Improve Credit Scores

IMPACT OF ADVERSE ENTRIES

In FICO's summary, notice the fine print: "The importance of any factor depends on the overall information in your credit report."

There's no perfect way to predict what variable will change the weight given to any of the five scoring elements, which is why FICO's algorithm is often referred to as the "black box." However, certain generalizations can be drawn, and, with respectable accuracy, a range of point change can be roughly predicted for many of the possibilities, particularly those involving payment history. After all, it's this category that can move a score very quickly-and in ways that aren't subtle.

FICO states that "the importance of any factor depends on the overall information in your credit report." As I've shown, FICO uses stair-stepping scorecards, which are assigned to people based on many factors and which can change with a slight modification of credit report data. Any extreme entry (a recent bankruptcy, for example) can skew a person's score by placing him or her into a different, undesirable initial scorecard. And since the importance of any one factor in determining your score changes as the information in your credit report changes, it's impossible to say exactly how important any single factor is in determining your score. What's important is the mix of information, which varies from person to person and for any one person over time.

This makes perfect sense. Someone with very few accounts, for example, may be more negatively impacted by a late payment than someone with many accounts. Likewise, someone with new credit may be more negatively impacted by lateness than someone with no new credit. Keep this in mind when trying to raise your credit score. Of course, removing anything recently negative will always help some and will often help a great deal. I've seen one BestCredit student with a 12-year credit history remove one 30-day late installment payment that was 18 months old-her only adverse entry-raising her FICO credit score 40 points, from 638 to 778! Now that's money.

When disputing negative entries on your credit report in an effort to have them removed, you will have to exert a certain amount of time and effort for each item, and the priority you give to each entry will vary according to your situation. Some entries may be more severe than others on their face; for instance, a paid judgment that's three years old may look more adverse that a late payment within the last 60 days. Yet the latter will impact a score far more. If you want to obtain a loan in the near term, you might consider targeting entries that affect your score the most. However, this may not always be possible, since different factors may play into the probability for removal, such as whether money is owed or not. Again, this will become clearer later, especially when you perform collective and situational assessments, as outlined in Chapter 8. But in the meantime, Table 2 shows how various negative items rank in terms of their general impact on a credit score.

Table 2.

Keep in mind that I don't know for sure what entry is worse than another on a FICO score; this is just my opinion based on anecdotal evidence. Again, since the severity of a mark is dependent on score-cards and algorithms, each item's impact can shift up or down, depending on other factors that have nothing to do with payment history. One way to see this variance in action is to try FICO's Credit Score Simulator and Estimator.

Credit Score Estimator

The FICO Score Estimator, available on the Bankrate Web site (http://origin.bankrate.com/brm/fico/calc.asp) is a useful tool in my opinion. Although it gives only ranges, it coincides with the real world in my experience; real-world scores seem to consistently fall near the middle of the FICO Estimator ranges. And while it doesn't interface directly with your individual credit report, it is useful for running hypothetical scenarios. Give the Estimator a try, changing a single variable and running multiple scenarios, to get an idea of what you can accomplish by modifying or deleting certain hypothetical entries and paying bills on time (over time).

Credit Score Simulator

In addition to the Estimator, FICO has also provided a tool called the Simulator (www.myfico.com). It goes beyond the hypothetical, serving as a personalized simulator that interfaces directly with your report, and you can peer into your future report by changing some variables. Although it doesn't give you the ability to simulate the deletion or alteration of tradelines and public records, using it in conjunction with the Estimator may give you some idea about where you can take your score and how fast, perhaps assisting you in the prioritization process.

Running Scenarios

Here are some generalities I've noticed with regard to FICO scores and reports that I've studied over time, viewing various credit reports and simultaneously toying with the FICO Score Estimator and Simulator:

• A current or recent late payment will affect a score a great deal more than a bankruptcy that's been discharged for three years or more.

• Creditors who've had their accounts included in bankruptcy by a debtor will tag such accounts on a credit report as "included in bankruptcy." Removal of these accounts from a credit report has some affect on a score, around 10 points on average for each when a score is within the 600-730 range.

• For credit reports with a very bad entry, like bankruptcy (more than three years old), yet no other bad marks, there's a FICO score ceiling (maximum) that falls around 730. This is true for someone with an average-length credit history (15 years), and the score doesn't improve much once three years have elapsed post-discharge. (Yes, it's possible for someone to have a bankruptcy and no other adverse entries, since those with a bankruptcy who are in the middle of credit restoration will remove the other bad marks first if they've read my book, and then remove the bankruptcy in accordance with Chapter 10.) I ran the FICO Score Estimator to test this and noticed the bankruptcy variable was set to a max of three-plus years, which supports my theory. The Estimator listed the maximum under this scenario at 760, but I've yet to see a maximum of a range ever attained.

• Using the scenario above, I simply removed the bankruptcy from the Estimator, and the FICO score maximum was then 790, only 30 points higher than the FICO cap where a bankruptcy was three years old.

• Continuing with the same scenario, I changed another variable and added a single recent collection account to the 3-year-old bankruptcy. I listed it as a $250-$499 debt, plus indicated that it was currently late, and the score went to a range of 595-645, dropping the maximum by 115 points and the minimum by 105.

• Although the Estimator doesn't ask about credit limits, it does ask for total non-mortgage debt and then asks about balances as a percentage of that debt. This seems odd. If the Estimator is to be taken at face value, then there's something it is using regarding total non-mortgage debt that should be discovered. Taking a closer look, I ran it using the max range of $20,000+ for the non-mortgage debt and then ran it again using $0. The score range was actually the same, 730-780. Suspecting that the debt would have an impact if there was recent lateness, I ran the Estimator again, simply changing a variable to include one recent late payment, and the ranges were still the same. And yet again, the same for high balances. I kept trying to get the simulated increase in debt to move the range but couldn't. This is consistent with my own experience: it doesn't appear that having a lot of non-mortgage debt and lots of accounts is a big issue; at issue are the balances relative to the limits, which are even weightier if there's derogatory history in the mix. (Though a lender can deny for having too many open accounts.)

• The biggest downward moves come with recent late payments or collection accounts, recent bankruptcy, and high balances relative to limits.

• Multiple late payments will make payment history worse on a magnified scale, particularly if they're more recent. Within the last 90 days is the worst but will gradually carry less weight as time passes, especially up to three years.