This article was contributed by credit expert John Ulzheimer.
Most of the time when I’m asked about credit scores the line of questioning is commonly about how to improve scores. It’s equally often, and equally enjoyable, when I receive questions from people about how many points certain things from your credit reports are worth to their credit scores. The questions generally go something like this… “How many points is a charge off worth” or some variation of that question.
Not only are these questions common but they are also reasonable. We grow up in an academic environment where questions on tests are worth a certain number of points toward our final grade. For example, if you have a test with 25 questions then each question is worth 4 points for a possible grade of 100. Credit scoring systems, however, are not designed such that entries on your credit reports are worth any specific number of points.
That’s Not How Credit Scores Work
If you ever read a book or blog or hear someone suggest that credit report entries are worth a specific number of points, you can ignore it because it’s factually inaccurate. Nothing on your credit report is worth any specific number of points, either positive or negative. Scoring models do not assign points like that because they’re not designed to do so.
Instead, credit scoring models assign points based on how well you have performed in certain credit scoring categories. Without getting highly technical and jargon-heavy, points are assigned based on how your credit reports answer questions asked by the credit scoring models.
Buckets, Bins, Variable Classing…They’re All the Same Thing.
Credit scoring models are made up primarily of three things…characteristics, variables, and weights. These three things can also be described as…questions, answers, and points. These three work in concert as part of the scoring process. Here is an example of how it works:
Characteristic (aka, a question asked by the scoring 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 assigned by the credit scoring model based on the answer)
Example: If you have between 3 and 6 credit card accounts with balances, you earn 20 points. As such, because you have 4 cards with balances you have earned 20 points.*
*This fictitious example isn’t meant to mimic the points you’ll earn for having four credit card accounts with balances. It’s simply meant to illustrate how scoring models work.
The variable or “answer” component is also commonly referred to as a bucket or bin. It’s essentially a range where the answer to a credit scoring characteristic/question falls. And, the weight or points are assigned based on which bucket/range your answer falls.
I recognize that this is complex and it might take you a few times reading through this to understand how it works. But, at the very least what this should expose is the truth that no item on your credit report is worth “x” points.
Instead, the bucket/range where your answers fall is what’s worth the points. And, you may have several answers that would cause you to fall into the same bucket, meaning multiple consumers with different credit reports can have the same credit score.
In the above example, the variable bucket was “between 3 and 6 credit card accounts with balances.” And, that bucket was worth 20 points to your credit score. So, if your credit report had either 3, 4, 5 or 6 credit cards with balances your answer would have fallen in the same bucket and you would have earned the same 20 points.
This is precisely why the people who try to assign a specific value to any one credit report entry are universally incorrect. In this example, you would have earned an equal 20 points toward your score even if you had 4 different credit reports.
You Never “Lose” Credit Score Points
Here’s another one that’s going to blow your mind. Your credit score doesn’t start out at a perfect 850 and then go down based on your credit reports. You instead start low and accumulate points.
Nothing on your credit report is worth negative points. So, collections are not worth negative 50 points. Charge-offs are not worth negative 100 points. It doesn’t work that way. Your score doesn’t go down because of negative information, it just simply isn’t as high as it could be because you’ll accumulate fewer points during the scoring process.
If you have any of those negative items, like collections and charge-offs, you would fall into a bucket that would be worth fewer points than you would have fallen into if you did not have those types of negative entries. That’s why people who have negative entries have lower scores, generally, than people who do not. They earn fewer points, rather than lose more points.
You can apply these examples to every scorable entry on your credit reports. This includes inquiries, the presence or lack of negative information, debt and debt-related ratios, the age of your credit report information, and the diversity of your credit report entries.
Video: Credit Score Buckets
John Ulzheimer is a nationally recognized expert on credit reporting, credit scoring, and identity theft. He is the President of The Ulzheimer Group and the author of four books about consumer credit. Formerly of FICO, Equifax, and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. He has 27+ years of experience in the consumer credit industry, has served as a credit expert witness in more than 370 lawsuits, and has been qualified to testify in both Federal and State courts on the topic of consumer credit. John serves as a guest lecturer at The University of Georgia and Emory University’s School of Law.
Disclaimer: The views and opinions expressed in this article are those of the author John Ulzheimer and do not necessarily reflect the official policy or position of Tradeline Supply Company, LLC.