A. The Importance of “Adequate” Credit Scores
Clearly, having an acceptably high credit score is more important in recent years than at any time since scoring models were developed. If your score is not sufficient, you will:
- pay more to get mortgages, car loans, and other credit;
- be less likely to get offered a job;
- be unable to get many brokerage or bank accounts;
- pay more, perhaps much more, for insurance;
Those are just the effects that are widely documented. Because the increasing use of credit scores by various agencies is controversial, we often don’t hear about their use.
B. “Adequate” vs. “Super” Credit Scores
A grading analogy might help demystify the importance of credit scoring. For most people, a credit score is more like a “high pass /pass / fail” grade than a letter grade.
If you score a “high pass”–roughly, between a 680 and a 720, depending on the model–then that’s “Adequate” for all practical purposes. Further improvements simply aren’t important, and won’t benefit you.
Moreover, the higher into the 700 range one gets, the more difficult it is to raise them still further. The bottom line is that in the vast majority of cases, once one’s true scores are well into the 700s, it simply isn’t worth worrying about them anymore.
The key is keeping a “high pass” or “Adequate” score.
C. Why would a “Super” credit score be helpful?
I can think of three reasons. First, super scorers sometimes receive the tastiest “by invitation” pre-approvals for new credit. Capital One has been especially aggressive about this, sometimes offering superb terms and huge lines to >760 credit scorers.
Second, very few lenders save their best rates for super scorers. Farm Bureau Bank, for example, will give a no-fee prime + 0 business LOC to super scorers (generally 760 or better) finally, it’s nice to have a “margin for error.”
For example, my credit profile is WAY too active to keep a score much above 750 on any sustained basis. But it’s very important to me that it’s always at least “adequate”, as I earn several thousand a month from my credit lines and would suffer real losses if some snafu shipped me into “sub-prime” status.
So, I like to shoot for the 740-760 range, so that I know that the minor issues (wrongly reported lines, unexpected inquiries, etc.) won’t drop me below 700.
SECTION TWO: GENERAL FEATURES OF CREDIT SCORING
A. Credit scoring models are intentionally ambiguous.
The three major credit reporting companies/agencies (CRC or CRAs) are Equifax, Experian, and TransUnion. They are private, for-profit entities.
They all maintain the position that their scoring models are “trade secrets,” and they fight tooth and nail to reveal as little as possible about their details. Moreover, they are regularly tweaked, in ways that are not publicized.
This is one reason why there can be no reliable answer to precisely how much a certain factor would affect a given person’s credit score.
This also explains why there is so much misinformation floating around on credit scoring, even from journalists and others who should know better.
B. Scoring model complexity prevents extrapolation.
Theoretically, two identical credit profiles, when faced with the same pertinent change (a new line, late payment, whatever) should have their scores change in the same way. But in practice, no two credit profiles are ever alike.
There are simply too many relevant factors. The age of each credit line, its type, its payment history, its size, the degree to which it’s used, and many other factors are getting put into the “black box” of credit scoring. When all these factors are considered no two people are really alike.
That’s why you should be suspicious of anyone claiming that “doing x will increase (or decrease) YOUR score by y points.” There is NO WAY that they or ANYONE else could know that information.
C. Scoring Depends on Reporting – which can vary considerably.
First, if a credit grantor doesn’t report the use of the credit, then it isn’t considered in your score. Most business credit lines don’t report to one’s personal credit at all–which is why business lines can be a great way to “hide” use of credit.
Most personal cards do report the limit, the balance (generally as of the close of the last billing cycle), and the minimum payment due (at that cycle close). A few do not. Capital One is probably the most prominent exception, reporting the “high balance” instead of the limit to the CRCs.
Counter to popular belief, such exceptions are rather easily worked around, and provided one knows they are there. (Note: Cap1 in particular is almost always willing to offer no fee balance transfers, and they will sometimes even offer “purchase checks” that allow you do deposit your CL into a bank account.
Simply pay the balance off before the cycle closes and your new “highest use” will be your credit limit, while your balance (which is measured as of the close) may be as low as zero.)
D. Scoring models and their key “inputs” are evolving significantly.
The ambiguity of scoring models and the changes in reporting mechanics complicates the tracking of changes in CRC scoring models. Even so, anecdotal evidence and occasional industry comments confirm that major changes have occurred over the past few years. Here are a few worth noting:
- Inquires are often sent to the CRCs much more quickly than previously. Years ago, it wasn’t uncommon for all 5 inquiries made on a Monday to not show on one’s report until Tuesday or later.Now, most of them will show up almost instantly. Needless to say, this has implications for credit application strategies
- Secured revolving lines are more accurately reported AND less damaging than they once were. Along with the HELOC boom of the early 2000s came many consumers whose credit was badly hurt by their >50% utilization on their equity lines.Gradually, equity creditors began to more precisely specify their lines as “secured revolving,” “heloc”, and the like, rather than the simpler “revolving” that all CCs are coded. Also, CRCs began treating them differently, recognizing that high use of a HELOC (at the prime rate or thereabouts, and secured by real assets) was a much lesser risk factor for creditors than similar balances on credit cards.
- Multiple loan inquiries within short time frames are more often bundled. Not long ago, “rate shopping” for a mortgage or a car could really hammer one’s score, since every inquiry by each lender one spoke with would knock it down another notch. Now, CRCs allow for multiple inquires for certain products (generally mortgages and car loans) to count as one, provided they are done within a 14 or 30 day period. This more lenient treatment does NOT apply to CCs, however.
One key point can be inferred from the observations in the last couple of sections. That is, DO NOT ASSUME THAT YOUR CREDIT SCORING EXPERIENCE DICTATES WHAT OTHERS WILL EXPERIENCE.
I’ve seen MANY people make claims like, “credit scoring doesn’t work that way–I know because it didn’t happen to me.” Well, THAT SIMPLY DOES NOT FOLLOW.
E. Scoring seems headed towards consolidation.
The big recent news in credit scoring is the arrival of the Vantagescore. Among other useful revisions, this score will use an “Identical scoring algorithm and leveled credit characteristics across all three national credit reporting companies.”
That will make monitoring one’s score much easier, and using the score significantly fairer to consumers. There is debate over how long it will take before this revision is phased in.
F. Scoring is always individual, not “joint”.
Unlike income taxes, where spouses can file “jointly” as one unit, credit scores are always individual.
So, a wife can pay a household’s bills on time for 40 years, and if she’s never established credit in her own right, it WILL NOT MATTER if her husband dies, and she needs to get a mortgage or buy insurance on her own!
Thus it’s crucial that every adult establish the credit that they might need IN THEIR OWN RIGHT.