Vision Credit Education, Inc.

The secret credit scoring formula is one of the best guarded secrets of our time. For those trying to figure out how to get a better score, it can be confusing since there is no public knowledge of exactly how FICO scores are calculated. There is an additional complication that can make it almost impossible to truly understand how the formula works.

We already know that we have more than one credit score, since each of the three main credit bureaus have different records about your credit accounts. We also know that each credit bureau maintains more than one score for you (See some of the credit scores marketed by credit bureaus). So what is this extra complication that can make credit scoring so difficult to figure out?

Ten Versions of FICO Scoring Formula

There’s not one formula for calculating your FICO score. There are ten. Each is a “scorecard,” that gives different items in your credit history slightly different weight. Your scorecard depends on where you are in your economic life.

Fair Isaac’s spokesman Craig Watts summed up this topic in an April 2009 interview. Fair Isaac actually supplies ten different versions of the credit scoring model. Each version is internally known as a “scorecard.” Your scorecard will depend on certain demographic facts that place you into a group of peers.

Little is known about what these demographic factors are that determine which scorecard will apply to your own unique situation. We know that some factors such as age and the types of accounts that you have maintained have some influence on which scorecard your credit score would be based on.

One factor that we are reasonably certain of based on previous Fair Isaac responses is bankruptcy. It is generally believed that consumers that have filed bankruptcy within the past several years are grouped together and are scored using the same scorecard formula.

Accordingly, your credit scores will be based on how you are viewed as a borrower in comparison to the other consumers that make up your group. If you are among the least risky of your group, then your credit score will be higher than the vast majority of consumers in your group.

However, your credit scores could still fall below those of other consumers that are members of another group. We frequently see evidence of this when one consumer has a higher credit score than another even though their credit reports indicate the possibility of higher risk.

One particular situation that supports this is an individual whose credit scores dropped when a bankruptcy finally fell off of their credit report. Conventional wisdom would suggest that this is counter-intuitive. However, the likely reason is that the individual was in the highest percentile of scored reports in the bankruptcy group, but found themselves in the middle of the pack or worse once they were transferred to a different scorecard group. They no longer appeared to be one of the most creditworthy based on the new set of peers that they were being compared to.

Certainly the scorecard method of calculating credit scores is not perfect. In many ways, it creates discrepancies and problems in credit scoring that can further reduce faith in the integrity of credit scoring as a means for measuring risk. It also alienates many consumers that sometimes try in vain to make positive changes to boost their scores, only to see their scores drop as a result.

The next time you check your credit, understand that these factors that determine your scorecard can ultimately cause your credit scores to shift dramatically. A positive change could open up lending options and reduce rates, while a negative shift could cause major headaches for you!

Either way, the best option is to understand how each action can affect your credit scores and to make the best decision possible to increase your scores. As far as the scorecards are concerned, that’s really out of your control!