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Today, many consumers understand what goes into a credit score and what they can do to improve theirs. Unfortunately, things aren’t always as simple as they’re portrayed. A hidden aspect of credit scores exists and it relies on a comparison of your credit report to your peers. Many credit scoring models will compare you and your history to other consumers that have similar profiles instead of lumping everyone together.
So how does this affect you? Well, the answer is complicated. It can positively affect you if you’re doing better than your peers, such as if you have good credit for someone that’s gone through bankruptcy. It can also be bad for you if similar consumers are doing better.
The bad news is there isn’t a single formula that can fit all consumers, making the ability to fully understand your credit score quite difficult. Consider this: within each scoring model that exists there is a series of more scoring models, or score cards. These score cards are programmed and made to predict the risk that a population of consumers presents. The FICO Classic scoring model, as an example, used 10 score cards while newer versions have as many as 12.
Score cards are created to cover all sorts of different groups and portray them as a comparison to their peers. One such score card is designed for individuals with thin files, or those that don’t have many credit accounts. Others are for people with many derogatory items but no bankruptcy, some are just for people that have gone through bankruptcy and others are for people with long, great credit histories. Of course, FICO does not provide a complete list of the score cards they use, making understanding these concepts hard.
Each score card puts a different amount of emphasis on different types of information. This is one of the biggest reasons why no one can tell you exactly what impact a change will make in terms of points. For example, a credit inquiry will hit a person with little credit much harder than someone with decades of great credit history.
Major factors that make up your score will still be the same, regardless of the score card you’re in. If you’ve forgotten, here’s the breakdown of a FICO score:
- 35% Payment history
- 30% Amounts owed
- 15% Length of credit history
- 10% New credit
- 10% Type of credit that’s used
Here’s where things can get tricky for you. When a change to your credit history causes a change to a new score card, the change to your credit score is hard to predict. Here’s an example. Suppose you have a good credit score for someone that’s gone through bankruptcy. Once the bankruptcy drops from your file, however, you’re switched to a new score card. Now, comparatively, your credit doesn’t look as good.
It can be almost impossible to predict what changes to your score card will mean for you, just as it’s difficult to know what score card you’re on to begin with. It’s also important for people to understand that score caps are placed on different score cards, meaning that someone that’s gone through bankruptcy and has it on file can never achieve a perfect 850 score.
So what should you do? Well, you can’t change most of this but what you can do is stick with the advice you’ve always been given about improving and maintaining a good credit score. Those things still apply: make payments on time, watch your credit card utilization and practice responsible credit use for a great credit score that will land you the lowest rates. Here are some helpful articles to give you a refresher course on maintaining good credit scores:
- Beginner’s Guide to Establishing Good Credit
- How to Use Credit Cards Wisely, Responsibly, and be Savvy About It