Found an old forgotten 401k, cashed it out and deposited it at the first of the week, about $30k (vested and forgotten, sheesh).
So (and I know the bank’s credit score is not the actual Fair-Isaac), but why would they show a decrease? The 401k was not tied to my bank in any way, and was in another state.
Credit scores are a bit of voodoo, and should not be reacted to within a week’s term.
I would guess there’s a computer algorithm there that
either can’t distinguish between a payment into some sort of savings and a splurge on champagne and high living
or flags up that you’re the kind of person who’s canny enough to avoid running up credit at the level that produces profitable interest income for them.
Many such scores these days are set by “AI” algorithms which no living human knows the details of. You don’t even know whether some human “expert” trained the AI to be suspicious of something you did, or the AI taught itself that suspicion.
I think credit scores are supposed to predict how easily lenders will make money off you, not how secure you are. If you have large cash assets you’re not likely to use credit as much and especially not likely to rack up extra fees.
Credit card companies search for a customer type they call the “Minnesota carpenter”. This is somebody who has a fairly decent income, but unpredictable (like a carpenter who can’t work during the cold winter months in Minnesota). This customer will make heavy use of credit, and pay a lot of interest, and will go through stretches where they are likely to miss payments and rack up extra fees (which were originally conceived as punishments to make customers honor their debts but eventually were recognized as excellent profit centers on their own). But the customer will generally pull themselves back into good account standing, though they can never escape the lifelong cycle of debt.
If you have significant cash assets you are less likely to get trapped in an expensive cycle of debt.
This I learned through a friend who led a team of research statisticians at a major credit card company.
Maybe cashing out a 401k instead of keeping it in a tax advantaged account is an indicator of distress.
But I’ve never heard of that being a thing.
How about taking that $30K out of savings and see if the score goes up? It also might be interesting to see if that same amount placed in a different kind of account (like T-bills, bonds, etc.) would change the score. And such an experiment might actually gain you interest (almost all investments pay better than savings) if you have it in traditional savings now, which I infer from your post.
I think Ruken is right. Cashing out a 401k might be an indicator of financial problems. Also, if you’ve had that 401k for a long time, as might be inferred by the vested and forgotten nature of the instrument, your average age of accounts might have declined.
In 2008 Citibank took it upon themselves to apply the penalty rate to my credit card account, though I didn’t have a balance or meet any of the conditions that the penalty rate applied to in the account agreement. As I recall, they just did it as a knee jerk reaction to the 2008 financial crisis.
I have heard that the credit card companies have a different knee jerk response to the current economic situation, and that is to cut available credit. As the amount of available credit and credit utilization are factors in credit scores, such actions may be affecting credit scores.
My point is that your score may have gone down for other reasons, and the timing of your deposit is just coincidental.
I do not believe that to be true. My wife has a credit rating of 849. She pays all her bills on time and never misses a payment or pays interest.
I don’t think this applies, but I do know when back in 2004 I paid off a $5000 credit card debt in one payment that my credit score went down by about 30 or 40 points, but went back up and over the original baseline in about three or four months. The reasoning behind that (as I researched) was if you had a history of carrying a big balance for an extended time (as I was) and then all of a sudden pay off $5000, one possible assumption is you took out a loan elsewhere that they don’t know about. (And that was somewhat true – I moved back to the US and was making real money again, and my parents fronted me $5K, which I paid back to them over 6 months).
I’m not exactly sure how that would apply there, but it gives you other ways to think about what the algorithm may be seeing.
It’ll likely go back up soon, DummyGladHands. I noticed the same hit after depositing a life insurance check, but the score rebounded less than 2 months later.
No doubt the credit card companies like the kind of customer that you describe, but I don’t think that your credit score is a metric designed to measure this. It’s true that if you just have a lot of cash and you never use credit, you won’t have the highest credit score. But I think that’s more a question of lack of data: they don’t have access to your personal balance sheet, so if you don’t use credit they simply don’t know your theoretical ability to repay.
Remember that credit card companies make some of their income (I think a little under half, from the last data I can find) from interchange fees - the fees a merchant pays when you use your card. And, unlike interest charges, this income is risk-free. I use credit cards for virtually everything, and although I have never paid a cent of interest to a credit card company in my life, they make good money from me. And of course I have a good credit score even though I don’t fit the “Minnesota carpenter” profile at all, they know I am never going to pay them any interest.
There are certainly a few quirks, like the odd situation described by the OP. But overall it’s not all that opaque. The credit karma service gives you a breakdown of the major factors, and in my experience this reliably predicts fluctuations in my credit score:
HIGH IMPACT FACTORS
(1) Payment history - on time payments
(2) Credit usage - fraction of your credit limits that you are utilizing
(3) Derogatory marks - collections, liens, civil judgments, bankruptcy
LOW IMPACT FACTORS
(4) Credit age - how long your accounts have been open
(5) Total accounts - open and closed accounts
(6) Hard inquiries - applications for credit
I have worked in credit cards for 20 years and this part is absolutely not true. A credit score does exactly what it sounds like, it predicts risk of default. Credit losses are one of the most important factors in credit card profitability, so to not have a way to accurately predict risk and losses would be insane.
You or your friend may be confusing credit scores with other models or tools that absolutely are used, to predict type of usage, profitability, etc.
Do you have a source for that, in regard to credit scores? Federal regulators are VERY interested to know exactly what attributes we use in credit scores, and how we use them, in order to ensure that we are complying with fair lending laws. We know exactly which variables are used in our scores.
Both things are factors. Simple common sense indicates that your likelihood of default is going to be a factor. If your official occupation is “unemployed bum” you’re not likely to get a credit card at all.
I once did some IT consulting work for VISA (or rather, for a major VISA issuer) and they used two different parameters for determining your credit limit – which is not the same thing as credit score, but obviously related. And they reflected both things you mentioned. One was something they called the “B-score”, or “behavior score”, which assessed risk in terms of things like on-time payments, payments in full, etc. The other one assessed how much money they were making from you, which at least in part was directly at odds with the B-score. The rich guy spending a fortune each month and paying it off was certainly good for business, but so was the poor schmuck who ran up a big credit card debt and paid huge amounts of interest each month. The customer who spent only modestly but always paid in full was the least profitable but likely the lowest risk. They balanced the two factors out using carefully honed algorithms. If the poor schmuck had his account a long time and always dutifully paid the interest and at least minimum payment, he and the rich guy would likely both have high credit limits.
I get my credit score each month in my Discover bill. Several years ago, I put about $2,000 on several credit cards purchasing clothing for a charity project I was involved with (and was reimbursed by the project even before I received that bill). My credit score dropped by about 100 points for a couple months, and quickly rebounded.
It was in the fall, and the Kohl’s cashier said it was the first time she saw a purchase go over $1,000 before all the discounts were applied (I got one of those big stroller carts, and it was heaped high). I said, “You didn’t see that during back-to-school time?” and she replied that she hadn’t worked there at the time.
It may have been more the result of an irregularity than the fact that you had shuffled some money around.
Credit scores are supposed to be exactly a measure of how risky you are to lend to. The indirect element of truth in your description is that if you never take on any debt, there’s no track record of being someone who pays back their debt on time. And if you’ve never (or within the time window of years they consider) taken out certain kinds of debt, let’s say you’ve always rented or long ago paid off your mortgage, and pay cash for cars, you probably won’t get an absolute top score just from always paying other kinds of debt (say credit cards). Usually to get an absolute top score you have to have a good track record on various types of debt.
True, lenders want to deal with people who borrow money. But the reason credit scores improve from having (a reasonable amount, by their measures) of various types of debt is not because of that. It’s because the firms that calculate those scores, the tripoly of Equifax, Experian and Transunion, don’t have good information about people’s assets and income. They mainly have to estimate creditworthiness based on how the person has dealt with debt.
Which is why OP’s story is very strange. 401k plan administrators do not report 401k balances or cash outs or anything else to the credit bureaus. And banks don’t report deposit account balances to them either. The bureaus are basically blind as to the asset side of the consumer’s ‘balance sheet’, which is why some of the algorithms and answers are strange: they are trying to assess creditworthiness without a key piece of information, how much money you have.
I’m curious as to how credit score compilers would even know about this incident. You must be referring to some score that is known only to the bank you do business with. There’s no reason a deposit into your bank account would get reported to credit agencies. I’ve had credit score tracking from multiple banks I do business with, and they don’t seem to take into account anything than what shows up on your credit report, which is only when you borrow money.
Maybe I was wrong about credit scores specifically. In the 1990s I worked with an AI guru who IIRC had headed a company that supplied banks with software for loan approval recommendations. I’ve also read that AI is used by police departments to target patrolling. Those examples are just off the top of my head and probably barely scratch the service.
I’d be satisfied just finding 30 g’s I had forgotten about.:smack: