- December 4, 2014
- Posted by: Joel Firestone (G-Net Consulting)
- Category: News
We all know FICO scores can be incredibly confusing to say the least. It seems there are always more questions than answers. How are they calculated? Why do they vary? What makes them change? I could go on and on. But what about those score factors/reasons you see when a lender pulls your credit report? What do those mean and why are they important?
When a lender pulls a potential borrower’s credit, each score will have several different score factors/reasons listed below the score. These are what have determined that particular score. There are usually four and sometimes five. According to Fair Isaac these reasons/factors are not an indication of why a score is low but rather they are an indication of why the score wasn’t better.
The reasons are in order of importance and each once carries a different point valuation. The bureaus will not disclose exactly what point valuation is assigned to each reason as that is “proprietary information”. The point valuation can very per bureau since each bureau has their own proprietary scoring model. For example, the score factor “ Amount owed on revolving account is too high” may have a 20 point valuation with one bureau but 30 with another. Again, Fair Isaac will not disclose the account points.
The number of score factors also varies per bureau and per model. For the FICO scores that lenders use, Equifax has 34 score reasons. Trans Union has 30 and Experian has 32.
These factors/reasons can constantly change and when they do they can have a dramatic effect on a score, sometimes positive and sometimes negative. These factors changing are not something that can be predicted. Since there is no human intervention when it comes to credit scores they can sometimes seemingly change for no reason. But the smallest change on a credit report, even one that may not be obvious can cause these factors to change. It is just how the scoring algorithms are computing the information on a credit report at that single moment in time.
To make things a little more complicated, within each scoring model are different “score cards”. Certain changes on credit reports can cause what’s called a “scorecard hop”. Within every model there are score cards for consumers with bankruptcies, consumers with thin files (very little credit), consumers with collections, consumers with a lot of revolving debt, consumers with multiple inquiries, etc. Fair Isaac won’t disclose exactly how many score cards are associated with each model.
Let’s say a consumer has a few collections on their credit report, two of them fall off due to age and the consumer’s scores drop. Why is that? The consumer may have several new accounts or several revolving accounts with high balances. When the collections fell off it moved them to a new score card and the score factors then changed. The number one score factor might now be that the consumer has too many revolving balances as opposed to a number one score factor of too may derogatory accounts. And since those collections that came off were older the revolving balances now carry a heavier weight, causing the scores to drop.
When you “hop” scorecards, items on your credit report are being evaluated differently and therefore being scored differently. Any change on your report can cause this “hop” to occur. Again, something that really can’t be predicted since it could happen almost daily depending on when and what creditors are reporting. If a lender pulls a consumer’s credit one month and then again in another month and the scores have changed and there is no apparent reason, the first thing to look at are the score factors. Chances are one or more of them have changed and/or the consumer has done a scorecard “hop” due to even one small change on the credit report.
The bottom line is scoring models are complex and difficult to understand. Especially when there is so much information that is not available to the public which helps keep credit scores under a shroud of mystery. The best way to alleviate this confusion is pretty simple. Pay bills on time, keep the balances on your credit cards low, don’t open new accounts and don’t close existing ones.