No Easy Answers to Credit Score Questions

I know a lot of people get frustrated when they ask a seemingly simple question about their credit score and receive an answer that sounds evasive. For example, how many points does a credit inquiry cost? How many credit accounts should I have on my credit report to get the most points for that area? What is the best credit card utilization percentage?

At first glance these seem like easy questions, yet the answer of “it depends” is oftentimes appropriate. A big reason for the answer “it depends” is something called scorecard segmentation.

Many people assume that the FICO score or Vantage Score is a single scorecard on which everyone’s credit score is calculated. This is a misunderstanding. In reality, these credit scoring systems actually consist of multiple scorecards and your score is generated based on just one of them.

Which scorecard is selected and applied against your credit profile depends on a series of criteria or questions about your credit report. Typically, the first thing checked is whether your report shows any delinquencies, collection items or derogatory public records (a bankruptcy, for example). If it does, your credit score will be generated on scorecards developed specifically for credit profiles with this type of information present. This technique actually helps increase the likelihood of getting a higher score for consumers with negative information on file. All these profiles would likely score even lower if there was only one single scorecard—as they would look so much more risky compared to consumers with no negative information on file.

If there are no instances of not paying as agreed on your credit report, the scorecard to which your credit information will be applied is based on segmentation criteria that takes into account such factors as how recently you opened new credit, how many credit obligations you have, and recent credit activity. The exact segmentation logic is based on a lot of statistical analysis of credit bureau data, and is typically not disclosed to consumer or lenders.

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Why are you potentially being scored on a different scorecard than your spouse, parent, or neighbor? Score card developers have found they can create a substantially more accurate and predictive scoring system when they group like segments of consumers together rather than grouping everyone into one single scorecard for the entire U.S. population.

The general credit behaviors that are predictive of risk (paying bills on time, keeping balances low and only seeking credit when needed) basically hold true across all the scorecards. However, the exact weighting and point assignment of scorecard attributes for a segment of consumers who are active credit users versus, say, a segment of consumers with previous instances of not paying as agreed, can differ based on what the data analysis suggests.

For example, going from 2 to 3 inquiries may result in a loss of 7 points in the active credit user scorecard and 11 points in a scorecard for consumers with previous instances of not paying as agreed. So, you see, the it depends answer is often the best response that can be provided to general questions about how a specific consumer activities or behaviors can affect a score.

To hear more about credit scores and credit scorecards, download Tom’s recent radio interview with Gerri Detweiler on Credit Talk Radio. Credit Talk Radio is streamed live from 2-3 PM Eastern Time (11-12 Pacific Time) every Friday.