Keeping Score: Credit Score Reporting

​Credit scores are a mystery to many of us. Why does your credit score vary even when your spending behavior is consistent and you’re paying your bills on time every month? And did you know that the score you are seeing is probably not the same number a potential lender or creditor is seeing? Let’s look at why credit scores vary, and the things you can do to have a positive effect.

​Individual credit scores are calculated through a variety of scoring models, including FICO, Vantage, Community Empower (CE) and others. Each model also has variations. FICO, for example, has more than 50 different versions of your score that it sends to lenders, depending on what factors the requesting company considers important. That’s why the generic score that you see may not match what a potential lender or creditor will see.

There are several key factors used to determine your credit score. The commonly accepted factors and their respective weights include:

• Payment history (35%) – Paying on time vs 30/60/90-day late payments. On-time payments are good; late payments are bad.
• Debt-to-credit ratio (30%) – How much total debt you carry vs your total available credit. A low debt-to credit ratio is positive.
• Age of credit history (15%) – How long you’ve kept accounts active. The longer accounts have existed, the better.
• Mix of accounts (10%) – Your demonstrated ability to manage different types of credit (auto loan, mortgage, revolving/credit card accounts, etc.) A mix of account types is positive.
• Recent inquiries (10%) – How many times you’ve applied for credit within the last 24 months. Having too many hard inquiries lowers your score.

​Experts agree that making on-time payments, keeping your debt ratio under 30%, keeping accounts active, and minimizing inquiries is the best way to keep a good credit score. If your scores vary slightly over time, don’t worry. Each of the four big credit-scoring companies (FICO, Experian, Transunion, and Equifax), has its schedule for data entry and its own way of interpreting data.

​FICO also uses a method known as “scorecard hopping” which groups consumers with similar behaviors, similar to how insurance companies assign customers to different risk groups. Consumers who consistently make late payments may be placed on a scorecard with other late payers whereas consumers who pay bills on time every month may be moved to another card. If you are on a scoreboard that is deemed to have more or less risky behaviors this month, you could see your credit score vary, even if you haven’t done anything different. Unfortunately, you can’t know or control how credit bureaus calculate scores. What you can do is to actively monitor your credit report, report incorrect or fraudulent data, and, of course, pay all your bills on time every month if you possibly can.