By Shonnie Fischer
Credit scores have made it into virtually every aspect of our life and dictate accordingly. Hitting that magic number whether it be for financing or other reasons is paramount and makes or breaks the deal -or- in some cases can even cost you employment opportunities. Because either a lender or other entity sets the minimum credit scoring requirements, those who do not make the cut try to quickly scramble to gain the points they need. Herein lies the problem, credit scores are created via an algorithm specific to the credit scoring source. We as consumers do not know the magic formula that holds our fate, thus end up desperately scurrying to find any possible solution to get our scores where they need to be when applying for financing or other credit score driven areas.
So what really makes up a credit score? How is it specifically calculated and why the big secret? Credit scoring is similar in comparison to Coca Cola® in that as consumers we have access to the basic ingredients but we do not know the secret recipe or how the end product is truly made. Like Coca Cola®, the formula that makes up a consumers credit score is in an of itself a heavily guarded industry secret known only to very few people. The Fair Isaac Corporation who developed the FICO® credit scoring software, keep a very tight lip and do not disclose what - if any- specific value(s) are applied or used when a consumers credit score is generated. However, most consumers know the basics like how failing to make a payment, collection accounts, bankruptcy, liens, and judgements will all cause a credit score to go down. Here is what else we know about the credit scoring system:
35% of the total score is derived from past payment history.
30% of the total score is derived from credit card utilization ratios.
15% of the total score is derived from the average age of a credit file.
10% of the total score is derived from diversity of account types.
10% of the total score is derived from inquiries into a consumers credit.
What we know about credit scoring is very generic and broad in range, thus does not provide much assistance to the consumer who needs an immediate 20 point boost. There is believed to be (and sometimes wrongfully published) a mythical treasure map of point values for credit scoring. It is here where I see consumers and industry professionals jump in and give advice such as “if you do this -or- pay off that, it will boost your score by X amount of points”. Unfortunately, a credit scoring treasure map does not exist and such statements are incorrect and completely misleading. Case in point, Liz Weston with MSN, recently published a point value chart in an article following an interview where a contact from FICO® disclosed the following canned figures.
Effect on a 680 score vs. Effect on a 780 score
Here is where the confusion begins and why this type of information is so unreliable, misinterpreted, and abused doing a great disservice to the consumers and the industry professionals involved. What FICO® did not disclose is that four of the five actions listed above will cause your credit file to be scored on a totally different scorecard. Yes, I know that I just confused and may have completely lost the vast majority of you reading this article. I will elaborate with fair warning that it just gets more confusing from here.
FICO® scores measure your credit files potential risk by scoring it using a unique algorithm specifically designed for your file type known as a scorecard. That means if you have a bankruptcy then you’re scored in a bankruptcy scorecard. If your credit file only has one or two accounts, then it’s scored as a thin file scorecard and so on and so forth. Point being that all credit files are not scored the same way and not using the same FICO® formula. Four of the five actions above are negative in nature and when a clean credit file suddenly gets hit with something negative, it will transfer from a “clean credit file” scorecard to a “derogatory file” scorecard respectively. The result is a completely different measurement for EVERYTHING on your file. So adding a foreclosure, settlement, 30-day late payment or a bankruptcy to your credit file does not “cost” the points you see above. Worse, is it causes everything on your file to have a new value so the score change can not be attributed just to the negative item. The score change has to be attributed to the change in scorecards.
Next, not all 680 and 780 credit scores are created equally. Your 680 credit score might have been caused by a completely different set of credit circumstances than my 680 and the same goes for the 780 category. Case in point, John Ulzheimer, a highly regarded industry expert ran similar simulations on his own personal credit reports using the myFICO.com website tools. It just so happens that Mr. Ulzheimer’s FICO® score for the simulations was also 780. This is a perfect example of just how different FICO’s® hypothetical 780 is from a real credit report with the same score of 780.
The score damage on the original 780 in FICO’s® simulation of filing a bankruptcy was a negative hit of between 220 and 240 points. On Mr. Ulzheimer’s real credit file with a real FICO® score of 780 the hit was between 195 and 255 points. Missing a payment on an account that was current, caused the FICO® score to drop between 90 and 110 points. On Mr. Ulzheimer’s 780 FICO® score the same 30-day late payment caused his score to drop 40 to 75 points.
As you can see the point differences for the exact same action on the exact same FICO® score of 780 was anything but exactly the same. Mr. Ulzheimer even trumped Ms. Weston by re-interviewing FICO’s Public Affairs Director, Craig Watts. Mr. Watts confirmed that the examples in the FICO® chart were “hypothetical” and “could vary significantly” from consumer to consumer, thus getting back to my original statement that there is no such thing as a treasure map of single point value systems for credit scoring. Unfortunately, we are left with only the basic and generic credit scoring components which do not help much when needing to hit an exact number.
The point of this article has been further proven thanks to some cavalier follow up journalism. Within two days of the publishing of Ms. Weston’s article, two separate writers picked up and misrepresented the data. Instead of interpreting the information as a general approximation of what could happen to your score if you made various mistakes, the data is purposely being positioned as a new breakthrough into FICO’s® black box.
Bottom line is I know we all would like to get our hands on this type of specific information so that credit scoring would make some kind of sense and give consumers the ability to regulate their credit scores and be in full control their own destinies. However, unless those magic numbers and secret formulas are ever formally published and/or made public knowledge, we will have to continue working with averages, assumptions and fingers and toes crossed.
