This article was written by credit expert John Ulzheimer.
Most of the time when I am asked about credit scores, the question is often about how to improve the scores. It is just as often and just as pleasant when I receive questions from people how many items in your credit reports are worth on their credit scores. The questions generally go something like this … “How many points is a charge worth” or a variation of this question.
Not only are these questions common, they are also reasonable. We grow up in an academic environment where questions about tests are worth a certain number of points for our final grade. For example, if you have a test of 25 questions, each question is worth 4 points for a possible grade of 100. However, credit scoring systems are not designed so that entries on your credit reports are worth a specific number of points.
This is not how credit scores work
If you’ve ever read a book, blog, or heard someone suggest that credit report entries are worth a certain number of points, ignore them as it is factually inaccurate. Nothing on your credit report is worth a certain number of points, either positive or negative. Assessment models do not assign such points because they are not designed to do so.
Instead, credit rating models award points based on how well you did in certain credit rating categories. Without becoming highly technical and slang, points are awarded based on how your credit reports answer questions posed by the credit scoring models.
Buckets, containers, variable classification … they are all the same.
Credit scoring models are mainly made up of three things: characteristics, variables, and weights. These three things can also be described as… questions, answers, and points. These three work together as part of the assessment process. Here is an example of how it works:
Characteristic (also known as a question asked by the assessment model)
Example: How many credit card accounts do you have with a balance greater than zero?
Variable / Bucket (aka the answer from your credit report)
Example: I have 4 credit card accounts with a balance greater than zero.
Weight (aka the points awarded by the credit rating model based on the answer)
Example: If you have between 3 and 6 credit card accounts with credit, you will earn 20 points. Since you have 4 cards with balance, you have earned 20 points. *
* This fictional example is not intended to imitate the points you earn with credit for four credit card accounts. It is only intended to illustrate how assessment models work.
The variable or response component is also commonly referred to as bucket or container. It is essentially an area where the answer to a credit rating characteristic / question falls. The weight or points will be assigned based on the range your answer falls into.
I realize this is complex and that you may have to read through a few times to understand how it works. But at least that should reveal the truth that no point on your credit report is worth “x” points.
Instead, the area your answers fall into is worth the points. You may have multiple answers that would put you in the same field, meaning multiple consumers with different credit reports can have the same credit score.
In the example above, the variable bucket was “between 3 and 6 credit card accounts with credit”. And that bucket was worth 20 credit points. So if your credit report had either 3, 4, 5, or 6 credit cards with credit, your answer would have fallen into the same range and you would have earned the same 20 points.
This is precisely why the people trying to assign a particular value to a credit report record are generally wrong. In this example, you would have earned 20 points for your score even if you had 4 different credit reports.
You never lose credit score points
Here’s another one that will blow your mind. Your credit score doesn’t start at a perfect 850 and then go down based on your credit reports. Instead, they start low and earn points.
Nothing on your credit report is worth negative points. So collections are not worth a negative 50 points. Withdrawals are not worth a negative 100 points. That’s not how it works. Your score won’t go down because of negative information, it just isn’t as high as it could be because you will earn fewer points during the evaluation process.
If you had any of these negatives, like collections and withdrawals, you’d fall into a bucket worth less points than if you had fallen without these types of negatives. Because of this, people with negative entries generally have lower scores than people without negative entries. You earn fewer points instead of losing more points.
You can apply these examples to any major entry in your credit reports. This includes inquiries, the presence or absence of negative information, debt and debt-related metrics, the age of your credit report information, and the variety of your credit report entries.
John Ulzheimer is a nationally recognized professional in credit reporting, credit scoring and identity theft. He is President of the Ulzheimer Group and author of four books on consumer credit. John previously worked at FICO, Equifax, and Credit.com and is the only recognized credit professional who actually comes from the credit industry. He has over 27 years of experience in the consumer credit industry, served as a credit expert on more than 370 legal cases, and qualified to testify in federal and state courts on consumer credit issues. John is visiting professor at the University of Georgia and the School of Law at Emory University.
Disclaimer: The views and opinions expressed in this article are those of the author, John Ulzheimer, and do not necessarily reflect the official policies or position of Tradeline Supply Company, LLC.