How are FICO Credit Scores Tabulated?

For professionals that serve those purchasing real estate or seeking financing we know firsthand how confusing and frustrating credit and scoring can be.

When advising and guiding individuals and businesses towards their goals many of us have heard these questions or something very similar, 

"How can my credit score be so low? I have been paying all my important accounts on time for 10-20 years, doesn't that count for anything?"

"I have millions of dollars in the bank and own many properties how can I have such a low credit score?"

"How can one account with a late payment for such a small amount of money do this to my credit score?"

The answer to these questions is vast and complicated since credit and scoring is determined by many factors, some of which are cloaked in secrecy.

Most mortgage banks qualify borrowers through a variety of means including the use of a version of the FICO score.  This FICO score helps to determine the risk of a potential borrower.

When credit scores were created, Fico, a bunch of lenders, and  the credit bureaus came together to figure out a better way for lenders to predict risk of default when lending. They wanted a more automated system that complied with the laws and made it easier for them to approve more loans allowing a higher volume of individuals to fulfill the American dream of home ownership.

The credit bureaus provided FICO with data from millions of unique credit profiles over varied time periods. FICO studies this information zeroing in on trends and negative outcomes, while learning what symptoms occurred before these delinquencies manifested on credit and lead to defaults. 

Each of us begins with a FICO score of 300 if we have open active accounts that have been in existence for a set period of time.  From there points are added for varied categories based on our credit profile including debt ratio, average age of credit, payment history, credit reviews, variety of credit, and what scorecard group we are assigned.

Example:

 
Individuals who opened many accounts within a year or two and have one or more delinquency showed a much greater likelihood of default. This trend could then become a variable that would make up a scorecard. For this scorecard the amount of points assigned to the unique credit file based on the categories mentioned might be lower than an individual with varied old non delinquent credit. 

There are a variety of different scorecards that are used depending on the credit behavior found on each consumer’s credit. There may be scorecards for those with no delinquencies, coming out of bankruptcy, having new late payments, and new credit or thin credit file consumers. A consumer with new accounts and over 4 inquiries may have a completely different scorecard than one with no new accounts and 4 inquiries. This could mean they have a totally different amount of points for each category of their credit based on the unique scorecard assigned.

As you can see once the right scorecard is determined the points then follow based on more detailed events occurring on the credit. So although we know debt, length of credit, history, variety of credit, new credit, and inquiries all help determine scores, there are more layers of scoring that we cannot know. This is why it is impossible to make a blanket statement saying exactly how many points a score will drop based on one event for all individuals.  

A great amount of information about scoring is proprietary and therefore a secret of the formula creator. The key for our customer base and potential referrals is to know their credit and scores.  Make sure to watch them consistently taking action to manage them while using timing and strategy when making decisions that will affect them. Credit is an asset that can help build wealth, determine the home and neighborhood we live in, and even put a child through college giving them better opportunities in life. This is a powerful tool that if nurtured and used wisely can change lives.

Call us with any questions or feedback on credit challenged clients or credit in general!

Making sure credit is analyzed with future real estate purchases in mind is a MUST before taking an action that can foil those plans and limit a consumers' option for a better quality of life.