Did you know that there is more to your credit score than how you pay your bills, any derogatory information, and how much you owe?
The credit bureaus have very complicated methods of scoring which they do not fully disclose, but these complicated formulas account for the reasons why, for example, your missing one payment on a credit card bill might affect your score more than your friend’s or neighbor’s score.
In addition to all the well known, and previously disclosed information you think you might know, Bankrate.com recently released an article about Secret score cards the credit bureaus use to compare you to your peers.
Credit bureaus group people into peer groups with similar credit histories. For instance, if you have had a prior bankruptcy, you will be grouped with others with a prior bankruptcy for scoring purposes. If you have a very short credit history, you will be grouped with others with similar credit histories. These groups of people compose what is known as “score cards.” This actually makes a lot of sense when you think about it.
One of the things that is strangest of all about “score card” groupings, is that as some of your credit history becomes aged, and drops off your report (for instance a bankruptcy that is finally old enough to drop off your report), you will automatically move into a new score card group. Ironically, this could work to your disadvantage, rather than your advantage. Yes, the bankruptcy, which was costing you points, is gone, but your new peer group could have a tougher scoring model, so those balances you carry on your credit cards might count more against you than they did before, and your scores might actually drop, rather than improve once that bankruptcy record disappears!
You are never told when you are moved from one “score card” to another, and the differences in your scoring might be so subtle that you don’t even notice. Currently FICO scoring has 12 score cards. They recently added two new score cards to the 10 that were in use prior to the economic meltdown. They will not disclose what all the score card categories are, but have disclosed the following:
- “Thin credit files” – for those with relatively new credit histories and little information
- Aging of credit histories
I would guess new score cards might include foreclosures, short sales, but this is just a guess.
Here’s another interesting bit of information: not all score cards have the same score range. It is commonly believed that the scoring range is from 350 – 850. However, if you are on a bankruptcy score card, there is no way you qualify for an 850 score, nor does anyone else on your score card, so your scoring has a different range.
And of course, there are 3 credit bureaus, each with their own scoring methods, which explains why your 3 credit scores are almost never the same.
Are you thoroughly confused? The credit bureaus will not disclose all their formulas for obvious reasons. Your best defense to keep your scores high is to:
- Pay your bills on time
- Keep your credit balances LOW (as in pay off bills monthly if possible, or under 10% of your credit limit).
- If you have to carry a substantial amount of outstanding debt, spread it around among several credit cards, rather than carrying it all on one card.
- Pay more than the minimum amount due, and if possible, pay on bills more than once in a month, even if that second payment is very minimal.
- Don’t open new sources of credit frequently; use existing credit instead
- Use more than one type of credit (examples are revolving credit (such as credit cards), installment credit (such as car loans, or gym memberships), and of course, mortgages, if you own property.
- Do NOT close credit cards you are not using. Your score is based, among other factors, on the amount of credit you are using, versus the amount of credit you have available. When you close a $10,000 line of credit, you are reducing the amount of credit you have available. Closing just one such line of credit, could drop your score!
Below is a chart showing how the FICO scoring model weighs information on your report:
Click here for more information on your credit reports, how to keep your scores high, and how to correct errors.
I hope this clears up some of the mystery surrounding your credit scores. As someone in the business of reviewing redit reports as part of my job, it certainly answered some questions for me.
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I can’t remember where I got this information from but it is very useful!!!
Sandra Parks, MBA 972.569.7938