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.