Good Credit Score: How Much Is a Credit Score Worth?

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What are Credit Scores?

While your credit report is important, the numbers that are created from your

credit report – your credit scores – may be even more important. Credit scores

are mysterious and often misunderstood. But they’re so important that it’s worth

taking the time to understand them.

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How Much Is a Good Credit Score Worth?

Most people by now have heard of “FICO” scores. They’re the scores created by

the company formerly known as the Fair Isaac Company, and now just by the

acronym FICO. FICO scores have been around for many years and they’re the

most widely used general type of score. But you don’t have a single FICO score

because different FICObased scores can be created depending on who is using

them, and for what purpose.

There’s one goal in creating a score, and that’s to predict behavior. In most

cases, lenders or insurance companies are using scores to predict the risk in

lending money (or extending insurance) to a consumer. But they can also use

scores to predict how profitable a current or prospective customer might be, to

predict what will happen if you increase a customer’s credit line or change the

terms of an account etc.

Scores are created by analyzing the factors that different groups of

consumers have in common. The goal is to find which factors those who pay

their bills on time have in common, as well as the factors those who don’t pay on

time, share. Often FICO scores are based on information in the credit report, but

they can also include information in an application or in customers’ account

histories.

On the plus side, there is simply no way credit would be as easily available

as it is today if credit reports and scores didn’t exist. If you need to borrow for

emergencies – or for the good debt – credit scoring makes it possible to get a loan

very quickly. Credit scoring is objective, and for the most part, unbiased in the

sense that they don’t look at race, gender, neighborhood demographics, or other similar factors. As Gerri Detweiler has noted, there are some legitimate concerns

that it is skewed against recent immigrants or minorities who may not have

established a traditional credit file. Here are some basics to know about credit

scoring:

It all depends. Most of us think of credit scores as a “scorecard” – in other

words, like a golf game where you tally up your strokes and see what your

score is. But it’s not so simple. In fact, there is tremendous data-crunching

that goes into creating these systems. The most important thing to

understand is that every factor is interdependent on the other data that are

available. It’s like a golf game where each stroke was based not only on the

fact that you swing at the ball but also on wind factors, lighting, and gallery

noise.

We tend to think of credit scores in direct terms … if I do X then my score

will improve (or go up by) x number of points. With a credit score, though,

the effect of action like closing an account or paying off an account will

depend on the other items in the file. Here’s an example. You may have

heard that each inquiry on your file drops your score by 3 or 5 points or

some other number. That may happen. But it might not. How much your

score will drop – if at all – based on a new credit inquiry, depends on the

type of inquiry as well as all the other factors in your individual credit

report.

Check logic at the door. While we often try to understand credit scores in

logical terms such as “too many credit inquiries makes it look as though

you’re shopping for too much credit,” the truth is it all comes down to

numbers. Information in the score is evaluated to predict risk. If it helps do

that, it will be included in the score. If not, it won’t.

Here’s an example of this. FICO determined a few years ago that the fact

that a person has been through credit counseling is not helpful in predicting

future risk. So they no longer include it when calculating a score.

I am not saying that credit scores are illogical, though it can seem that way.

It just means that arguing with the explanations of why something is

included (or not) is not that helpful.

If you are turned down for credit or insurance (or charged more) based on a

score, by law you are supposed to be given the top four reasons that

contributed to your score. But even those can be confusing. If the reason is

“too many retail accounts,” for example, that begs the question “how many are too many?” There’s no specific number that FICO can give you,

however, since it all depends on the information in your file.

You don’t have one credit score. In fact, you have many different scores,

depending on who compiled it, and when. If you’ve ever applied for a

mortgage, for example, the lender likely ordered your credit report and

score from a specialized credit bureau that could merge information from

all three major credit bureaus.

In doing so, they probably received a FICObased score from one of

them. These scores were very likely all different – in some cases, quite a bit

different. That’s because the formulas are not exactly the same, nor is the

information that goes into them. After all, a score can only be based on the

information available. And since all three credit reporting agencies will

likely have somewhat different information, as I’ll explain in the next post, your score will be different with all three.

In the mortgage example, the lender probably took a look at the “middle”

a score of the three to help determine which program and/or rate you

qualified for. In other cases, lenders may prefer to use a score from one

particular credit reporting agency or they may use different agencies for

customers in different parts of the country.

Scores are created when requested. You may think of your credit reports

and scores as sitting in a file at the credit reporting agencies, sort of like a

Word document that’s updated periodically. But in fact, credit reports and

scores are really only created when they are requested. When a lender (or

you) makes a request for your credit information, the computers go to work

gathering information available about you at that point in time, so that your

report and/or scores can be created. That means that…

Things change. New information is constantly being reported to the credit

reporting agencies and so the next time your credit information is

requested, your credit reports may change. The information reported about

you may change a lot or a little. And since your credit scores are based on

the information in your credit reports, your scores can change too. If you

file for bankruptcy, or if one of your accounts is turned over to a collection

agency, your score can drop a lot. But it can also drop after what you think

are positive changes, such as a bankruptcy or judgment falling off the

report. This makes predicting what will happen if you make certain

changes to your credit tough. For example, John had a bankruptcy, and two tax liens dropped off his credit

report after seven years. He thought his score would shoot up but it went

down instead. The reason was likely that before, he was in a “had a

bankruptcy” group. Now he was just a consumer without much in the way

of credit references.

More may be better. If you’ve been through credit problems, you may think

that avoiding credit is a good way to stay out of trouble and build better

credit. But credit scoring systems must rely on the data in your report to

predict how you’ll handle credit in the future. If there’s nothing recent to

analyze, your score will suffer. Also, if you have nothing at all it is even

harder to have a good credit score…

Self-Sufficient Sam- good credit score

Sam was a rugged individual. He didn’t like banks, credit card companies,

political parties, trade unions, television networks, charitable crusaders, or

religious zealots. Sam especially didn’t like power companies.

Sam just wanted to be left alone. He lived in a small cabin in the remote

wilderness of eastern Idaho near the Grand Tetons. Sam had long hair, a long

beard, and a short fuse. He cut wood all summer so he could keep warm all

winter and he used a propane lamp at night so he wouldn’t have to pay the

infernal local power company. At harvest time, Sam preserved blueberries,

apples, and other fruits so he had food through the winter.

Sam made barely sustainable living stuffing envelopes in his spare time,

which time was limited due to all of the wood chopping and preserving of food.

Sam was paid in cash, which was fine with him. While he didn’t like the Federal

Reserve Board (that issued the cash notes), he liked banks even less. He didn’t

have a bank account, nor did Sam want one. He was a cash-and-carry kind of

a loner.

All of Sam’s necessities were paid for with cash, and he was proud of the

fact he did not have regular monthly bills. Sam felt his credit was excellent and

superior to all others.

But Sam was worried about the health of his dear mother, who lived alone in

Arkansas. He had often thought about calling her but didn’t have a phone at the

cabin. The owner of the small gas station way down the hill wouldn’t let Sam

use the only pay phone in town due to some argument they had years ago about

the evils of energy companies. So, Sam didn’t get around to calling his beloved mother very often.

Then one day a U.S. Postal Service truck arrived. It was the first time one

had ever come onto the property in five years. Sam didn’t get any telephone or

power or credit card bills. He didn’t subscribe to any publications. And Sam

certainly didn’t get any junk mail. Five years ago, when the last postman had

showed up to deliver a Publisher’s Clearinghouse award notice, Sam had run him

off the property with what appeared to be a bazooka. Sam relished the fact that

heavy firepower was still the only truly effective cure for junk mail.

The postman approached cautiously, with his hands up. He waved a white

flag in one hand and held a white envelope up in the other hand. He stated that

he had a letter for Sam from a family member in Arkansas. Sam told the

postman to drop the letter where he stood and to slowly retreat. The postman did

so and hurriedly drove off. Sam set down his bazooka and retrieved the letter.

It was from his brother, Elbert, notifying him that their mother had passed

The letter urged him to come to the funeral. Enclosed was an airplane ticket.

Sam was ambivalent. He didn’t want to see the rest of his soft grid

family but he did want to honor his mother. So he packed up the old Studebaker

pick-up and headed out early to the Idaho Falls airport for the flight.

Forty miles down the road, the Studebaker died. Sam got the old beast to a

service station where the owner indicated that he would need a deposit to locate

some very hard-to-find parts. He asked Sam for a credit card. Sam didn’t have

one, nor, as he belligerently noted, did he want one. The owner shrugged his

shoulders. He would take cash. Sam forked over enough cash to satisfy the

owner and saved enough for the cab fare to Idaho Falls.

At the airport check-in counter, Sam was asked for his identification. He

showed his driver’s license, which hadn’t been renewed in three years. The

counter agent asked to see another form of ID. Sam didn’t have one – no credit

cards, no store cards, nothing, and was defiantly proud that he didn’t need such

things – due to his excellent credit.

This situation rang off silent alarm bells with the counter agent. Angry,

bearded men without current identification were not the airline industry’s

favorite customers. Sam was politely asked to wait while the airline did some

checking. Sam growled that he’d better not be late for his mother’s funeral.

In the back office, the agent searched the national security database for Sam.

He had a social security number with no real payments made to it. Otherwise, he

was invisible in the system, a unique and troubling prospect.

The station manager wondered how Sam had purchased the airline ticket. They searched and found Elbert’s name. Searching Elbert’s background they

learned that he was with the Arkansas National Guard. They called for

confirmation. Elbert was eventually reached and vouched that his challenging

brother was, indeed, headed to his mother’s funeral.

Sam was allowed to board the flight, never knowing that his excellent credit

had almost cost him a seat.

Arriving in Little Rock, Arkansas, Sam realized that he didn’t have enough

cash for a cab ride to Botkinburg, where the funeral was being held. He thought

it would be cheaper to rent a car. At the first counter, he was asked for a credit

card. Once again, Sam defiantly noted that he didn’t have one, or want one. He

was politely informed that without one, he couldn’t rent a car.

Sam stormed off to the next counter, and the next counter, and the next

counter. He angrily fumed why someone with excellent credit could not rent a

car in America without a credit card! A nice man in his mid-30’s approached

Sam. He shared Sam’s frustrations and offered to help. He was headed up

Highway 65 and could give Sam a lift so he could attend his mother’s funeral.

Arriving in time for the service, Sam thanked his driver. The man said no thanks

were necessary. He was heading north on business anyway, noting that if anyone

should be thanked it was his employer, the local power company.

As Sam’s case illustrates, it is very difficult in today’s society to maintain

excellent credit, much less move about, without a credit history. You can choose

to be a recluse in the mountains, but that is an option for very few. The rest of us

have to be concerned about our credit profiles and our credit scores.

Currently, you are better off having a number of credit successes. Generally

speaking, four or five different types of accounts paid on time over time will

make for a stronger score than if you only have one. Include a major credit card

in that mix, and perhaps a car loan, mortgage, retail card, and another type of

loan.

This doesn’t mean you should open a bunch of accounts at once. Doing so

can also have a negative effect on your credit in the short term. But if your credit

history is skimpy and your score reflects that, you may want to add some

positive references.

What’s In A Good Credit Score? – raise credit score instantly

With a FICO-based score, the higher the number, the better your score. Scores

above 720 are usually considered excellent (850 usually tops), and those in the 680

– 720 range is still quite good, while those in the 650 – 680 range aren’t terrible, but will carry higher rates. Once you start getting below 650 you may

have some trouble getting credit or be charged high rates. These are general rules

of thumb, though, since every lender has different criteria.

According to FICO, five categories of information (along with their relative

weightings) go into your credit score:

Payment history 35%

Amounts you owe 30%

Length of credit history 15%

New credit 10%

Type of credit in use 10%

It’s obvious that your payment history is the most important factor in your

score. But there are some finer points here that you may not be aware of:

Most lenders don’t report you as late to the credit bureaus until you fall

behind by 30 days. (But they will often charge you a hefty late fee if you are just

one hour late with your payment.) This isn’t a hard-and-fast rule so always be

sure to double-check if you’re having trouble meeting the due date. Sometimes

lenders will close your account or up your rate if you are chronically late, even

by just a few days.

Recent late payments, even for small amounts, hurt your credit score

significantly.

Late payments will generally remain for seven years, even if you catch up on

the account or pay off the bill. See the next post for details.

All other things being equal, how far you fell behind is more important than

the amount. For example, missing a $20 minimum payment for 4 months in a

row will probably impact your score more than missing a $300 car payment on

time.

Account balances, however, play more of a role in a score than most people

realize. It’s not uncommon to hear, “I have excellent credit” from a consumer

who has paid on time but has a ton of debt – and whose score is suffering as a

result. There are several factors that will come into play in this evaluation:

How close you are to your limits on your revolving accounts such as credit

cards and lines of credit. The closer you are to your limits, the worse it can be

for the score.

How much do you owe on your total revolving lines of credit? Total up all your

available revolving lines of credit and then total your outstanding balances.

Ideally, you want to use less than 10% of your available credit. If you use more of your available credit on your revolving accounts, your score can start to

suffer.

How much do you owe compared to other consumers across the country?

Also, you don’t have to carry debt to build credit. You do need credit cards

as credit references, but you don’t have to carry balances on them. You can use

the cards you have for things you’d normally buy, pay them off in full, and avoid

bad debt.

The obvious advice is to try to keep your balances down, especially on your

revolving debt like credit cards (which is often bad debt anyway) down. But

there’s also another piece of advice that goes along with this: Be very cautious

about closing old accounts.

Closing Accounts – raise credit score instantly

If you’ve had credit for a while, you’ll almost always find old accounts you

don’t use anymore listed as still open on your credit report. Unless you actually

tell the lender you want to close your credit cards, they probably won’t. (They’d

love it if you’d use them again.) But if you do ask, they have to list them as

closed at your request.

But is this best for your credit? Maybe not. FICO has said that closing old

accounts can never help your credit score and can only hurt it. If you talk with a

savvy mortgage broker, however, you’ll hear how they had a client who closed

some inactive accounts and boosted her credit score. But it can hurt your credit

score, for three reasons:

You’ll probably close the older accounts. While closing an account does not

remove it from your credit history, once closed, that old account may drop off

your credit history and this will shorten the average length of your credit history.

With credit scores, a longer report is better.

I’ve already explained that credit scores look at your available credit to

outstanding debt ratio. Close some accounts and you may appear closer to your

total available credit limits. FICO scores don’t care about how much total credit

you have available, though individual lenders may take that into account.

Closing accounts may leave you with too few credit references.

Here’s an email Gerri Detweiler, our contributing editor, received from a

mortgage broker about his client’s experiences with closing accounts:

I had an interesting day. First thing this morning I ran a credit report for one

of my customers and got scores of 648, 677, and 684. She couldn’t

understand why her credit scores were so low since she ran her credit just two months ago and got all scores in the 700 – 710 range. Since I couldn’t

see any reason at all why her score had gone down, no late payments, and not

a lot of other credit available, I asked her if she had closed any credit cards

lately. It turned out that she had just closed what was most likely her oldest

card. I don’t see any other reason her credit took such a drop so this must

have been the cause.

Gerri told this story to a colleague, who had a very different story. A couple of

months ago she ran her report and got scores around 570. She had 17 open credit

cards and a lot of available credit but not one late payment. She closed 7 credit

cards and was smart (or lucky) enough to close the new ones and keep the old

ones. A month later her credit score went up to 640.

My guess is that in both cases the change in credit was so large because they

are both very young and don’t have a lot of credit history. I doubt that there

would be so much of a change in either case if they had 20 – 30 years of credit

but who knows?

As Gerri suggests, if you really want to close out those inactive accounts, do

it one by one – perhaps no more than once every six months. FICO recommends

you start by closing retail cards rather than major credit cards, and close more

recent ones rather than older ones. Leave several open for emergencies as well as

for better credit history.

Inquiries – raise credit score instantly

Whenever a company requests your credit report, an inquiry is created. There are

two main types of inquiries: hard inquiries (which companies that request your

credit report will see) and soft inquiries (which no one but you sees). Hard

inquiries will affect your credit score while soft inquiries won’t.

Soft inquiries include:

Promotional inquiries: When your file is used for a prescreened (pre-

approved) credit offer.

Account review: When your lenders review your file.
Consumer-initiated: When you order your own report.
Inquiries from employers and insurance companies may be hard inquiries,

but don’t generally count in calculating your credit score.

Mortgage, student loan, and auto-related inquiries

Shopping on the Internet for a mortgage or car loan can create lots of inquiries, something you need to be careful of. Also, when you go car shopping, it’s not

uncommon for the dealer to access your credit file. Sometimes they even do that

without your permission or knowledge so watch out.

FICO has created a program to address this. All mortgage, auto, or student

loan-related inquiries within the most recent 30-day period (or 45-day period,

depending on which version of the FICO scoring system is being used) are

ignored, while mortgage, student loan, or auto-related inquiries within a 14-day

period (before the most recent 30-day period) is treated as a single inquiry.

However, there is no special protection when it comes to shopping for credit

cards or other types of loans.

Watch out: If a mortgage or auto-related inquiries can’t be identified as such,

this buffer won’t help. Also, if the lender is using older credit scoring software

that doesn’t incorporate these changes, it won’t help.

Getting Your Highest Credit Score

While you are entitled to a free copy of your credit report from the major credit

reporting agencies once a year, you are only entitled to a free credit score if you

are turned down for credit or insurance (or are charged more for it) due to

information in your credit reports. The good news is that if you do receive this

disclosure you will get the actual credit score that was used by the lender or

insurer. The bad news? You get your score after the fact and the best time to

see it is before you apply for credit.

That’s why it can also be helpful to find out where you stand once a year. In

the next section, we’ll explain how to conduct your own annual credit check-up.

Credit-Based Insurance Scores

Some 95% of auto insurers, and 90% of homeowner insurance companies, use

credit-based insurance scores to help decide if you’ll get insurance, as well as the

rate you’ll pay. There is a lot of controversy around this issue.

Some elderly drivers, for example, who had never filed claims, have been dropped by their

auto insurers due to their low credit-based insurance scores. It’s not that they had

bad credit, they just never used credit much at all, so their scores were low.

No Credit is Bad Credit – fico score

Agnes and her husband Bill always worked hard and saved their money. When

they retired, they decided to travel, purchased a fifth wheel, and started seeing the country. For the first time, they obtained a credit card just for emergencies on the

road.

Their daughter watched their home and checked their mail while they were

gone. They called her faithfully every Sunday from the road. One week their

daughter reported they had received a letter from their insurance company

indicating that while the insurance for their truck was being renewed, they did

not qualify for the company’s “excellent credit discount.” Their daughter had

already called the family’s insurance agent and learned that even though their

driving record was spotless, the insurance company was now relying on credit

scores to rate drivers. Even though Agnes and Bill had never paid a bill late in

their lives, their lack of recent credit references meant they did not get the best

rate. The agent was going to find another policy but warned their daughter that

credit scores were commonly used these days for insurance purposes.

In addition, there’s always the issue of accuracy. If your credit report is

inaccurate or you’re a victim of fraud, that information can influence your

scores. You may be paying more for insurance or other benefits and not know

why.

Usually, a credit score and credit-based insurance score will fall into similar

categories. In other words, if you have a good credit score, you should have a

good credit-based insurance score – but not always.

If you are denied insurance, or your rate is raised, in part due to a credit-

based insurance score you must be told that and given information on how to

contact the credit bureau that supplied your file to get a free copy. Insist on that –

it’s your right.

If you don’t like the idea of your bill-paying history being used to determine

your insurance rates, the only thing you can do is complain to your elected

officials at both the state and federal levels. Then take my advice and start

building better credit. Better credit usually means a better credit-based insurance

score.

Warning: Some consumers have been taken by the “false credit score scam.”

A car dealership checks their credit. They are then told that their score is lower

than it really is and give more expensive financing. Another alternative is for

the dealership to use its own custom version of a FICObased score, which turns

out to be lower than the score with the bureaus. Your best self-defense? Always

check your own credit scores before you shop for a loan, and apply for pre-

approved financing with a lender before you start looking for a car. Be prepared

for the fact that some unethical individuals misuse credit information and you have to watch out for yourself.

The Truth About FICO Score

Following is a transcript of an interview from Talk Credit Radio with Gerri

Detweiler. In it, Tom Quinn, a credit scoring expert dispels common myths about

FICO scores. Tom Quinn worked at FICO for 15 years and his initial focus there

was on creating and delivering credit scores and credit-related educational

initiatives at a time when the public was just starting to learn about credit

scores. He later developed, launched, and grew MyFICO.com, the company’s

consumer-driven initiative to provide consumers with direct access to their FICO

scores. He’s a nationally recognized authority on the inner workings of credit

scoring models.

Gerri: Tom, I want to play a little game here. I want to talk about “Fact or Fiction”

when it comes to credit scores. We see so much information out there, and a lot

of times it’s wrong, it may be incomplete, or it may just misleading. So I’m

going to throw some statements at you that I’ve seen and then I want you to tell

me whether they’re fact or fiction. Are you game for that?

Tom: Sure, sounds like fun.

Gerri: Ok. So the first one is – fact or fiction? Every time a person applies for

credit it costs them 5 points off their credit scores. True or false?

Tom: That is false.

Gerri: So what’s the truth about it?

Tom: Basically, whenever a lender touches your credit report or if you’re

seeking credit, then they usually will pull your credit report to understand

your credit risk, and an inquiry is posted. So there are all these different

kinds of inquiries out there.

For example, if you come home today and have a pre-approved credit

offer in the mailbox, a lender probably pulled your credit report to do

that and then there’s a certain code associated with it that can be

identified as a promotional inquiry. Or, if you get a message on your

credit card statement saying, “because of your great credit behavior

we’re raising your credit line,” they probably pulled a credit report to do that as well, and then an inquiry will be posted. If you go and try to pull

your own credit report at myFICO.com for example, an inquiry is posted.

So the good news is, that all those inquiries are tagged or identified

separately so that the model can really isolate those credit inquiries that

are related to you seeking credit than when you’ve actually applied for

credit. When you apply for credit, what research shows is that people

who applied for credit are riskier than people who haven’t.

But the good news is, inquiries don’t cost a whole lot of points in the big

scheme of things. How you pay your bills and how you manage your debt

is really what’s counted in the score and so inquiries will add a little bit

of predictive value on top and may result in a couple of points lost here or

there. But the way the inquiry logic works, a couple of things: Your

inquiry is shown on your credit report for the last two years but that

model’s only looking at inquiries in the last 11 months. So those a little

older than 12 months, for example, aren’t counted.

And there’s a capping logic. Basically, the way the model works is once

you’ve reached a maximum number of inquiries for that particular score

card, whether you have one more on top of that or 15 more on top of that,

they don’t count extra against the score. So, in the big scheme of things

Gerri, inquiries get a lot of attention focused by consumers but they

really don’t cost that million points. Really focusing on paying bills on

time as well as managing your debt levels is really what’s going to drive

the score.

Gerri: Okay now, let me ask a related follow-up question to that, Tom, does it

matter whether you’re approved or not for that credit card? Just the fact that if

they declined you, does that hurt your credit score?

Tom: Well, the lender does not report to the credit reporting agency whether

you were approved or not. The fact that a lender made a decision to deny

your applications for credit, that denial activity or action is not reported so it

would have no impact on someone’s score.

Gerri: Okay. So it doesn’t matter if you were denied or approved. It’s just the

the inquiry that could affect your credit score depending on the type of inquiry that it

is.Tom: That’s correct.

Gerri: Let’s get another question. Fact or fiction? A bankruptcy will haunt my

credit scores forever. I hear this a lot, Tom, from people who are thinking about

bankruptcy and they’re terrified of what it will do to their credit. Does it stay on

there forever?

Tom: The answer is false. The Fair Credit Reporting Act has rules and

guidelines that the lenders and credit reporting agencies must follow

regarding how long information stays on a credit report, especially

information related to past due behavior, delinquencies, charge-offs, and

bankruptcies. And most information is required to be purged off of your

credit report, negative information, after 7 years. The bureaus are very

diligent about policing that.

For bankruptcies, some are off after 7 years and some are off after 10

years, so there’s a little bit of variation for bankruptcy. The reason

bankruptcies cost so much on the credit score and result in a big loss of

points is because they’re extremely predictive. If you’re building a model

and you see profiles that have a bankruptcy on their credit report the

likeliness of them having future delinquencies is very high. So that’s why

bankruptcies do result in a significant point loss. But they don’t haunt

you forever – that’s the good news.

The score is forgiving and as that bankruptcy ages off of your profile, it

has less impact on the score as long as your new information shows

you’re paying as agreed. And then, after 10 years, that bankruptcy will

be deleted from your credit report and the score would never know it

existed. Let’s say, you’ve got bankruptcy 11 years ago, it would never

know it existed. It does fall off the credit report. It no longer has an impact

on the score.

Gerri: True or false? A short sale has less of an impact on my credit score than a

foreclosure.

Tom: Yeah Gerri, I’m hearing this question a lot or seeing a lot of

misinformation out there about this and I don’t know where it started. But the

perception that a short sale has less impact on the score than a foreclosure is false. Actually, FICO recently published some information on some studies

they’ve done to let the consumer population have a better understanding of

the potential impact a short sale or a foreclosure has on a credit score.

And basically what their research has shown is that the number of points lost

for having a short sale or a foreclosure is about the same.

Gerri: Well, so the takeaway that I hear is that the short sale versus the

foreclosure, your credit score is not the main consideration there. There are other

financial decisions you need to make, and it’s certainly serious in either case, but

it’s not one versus the other in terms of preserving your credit score.

Tom: Absolutely. Anybody who’s making a decision about a short sale or a

foreclosure needs to balance a lot of factors in that decision process. The

credit score is one, but not the only one. But in terms of the credit score,

the impact of foreclosure versus a short sale on the score is going to be

about the same so that information should at least help them understand the

impact on the score-related aspect of that decision process.

Gerri: Here’s one I’ve heard a lot over the years. True or false? Going to a credit

counseling agency will hurt my credit scores.

Tom: In general the exact answer is false, it does not hurt your credit

score but it could impact your score depending on what action has taken

place. So let me give you a little more background on that answer or it

may seem a little bit ambiguous.

Whenever you enter into a relationship with a credit counseling agency,

the lender, if you’re interacting with the lender, may report on your credit

obligation when they report to the bureau. There’s a code they can submit

that says that you are in credit counseling services with that particular

trade line or credit obligation.

The fact that you’re engaged with consumer credit counseling services

agencies in and of that itself will not impact the score. So the score does

not look for that particular code and say, you know, this is negative, I

should ding the score because he or she is with a counseling agency.

However, if in your interactions with that consumer credit counseling

agency and their interaction with your lenders they are able to negotiate, for example, settlement of the debt, which can be different.

Let’s say you, with a credit card, owe $10,000 but through your

interactions with that counseling agency, you’re able to get that card

issuer to agree to accept a $5,000 payment and close the account out

versus the $10,000 you owe. Then the lender will normally report that the

account had some type of partial payment settlement agreement or was

not paid in full because you did not pay as originally agreed on the full

$10,000 owed. And that activity or that payment, that settlement

indicator, would be considered negative by the score.

So that’s why I considered it a little bit of a trick question because the

the fact that you go to credit counseling services will not hurt your score in

of itself but the activity that comes out of that engagement, depending on

what they are, could potentially impact your score, depending on, you

know the agreements that you reach with your debtors.

Gerri: Well, the other thing that I think is important to keep in mind Tom is that

with many people going to credit counseling they have a lot of credit card debt

and they’re probably maxed out on some of their cards and that alone is hurting

their credit scores. So paying down the debt and paying off that credit card debt

could have a significant, positive effect. Correct? In terms of bringing down

those balances on the credit cards?

Tom: Yeah it’s going to be case-specific, and if you have a profile of a

a consumer who has a lot of revolving debt that’s probably already

affecting their score and causing it to be lower. So let’s say they reach an

agreement with the credit card issuers to pay all that off, once they pay

that off they will get incremental points obviously, for those

characteristics in the model that is focused on the balances of the credit

cards.

But if they had no delinquency on their report and now all of a sudden

there are these codes that say that they’ve accepted partial payment in

agreements with the lender, they may be losing extra points for that

negative information hitting the file for the first time. So it’s hard to give

a generalized answer on that since it’s going to be case-specific in terms

of the makeup on that consumer’s credit report.

Gerri: Okay, and I’ll add from my viewpoint. With the credit counseling

program if you’re entering into a debt management program, typically it’s a full

payment. You pay off the full balance over time and some interest depending on

what’s negotiated. Settlements usually come when you end up going into debt

settlement or debt negotiation rather than just a standard debt management plan

or DMP with a credit counseling agency. So there’s a distinction there.

My advice to consumers: If the main goal is to get out of debt, get that monkey

off your back and then focus on your credit scores. Don’t let that stop you from

getting the help that you need if you need help.

Tom: I agree 100%.

Gerri: Tom, when we were talking about bankruptcy, you raised a little issue

there that I don’t think most people don’t know about. I know this is getting a

little technical but I’d like you to give an overview of it because I think it’s

important for people to understand, and that’s the issue of different scorecards.

What if I were to go and apply for credit and my neighbors were to go and apply

for credit, and then someone down the street’s applying for credit at the same

exact bank, or we all go to Target and we all open a Target card, it could impact

us differently because of the way the FICO system assigns people to different

scorecards. Could you just give us a general overview of what that means?

Tom: Sure. We used to actually joke in FICO that the FICO score is more

than a score, it’s an equation and it’s true. So there’s probably this

perception out there that there’s one mammoth FICO scorecard that

everybody gets scored on. But the way modeling works it actually tries to

segment the population into meaningful groups or like groups of consumers

based on credit information so that it can optimize the credit

predictiveness for likeness-oriented groups.

To give you an example, if you have a typical family where you have the

grandparents and then you have let’s say a couple in their 30s who have

children, and then you have someone just starting out, just getting out of

college. Well, their credit needs and their behaviors are probably going

to be very different so the older couple. The grandparents have probably

have less need for credit or are less active on their credit because they’re in

that part of their life where the house is paid off and they’re not funding

education, funding all these needs of the children so they have less credit, in general.

And then you can have a younger couple with children where there are a

a lot of needs, purchases and activities and etc. buying a house, car, cell

phones, the whole nine yards so they’re usually more credit active and

using credit more fully.

And then on the other end of the spectrum, we have someone just coming

out of college where they don’t have a lot of established credit yet but

they need the credit so they’re out there seeking credit. So the way they

model works is there’s actually a system of scorecards and your profile

when you’re requesting credit will get sent to one of those scorecards

based on whether the model sees any previous experience or delinquency.

So you’ll be scored on what they call “scorecards” that will help

specifically for consumer populations that have experienced, and missed

payment behavior in the past. And if you have no missed payments on

your credit report, you may get sent to one of the other several

scorecards based on how long you’ve had credit, missing credit, seeking

activity (or debt) for credit, etc. What this allows is the model to do is to

be more predictive and score you more fairly where you belong because

it’s scoring you in essence along with your cohorts against the entire

population, and then that allows for a more robust model and a more

the predictive model which lenders value as they’re making credit decisions.

FAQ

What is a credit score?
A credit score is a 3-digit number of the credit history of an individual and it helps in deciding the credit and financial status of an individual in loan types and banks.

What is a good credit score?
To get a credit card, you must have a good credit score. A score of 750 or more is considered good by the bank.

What should be the minimum credit score?
In this at least your score should be more than 750. If you score less than this, you can get into trouble. A score above 800 is considered good. By the way, people who have a score of 750 or more, can get a loan quickly and easily.

What is the difference between CIBIL Score and Credit Score?

CIBIL is an institution that keeps an account of the finances of any person, which we call a credit score, it helps us in loans, homes, credit cards, and other financial transactions! A credit score is a three-digit number that ranges from 300 (300) to 900 (900).

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