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So you thought you knew everything you needed to do to improve your credit score. Do you know what score card you’re on?
When it comes to credit scores, you may not realize the importance of your peers. Scoring models compare you with other consumers with similar credit profiles rather than everyone with a credit score.
That’s right. There isn’t just one formula that spits out a score for all consumers. “Within any scoring model are a series of scoring models. Each of those scoring models is called a score card,” says John Ulzheimer, CNBC contributor and president of consumer education for San Francisco-based Credit.com, “and a score card is designed to predict risk on a homogeneous population.”
Previous editions of the FICO Classic scoring model used 10 score cards, and its newest version has 12 for more granular segmentation.
Some of the FICO score cards include those for “thin files,” or reports with few accounts; those for people with bankruptcies; derogatory items but no bankruptcies; and those with a clean, lengthy credit history, according to Ulzheimer. FICO doesn’t disclose a complete list of score cards.
Different score cards emphasize some variables over others, which is why any given change to a credit report doesn’t cost or add a set number of points. “An inquiry is not worth the same number of points for a young consumer as it is for someone who’s had credit for 30 years,” says Ulzheimer, also a former manager at FICO.
The major factors that make up a score still apply in every score card, though. Payment history and revolving debt levels, for example, remain important.
What makes up the FICO score?
Score card hopping
When changes to your credit report prompt a score card move, known in the industry as “score card hopping,” it can cause significant credit score fluctuation — sometimes in a counterintuitive direction.
For instance, if you had a good score for someone with a bankruptcy on file, the score could drop once the bankruptcy comes off the report and you are pushed on to a new score card. At that point, your credit might not look so stellar compared with everyone else in your group.
“The analogy that I always use: It’s like going from the low-level reading group back in elementary school to the medium-level reading group,” says Barry Paperno, consumer operations manager at FICO, the Minneapolis-based company that created the FICO score. “You basically went from being at the top of that low group to the bottom of that higher group.”
It can prove difficult, if not impossible in most circumstances, to recognize score card changes. Consumers aren’t told of shifts within a group or to a new one. What’s more, some triggers can be very subtle, such as credit card accounts reaching a certain age.
Certain actions, however, will cause a score card hop, according to Ulzheimer. Filing for bankruptcy would throw you onto the bankruptcy score card, for example. A collection hitting a clean credit report would land you on a derogatory score card. Conversely, a credit report left spotless once negative information came off would land the consumer on a clean-file score card.
Not all score cards allow perfect credit score
FICO scores run from 300 to 850, but each score card has its own range. Some have lower maximum scores. “An example that would make sense is if you’re in the score card with folks who have had bankruptcies and repos. You’re not going to be able to get an 850,” says Paperno.
People who are new to credit are also excluded from the elusive 850. “Same thing with a young, thin file,” says Paperno. “That person could have a very good score, but they’re not going to be able to get the highest score possible for all the score cards.”
What to do
The good news is, you don’t need a perfect credit score, or a score card that allows it, to qualify for the lowest rates. A FICO score of 760 should get the same results that an 850 would.
To raise your score, maintain good credit habits. Pay bills on time, keep credit card debt very low, let accounts age and apply for credit sparingly. Stagger free credit reports so that you obtain a different one every four months through Annualcreditreport.com, and dispute errors found on your credit report.
Copyright 2009, Bankrate Inc.
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If money and relationships are an uncomfortable mix, then credit and romance are downright strange bedfellows.
“You may say you know everything about a person, but you probably don’t know anything about his credit record,” says Adam Levin, founder of Credit.com.
Now, a frequently aired TV commercial featuring a forlorn young husband forced to live with his in-laws because he was clueless about his bride’s abysmal credit is aiming to spur young lovers to share credit scores.
Of course, the commercial’s sponsor, the Web site freecreditreport.com, is hoping to rev up its credit information sales, too. Romantic partners are a big, untapped market.
It’s important that consumers know that the only Web site where they can obtain a free credit report is AnnualCreditReport.com, a site set up by the federal government. One credit report per year from each of the reporting agencies is available for free to consumers.
“We have found that people often aren’t interested in reviewing their credit report until there is a life event which makes them aware of how important it is,” says Heather McLaughlin, spokeswoman for Experian Americas, the parent of freecreditreport.com. “The commercial about the couple living in the basement addresses one of those life events where knowing each other’s credit prior to getting into a financial obligation together would have been helpful,” she says.
But according to relationship experts, it will take much more than a commercial to get someone to present his partner with a report detailing his sinking debt.
Don’t mention it
In a recent study of 50,000 couples who went through its marriage preparation course, Life Innovations finds “a large percentage of partners don’t talk about money or credit issues in any detail at all,” says Peter Larson, clinical psychologist and vice president of the Minneapolis firm.
They may prefer to remain mum about finances and credit, but these issues are major irritants to the 50,000 couples, adds Larson.
“Seventy-two percent of the 100,000 individual respondents said they wished their partner would be more careful about spending,” says Larson. “And 56 percent say major debts are a problem.”
Not my problem?
As long as you don’t have an account held jointly in both names, you’re not responsible for a romantic partner’s debts. And debts that someone brings into a marriage under her own name are not legally the responsibility of the spouse, notes Alton Abramowitz, vice president of the American Academy of Matrimonial Lawyers.
But even when you’re not legally liable for someone else’s debts, if you’re living together you’ll suffer the irritating calls from creditors coming into your home, says Levin.
Look for clues
Not only is credit an unpopular topic of conversation, it’s only human nature to keep a bad record to yourself. “It’s hard to bring up because of the shame factor,” says Levin.
Often, you don’t have to actually to talk about credit or pull a report to know that your partner is on shaky ground.
Nancy Michaels, founder of the Web site MatchGoneWrong.com, believes there can be plenty of warning signs.
Trust me?
For most couples, simply talking about credit is all that’s needed, not actually pulling each other’s scores or credit records, says Larson. He likens pulling a credit report to a prenuptial agreement. “It implies a lack of trust,” he says. “It means you need an underlying confirmation.”
Still, just as there can be good reasons for a prenup, there can be reasons why couples need to exchange credit information. “Many more couples are choosing to keep their finances separate, but the tradition is still to combine finances,” says Larson. “If I had any reason to believe my partner had a checkered financial past, I may want to sit down with a financial adviser and look at credit scores before I made the decision to combine finances. For some couples, this is an important move to being able to buy a house or finance a car. They need the credit of the individual most worthy of that type of financing.”
My number for yours
Federal law prohibits anyone from seeking credit information about another individual for personal reasons without that person’s consent. So, you don’t have to worry that your significant other is digging up your credit sins behind your back.
But, if it’s true love, credit-scarred individuals may have nothing to fear about barring their score. The Internet dating service, True.com, conducted a survey earlier this year of some 2,200 online respondents. In response to a question about whether they would stay in a relationship where their partner had substantial credit card debt or had filed for bankruptcy, 87 percent of men and 80 percent of women said they would.
