The world of credit: Defining current credit scoringJohn HudockCredit scoring
Before 1991, when the Fair Isaac Corporation (FICO) began
developing the credit scores for all three national repositories,
if you didn't have too many bills and paid them on time, you would
have great credit. Today, you can't have too many bills. You must
pay them on time and you must follow FICO's risk factor criteria. A
basic interpretation of credit scoring is comparing the credit
habits of a consumer to a list of risk factors that apply. It
appears that FICO and the three national credit repositories
(Equifax, Experian and TransUnion) may be having problems with the
conclusions of their scoring models.
†I have a credit report that has only one trade line with
the balance over the limit, and a score of 688. It should be "too
low to rate." The consumer has no credit.
†A credit report has five trade lines over a year old, no
derogatories and no public records with a score of 562. It should
be over 650 except there was only one revolving trade line.
†A credit report with seven trade lines reported by all three
repositories with the high and low score 92 points apart. When
repositories have the same trade lines, the scores should be the
same. I have no explanation why there was this difference.
†There was a club member with a 735 middle credit score that
was declined an unsecured credit card because he didn't have
sufficient revolving trade line accounts. The credit card bank only
wanted to offer him a secure credit card which required a deposit,
monthly fees and high interest rates.
We are all at the discretion of FICO. They are a monopoly and
they determine the rules that represent what is good credit and
what is bad credit. Some of the risk factors are common sense;
others, in my opinion, are an attempt to confuse and mislead the
consumers. Credit report resellers list on each credit report four
or five factors that determine what the factors are of that
particular credit report's credit score. We have tabulated these
factors from more than 1,000 credit reports since June 2005. Using
this sample, we've distributed the reasons that the national
repositories offered on each of the credit reports into the
following percentages. During the past 24 months, we have recorded
36 different risk factors, but for the most recent 1,000 credit
reports, we have only seen 12 different risk factors.
Percentage Code Definition
2.4 percent 01 Amount owed on accounts too high
4.8 percent 02 Delinquency on accounts too high
2.4 percent 03 Too few bank revolving accounts
12.9 percent 05 Too many accounts with balances
2.4 percent 06 Consumer finance accounts
7.1 percent 08 Too many recent inquiries in the last 12
months
21.4 percent 10 Proportion of balances to credit limit too
high
10.9 percent 14 Length of time accounts have been established
4.8 percent 20 Time since derogatory public record collection
2.4 percent 24 No recent revolving balances
2.4 percent 30 Time since last account opening too short
4.8 percent 33 Proportion of loan balances to loan amounts too
high
17.6 percent 38 Serious delinquency and public records or
collection filed
4.8 percent 40 Delinquency public record or collection filed
(bankruptcy)
The most frequent four risk factors for this period were:
Percentage Code Definition
12.9 percent 05 Too many accounts with balances
21.4 percent 10 Proportion of balances to credit limit too
high
10.9 percent 14 Length of time accounts have been established
17.6 percent 38 Serious delinquency and public records or
collection filed
This sample of 1,000 credit reports is listing only 12 of the 36
risk reasons that I have recorded in the past two years24 reasons
did not appear on any of these credit reports:
Code Definition
04 Too many revolving accounts
07 Account payment history too new to rate
09 Too many accounts opened in last 12 months
11 Amount owed on revolving accounts too high
12 Length of credit history too short
13 Time since delinquent is too recent
15 Lack of recent bank revolving history is short
16 Lack of recent revolving history is too short
17 No recent non-mortgage balance information
18 Number of accounts with delinquency
19 Too few accounts paid as agreed
21 Amount of past due on account
22 Serious delinquency, derogatory public records or
collection
28 Number of established accounts
31 Too few accounts with recent payment
32 Lack of recent installment loan information
34 Amount owed on delinquent accounts
36 Length of time open accounts have been established
37 Number of consumer finance company accounts established/relative
to length of history
39 Serious delinquency
47 Number of consumer finance company inquiries
97 Lack of recent auto loan information
98 Length of time consumer finance company loans have been
established
99 Lack of recent consumer finance company account information
†Of the 12 risk reasons listed, almost 13 percent were
Code 05 (too many accounts with balances). There was no Code 11
(amount owed on revolving accounts too high), yet revolving account
data refers to credit cards, and more than 70 percent of the high
balances were credit cards.
†21.4 percent were Code 10 (proportion of balances to credit
limit too high). Again, there was no Code 11 (amount owed on
revolving accounts too high), yet again, revolving account data
refers to credit cards and more than 70 percent of the high
balances were credit cards.
†Almost 11 percent listed were Code 14 (length of time
accounts have been established), but there was no Code 07 (account
payment history too new to rate), no Code 09 (too many accounts
opened in last 12 months) and no Code 36 (length of time open
accounts have been established).
†Nearly 18 percent were Code 38 (serious delinquency and
public records or collection filed), but there was no Code 22
(serious delinquency, derogatory public records or collection).
What does all this mean? It is my opinion that the information
we are given on credit scoring is not consistent. There is no true
interpretation offered by FICO or any of the national credit
repositories. There are slight variations in the risk codes in what
we are seeing. For example, open accounts or miscellaneous accounts
and/or revolving accounts are all different types of trade lines.
It is evident, in my opinion, that the three national credit
repositories have the same agenda. It appears that there is a
direct parallel to the risk factors that each repository is
reporting. Although the order is not the same for each credit
report, they are avoiding specific mixed risk factors in their
listings.
John Hudock is president of The International Credit Club
and The World of Credit, two companies specializing in credit
report problems and scores. He also has online continuing education
courses on credit. John can be reached at (570) 829-5696 or e-mail
[email protected] and invites e-mails
on any credit topic. He will answer each one and publish any that
will benefit his readers. Please be specific with your
questions.
