a decent score — so long, of course, as you’re using your credit account(s) responsibly.
“For instance, you can be 18-years-old with a secured card opened six months ago, pay on time every month, keep a low utilization, and your first score can be in the high 600s,” Paperno said.
Remember, to build good credit in the long-term, you want to make all loan payments on time, keep the amount of debt you owe below at least 30%, and ideally 10%, of your total available credit limit(s), and add a mix of accounts to your credit file as your score and your wallet can handle it. You can track your progress toward building good credit by viewing two of your credit scores for free each month on Credit.com.
There are lots of places that offer free credit scores nowadays, but not every score is the same. Even when you pull your free credit scores, chances are the scores will be different.
Why is that?
Free credit scores can differ because of the scoring model used, the credit bureau supplying the data and how frequently that information is reported to places offering free credit scores.
“They don’t always pull the same accounts,” explains Brette Sember, author of “The Complete Credit Repair Kit.” “There may be some information missing which can affect a score, too.” Also, “they don’t monitor your information in real time,” she says. “They only actually check periodically, so it depends on who checked what, when.”
Here are three reasons your free credit scores may not look alike.
1. Scoring Models Differ
There are two major credit scoring models — FICO and VantageScore — and credit sites and card issuers tend to offer one or the other. While the latest versions of FICO and VantageScore have the same scoring range — from 300 to 850 — each weighs the factors comprising those scores differently. For instance, VantageScore says its scoring system benefits those with a thin credit file. (You can learn more about VantageScore here.)
One of the most common credit score misconceptions is that you have only one score, when in reality you have several dozen credit scores. Consumers, in fact, have multiple FICO scores, which can vary based on the credit bureau supplying the data.
2. Lenders Tweak Formulas
Many financial institutions make adjustments to scoring formulas so they are more specific to their credit business. For example, an auto lender might weigh one’s auto payment history more heavily.
3. Timing Matters
As Sember notes, the score you receive may depend on how often your credit information is calculated and when the scores are updated. Your free credit score might not reflect your new home mortgage or paid-off credit card debt. Or that new credit card with a higher credit limit — which reduced your credit utilization ratio, or how much debt you carry on all your credit card(s) versus their total available limits — may not be showing up yet.
So what’s a person to do?
Think of it this way: The scores are all accurate depending on the scoring model and when it was last updated. But things change, and credit is fluid. Free credit scores are best used as more of a guide than a precise figure. The point is to track your credit score to make sure it’s moving in the right direction by always paying your bills on time and in full. (You can get two of your credit scores, updated each month, for free on Credit.com.)
“There are hundreds of credit scores, and they are for educational purposes,” says credit coach and Credit.com contributor Jeanne Kelly. “Each of these varies on how the credit score is calculated.”
She adds, “My rule is, if you always just focus on your credit report and make sure you try to maintain healthy credit, then no matter what score is used, it will be a good one.”
Couples may be inclined to buy a new home together — and, if necessary, apply for a home loan — but new data suggest you ought to think twice before saying “I do” to joint mortgages. In fact, according to a note from the Federal Reserve, some borrowers could have saved a lot of money in interest if they’d applied solo.
“Specifically, we find that nearly 10% of prime borrowers who applied for their loans jointly could have lowered their mortgage interest rate at least one eighth of 1 percentage point if the mortgage was applied for by the applicant with a higher credit score and an income high enough to qualify for the mortgage,” the note reads. “Furthermore, among the joint applicants with a lower credit score below 740, for whom mortgage interest rates are most sensitive to credit scores, more than 25% could have significantly reduced their borrowing cost by having the individual with a higher credit score apply.”
How Couples Wind Up Overpaying
Good credit scores generally qualify you for the best terms and conditions on any type of financing, but mortgage borrowers are subject to what the Fed calls “the minimum FICO rule,” FICO being a popular credit scoring model. Per this rule, when two people apply for a mortgage together, only the lower of the two credit scores is considered in the underwriting and pricing of the loan by originators, mortgage insurers and secondary market guarantors.
We use the term “could” because the rates and fees you pay on a mortgage can also be affected by your debt-to-income ratio. Borrowers generally need a 43% debt-to-income ratio to obtain a mortgage. So, if you need both your incomes to reach that threshold, applying together could give you more borrowing power.
It’s worth doing some number-crunching before applying for loans, especially if you both need to be on the deed (not mortgage) to claim ownership of the home. Based on its analysis of over 600,000 joint-applicant securitized mortgages made between 2003 and 2015, the Fed estimates couples subject to the minimum FICO rule could have reduced their annual interest payment by $220 to $1,400 had they let the person with better credit apply solo.
How to Get Your Credit Mortgage-Ready
Of course, it’s a good idea to fix your credit (or have your spouse fix his or hers) before applying for a mortgage. You can generally improve credit scores by paying down high credit card balances, limiting inquiries during your home loan search and disputing any errors on credit reports. (You may want to hire someone like a credit repair company if you’re overwhelmed by the process or want to hit the “easy button.”) You can also build good credit by making loan payments on time, keeping the amount of debt you owe below 30% and ideally at 10% of your available credit limit, and adding a mix of credit accounts over time.
Outstanding unpaid debts can do big damage to your credit score, so it’s a good idea to try to resolve them as quickly as possible. Creditors and debt collectors may be willing to work out a repayment plan or even settle the debts for less than what you owe. But can paying this lower amount cause extra damage to your credit?
Unfortunately, the answer is yes.
“Generally speaking …. paying in full as soon as possible is the best action to take in terms of … preserving the credit score,” Barry Paperno, a credit expert who blogs at Speaking of Credit, said in an email.
A debt settlement, conversely, could have a negative effect on your credit score.
“The precise impact of a debt settlement on the score will depend on how this specific information is reported to the bureaus as well as on the remaining information on the credit report,” major credit scoring model FICO said in an email. “FICO research on millions of credit files has found that consumers who do not pay off their loans per the original terms of the agreement represent higher risk to lenders, and as such, if the debt settlement is reportedin the credit file with an indicator that the account was paid for less than the full amount owed, that can be viewed as a derogatory indicator by the score.”
An Important Caveat
But that’s not to say that settling for less isn’t your best course of action. Failing to make good on your balances could cause a creditor to take further adverse action against you. They might charge off the debt or resell it to a collection agency. And both collectors and creditors could sue and ultimately secure a judgment against you to get repayment for the debt.
Newer credit scoring models, including FICO 9, ignore paid or settled collections. These scores, however, are yet to be in widespread use, so there’s still a good chance a collection account will do more damage to other versions of your credit score.
And, when it comes to judgments, “the impact … on the FICO Score is primarily driven by their presence as opposed to their status (e.g. paid-in-full vs. settled),” Can Arkali, principal scientist at FICO, said in an email. “So, if the debt can be satisfied in advance of the judgment filing, that could prevent a more adverse impact to score which might arise if an additional judgment is posted to the credit file.”
In other words, “damage control … i.e. paying as much as you can as soon as you can” should be a major consideration for consumers looking to resolve unpaid debts, Paperno said.
Deciding What to Do
In weighing your options, it’s a good idea to ask the creditor or collector in question how they plan to report any settlement they are offering to the three major credit reporting agencies. You can also try asking if they will remove the collection account in exchange for payment.
Paying off a loan is a good thing. It’s a sign of success and responsibility. The logical conclusion from here would be that paying off a loan would help your credit score, but that’s not always what people experience.
Awhile ago, I saw a post on Reddit where a user said they saw their credit score drop after paying off student loans, and I wrote a story about that scenario. To sum it up: Paying off a loan is not in itself a negative thing in the eyes of most credit scoring formulas. Scores change constantly, and there are so many variables that the drop someone may see after paying off a loan could happen for a lot of different reasons.
But there’s more to it than that. After I saw a few comments from readers saying something similar happened to them, I dove deeper into the issue. I turned to the credit-scoring giant FICO to find out why some people report seeing their credit scores drop after paying off a loan, even though nothing else on their credit reports seemed to have changed.
Ethan Dornhelm, a senior director at FICO who oversees score development, said he could think of two situations in which paying off an installment loan would hurt someone’s credit scores. (Keep in mind this refers to FICO scores, of which there are many variations, and there are many more credit scoring models beyond FICO.)
1. You Paid Off Your Only Installment Loan
First of all, there are two kinds of credit: Installment loans (like a mortgage or student loan) and revolving credit (like a credit card or home equity line of credit). If the loan you paid off was your only active installment loan, you would likely see a small drop in your credit score. It has to do with your mix of active accounts, which is one of the five main factors that determine your credit scores.
“I would emphasize it’s the smallest of the five,” Dornhelm said. It makes up about 10% of your FICO score. “We found that those consumers who are demonstrating active and current responsible management of a variety of [accounts] show a lower risk.” By risk he means risk that the borrower will not repay creditors — that’s what credit scores assess.
To get those points back, you would need to have an active installment loan, i.e., borrow more money. It’s important to reiterate that account mix makes up a small slice of your credit score. Many financial experts would tell people to not go into debt just to improve their scores.
The other option is to compensate for those lost points. You could pay down credit card balances (you want to use as little of your available credit as possible) or be sure to pay loans and credit card bills on time. Payment history and credit utilization have the largest impact on scores (35% and 30% of your score, respectively).
2. Your Remaining Loans Have High Balances
Let’s say, for example, you just paid off your last student loan, and when you check your credit score, it went down a little bit. You have an open auto loan, so you know it’s not because of the account mix scenario described above. That auto loan could be the reason for the drop: If it’s a newer loan, meaning you haven’t paid off much of the balance yet, your credit report would show that you owe a significant portion of the original amount you borrowed.
This falls under that credit utilization category mentioned earlier.
“It’s one dimension of amounts owed,” Dornhelm explained, adding that “the key driver of that 30% of amounts owed categorization is your credit card utilization.”
He said that the difference between what you had owed on the loan before you paid it off and the balance of the remaining loans would have to be quite significant to impact your credit scores. Even then, Dornhelm said the drop would be small and temporary. The impact would probably be around 10 to 25 points or so, he said. A score change like that generally isn’t something to worry about, unless your score is hovering near two scoring thresholds, like between a good credit score and a great one. As you pay down your newer installment loans, you would likely see your credit score go up.
Of course, these things don’t tend to happen in a vacuum. It’s likely many things on your credit file are changing at once, so it can sometimes be difficult to pinpoint the precise impact one account is having on your credit score. You can get an idea of what’s going on with your free monthly credit report summary from Credit.com.
Dornhelm described the scenarios above as unique, adding that loan payoff tends to have a neutral effect on credit scores. That raises another common question: Why don’t people gain points as a direct result of paying off loans? Dornhelm said they could, in very specific situations, but for the most part, you can expect something anticlimactic. Regardless, reducing or getting out of debt is a huge accomplishment, and you should be happy about it.