If I ever want to get my FICO score above 800, I'll need to lay off the applications. Additionally, I'll need more seasoning as well. Indeed, every time I apply for a new card, or do something that's different from those who score in the 800s, I reduce my chances of keeping up with that group. That's because Fair Isaac, the creator of the FICO score, has lumped each of us with the group that best fits our credit profile.
Ten scorecards are built into the classic FICO formula. If you have a bankruptcy on your report, you'll be placed with that group of consumers. If you have very little credit -- or a short history -- you'll be compared to people in that group. If you've recently opened a credit card account, you'll be placed with that group. If you've got a fairly lengthy history, and no blemishes, you'll be placed in yet another group. In short, we're all being compared to people who most resemble us. In other words, FICO is using an apples-to-apples comparison when it assesses our risk. In all, two of the scorecards are for those who have a derogatory mark on their credit report. The other eight scorecards are for those who do not have a negative mark.
As a third-year law student (link here), I'm quite familiar with this approach. We're all graded on a curve at my school. We have one exam -- per class -- each semester, and then our professors rank-order us from first to worst. Thus, let's say that I get 90 out of a possible 100 points on the torts final. However, if everyone else got scores that ranged from 95-99 points, I would be dead last in my class, despite the fact that I did really well on the exam (on a raw-score basis). The same thing happens in FICO scoring.
Although I am performing well in my credit life, I may not be doing quite as well as those in my class (scorecard). When I apply for a new credit card, and my score is in the neighborhood of 780, there's a strong likelihood that my score is going to take a good-sized hit when that new inquiry and new account appear on my credit report. That's because the rest of my peers (those who are in my scorecard) are not out shopping for new credit. On a relative basis, I've just made myself look a little less attractive (and FICO penalizes me for it).
Ever wonder why some people actually lose points when a bankruptcy falls off their credit reports? Intuitively, you'd think that these people should gain points. But that's not what often happens. Instead, when the bankruptcy falls off the report, the person is placed in a new scorecard. Now, instead of being compared to people who had a bankruptcy on their report, they're being compared to those who don't. All things being equal, they often look less attractive when compared to the new group. That's why it's so critical that people who go bankrupt try to reestablish credit as soon as possible. You don't want to have huge gaps in your credit history when that bankruptcy falls off the report -- and you move into a new segmentation group.
Similarly, I've seen people lose points on a day when absolutely nothing changed on their credit report. This often happens when someone's credit history gets lengthier. Instead of being scored with people who had relatively young histories, this person is now being scored against those with more seasoned ones. For illustrative purposes, look at this example that FICO cites for losing a few points on a day when there were no changes on the credit report:
"You moved from one category of credit users to another as time passed. For example, you may have transitioned from the category '"consumers with a new credit history"' to the category '"consumers with a two- to five-year credit history."' As a result, your credit report is evaluated differently, causing a slight change in your score. The good news is that moving between categories like this usually offers you the potential to reach a higher FICO score in the future."
In other words, this person was moved from one scorecard to another. Although this person may have scored well against those people with relatively new histories, this person doesn't score so favorably when he or she is thrown in with those who have 2- to 5-year histories. Such is life in the land of scorecards. To be sure, there is a silver lining in the scorecard change. The good news, as the FICO explanation pointed out, is that there is now more growth potential for this credit user -- despite the temporary score setback.
Which brings us back to me. I'll never escape the 770s -- and move into the 800s -- as long as I continue to apply (link here) for more credit. My high-FICO peers are applying for credit less frequently, their credit histories are more lengthy, and the average age of their portfolio is higher. In sum, I'm in a scorecard that rewards longevity, conservatism, and patience. Until I adopt those qualities, I'm going to remain stuck on the lower end of my group's scorecard.
Still, who am I kidding? If you read my column about high-FICO friends (link here), you already know that an 800 FICO score wouldn't last long with me. I'd be too eager to get that score out on the open road, scooping up opportunities that come my way. Given my penchant for using, rather than idling, my credit score, I guess I'll just have to live with my scorecard plight. At least for now.
In the meantime, if you happen to see me on the road, be sure to honk.