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As suspected, there’s more to FICO than meets the eye.

What follows is the result of observation of FICO’s behavior and not any information published by Fair Isaac and Company.

While I believe it to be accurate, remember that if one thing is constant or predictable with FICO it’s that nothing is constant or predictable.

Your results may differ, your mileage may vary, information is presented as-is with no warranty on parts or labor.


FICO is constantly “learningâ€.


Remember FICO is designed not to merely capture your previous credit behavior, but also to predict the possibility that you will default in the future. FICO appears to periodically recalculate the credit patterns of both those who maintain excellent account history, and those who fall into default, and use that data to adjust itself.


What that means is- to have a good score; you have to mimic the behaviors of others who have good credit. While that seems obvious, let’s imagine a scenario where the majority with good credit have exactly two inquiries from prospective lenders in the last six months. If you have one, or three, you’ve fallen out of the pattern and may be penalized for the deviation.


Conversely, if the majority who default have three “finance company†accounts showing, you’ll be penalized for having the same, even if they were financially sound decisions for you. This alone makes understanding FICO fairly difficult as it’s a formula that changes periodically.


What constitutes good advice today may constitute bad advice tomorrow.

If 100% of those who default on their loans in the next six months all previously paid their credit cards in full monthly, while those who remain in good standing carry a 25% balance- I’ll carry that balance, thank you.

It’s a game of statistical averages and nothing more.


A good FICO is not the same as being a prudent manager of money.


FICO knows nothing about money management. Sometimes you have to make a choice between the ultimate credit score- and saving money.


-Let’s assume that you have received a zero-percent offer from your credit card issuer, allowing you to transfer other balances. So you transfer one card at 15%, another card at 18% and a third card at 9%, up to the limit of your transfer offer.


You’re saving money, an average of 14%, a sound financial move. Are you thinking FICO will reward you for your shrewd management skills? Well…no.

FICO will see that you’ve maxed out the zero-percent offer and drop your scores, possibly substantially. If the cards you transferred were themselves only partly utilized, the effect will be worse, if they were themselves maxed out, you may see a slight improvement overall.

FICO only cares about the balances (both individual and overall) that you are carrying, not about the rates that you are paying. This fact has come back and bitten more than one consumer using a HELOC to pay off high rate debt as well.

Something to consider if you will be needing high scores in the near future.


If saving that 15% will cost you a point or two on your new mortgage via the lower scores- wait until the “big†move is completed before making the smaller one!


-Similarly, investing money borrowed at low rates into higher rate investments is a basic tenent of wealth building. Again, FICO doesn’t care that you’ve maxed out the 1.5% credit and invested it at 6%. Down you go.

Advance planning is the key here, make the moves that benefit you financially but be aware of their impact on future plans.

FICO Doesn’t reward you for doing what’s right.


-That old collection account on your report, the one you’ve ignored for years? In a burst of inspiration, you decide to pay it off.

After all, the collector tells you** that doing so will improve your credit, and you feel like a responsible person again by writing that check.

So you pay it.

And you find your scores have dropped into the basement.



FICO sees the date of last activity and runs with it.

That date was aging, as the account grew older, FICO gave it less and less attention.

Paying it reset the date of last activity to the date you paid it, making it look brand new to FICO.

A human reviewer may give you “points†for paying that old obligation, but FICO apparently won’t. A collection is a collection is a collection to FICO, paid or unpaid doesn’t seem to matter. The fact it went to collections at all is what does the damage.


** Debt collectors are not a recommended source of investment advice. Results are not guaranteed. You may lose money. Not FDIC insured. And all that ;)


-You’ve received a “notice of change in terms†from your credit card company, raising your rates to 29.99%. The only way to keep your terms as-is is to close the account.

While the best course of action is to pay the account off and leave the card open but unused, many people instead decide to close the account and pay it off in installments.

That’s a reasonable financial move, yet FICO will punish you.

See below “the closed account trap†for the reasons why.


FICO may bite you for disputing accounts with the Credit Reporting Agencies.


Whether intentionally or not, this phenomenon has been observed, particularly with Experian credit reports.

You dispute an older charge-off account on your credit report.

The Creditor verifies it as accurate.

The date reported changes to today’s date.


Whammo! Your score takes a dive. Why?

As the account aged, it hurt you less and less. Due to some apparent mismatch in data between Experian and FICO, the date the account is updated is seen as the date the charge off actually happened, making it look very recent once again.

While both parties claim to be “looking into the problemâ€, it’s something to be aware of.

And stop holding your breath.

Hey, Can't you see were’ trying to predict default here? Well, Sort of.


Some defaults FICO can see a mile away, most are sudden and unexpected.

Job loss, illness, divorce all tend to happen quickly and without warning, FICO can’t predict that. But it still tries, attempting to fit you into the pattern set by those who have defaulted in the past.

Even FICO admits that its default detection rate isn’t exactly astounding…but certain actions can still be telling.


-Carrying large balances on revolving accounts without large limits.

This is probably the worst single thing you can do outside of default.

If you are carrying a balance over 25% (or so) of a card’s limit- that’s bad.

Over 50% is worse.

Hitting 100% will drop your score like a Detroit Lions lineman with a greased football.

I’m from Michigan, I can say that. And sadly, prove it.


-Charging the card up and paying in full monthly is a matter of timing.

Make the payment before the card reports for the month, so it shows a low balance.

Letting it report before you’ve made payment punishes you for carrying a balance, when in fact you are not.


-Applying for new credit is OK- if you already have old credit. But don’t overdo it.

Too much too fast means default to FICO.

If you have established credit history, FICO will assume that you’ll probably behave with your new credit as well. If you do not, take it easy. If you have established history that is bad, take it even easier. Open a few new accounts for purposes of rebuilding, but let enough time pass to demonstrate responsible handling. Open a lot of new accounts with bad history present and FICO will assume that you are up to something…something like repeating the past…and dropkick you.

-The combination of certain actions can be worse than either action alone.

Carrying high balances on your revolving accounts is a score-killer. Applying for credit frequently (and the resulting inquiries on your report) is also cause to lower your score.

The combination of the two is disastrous.


When you are carrying high balances, over 50% of a revolving account’s limit AND applying for new credit, it appears to FICO that you are overburdened with debt and are looking for somewhere to shift it.

Sometimes referred to as “pyramidingâ€, it’s an unusually bad combination. Unfortunately FICO doesn’t do a good job of distinguishing inquiries by source.

You may be carrying substantial revolving balances and applying for an automotive loan, or shopping for homeowner’s insurance- resulting in multiple inquiries.

The result is the same- too many inquiries + high revolving balances = lower score.

No matter the purpose behind the inquiries themselves.


The closed account trap.


One of the most common bits of bad credit advice is to close accounts you don’t need.

This is bad for several reasons:


1) Age is important to FICO. If the accounts you close are among your oldest accounts, you may lose average age- and FICO points.


2) Available credit is very important to FICO. You may not have used those cards, but FICO counts the available balance in your favor.

Let’s say you have two cards, for simplicity- with a $1,000 limit each.

One card has $500 charged to it, the other is unused.

Overall, FICO sees that you have $2000 available and are using 25% of it.

While you will lose points for the first card being at 50%, you will gain some back for only being at 25% overall.

Close the unused card and you’ve increased your overall utilization from 25% to 50%. Double-whammy, now you are at 50% individually AND at 50% overall.

Your headroom is severely diminished. That's gonna cost you, buddy.


3) Closing accounts that still have a balance owed is a triple-whammy.

While the amount still owed is calculated into your revolving debt load, the former credit limit is not.

Remember closing that account in order to stop the rate increase to 29.99%?

The balance on that account still figures into your revolving debt, but the limit is now zero. You could well be over 100% overall utilization, even if you are much lower in reality.

Expect a severe FICO point loss.

FICO loves antiques.


-Even if they are negative antiques.

As negative items on your report age, they hurt your score less and less. As they grow older, they improve your average age of accounts more and more.

At a certain point, they cross over, adding more score points than they subtract.


Imagine the shock a consumer experiences when a 9 year old bankruptcy drops off of their report leaving nothing but positive history…

and their FICO score drops!

After dusting off some old infrequently used vocabulary words, the analysis begins... and quickly ends with age.

That old Bankruptcy (or other negative) was so old it wasn’t doing much harm. After all, that was long ago and you’ve done much better since then.

It was quietly adding age, losing it caused the average age of accounts to become much shorter.

The best advice is the old advice- after a fall, get right back on the horse.

If this consumer had established positive credit right after discharging the bankruptcy, they’d be in a much better position.

Waiting to do so set a trap that caught them down the road, a trap that could not be reversed later on.


-Leave the positive antiques alone. The dust looks just fine. It adds charm. Dust is your friend. Remember the advice to leave unused accounts alone?

Stuff them in a sock drawer but leave them open is good advice for this very reason.

Better than negative antiques, positive antiques are a real asset. They add not only age, but years of positive history.

Take that old card out once or twice a year and warm it up. Make a charge, pay it off, put it back in the garage.

Doing so will help you build the foundation necessary for high credit scores in the future.


FICO isn’t FICO isn’t FICO isn’t’ FICO.


There isn’t just one FICO score, there are many. And some scores aren’t FICO at all.


-Scores you receive with some credit monitoring services, or those you receive with a credit report may not be FICO scores at all.

They’re wannabes, posers, knock off copies of a Luis Vitton sold on a street corner. Unless it says FICO and/or Fair Isaac, it’s an imitation.

These scores can vary wildly from your actual FICO score as their treatment of data is different and their calculations are their own.

Lenders don’t use these scores and you should ignore them too.


-So it’s a real FICO score, but which one?

Fair Isaac supplies customized scoring for different applications.

The score used for credit card approvals may be one number, the score tweaked for automotive loan approvals may be quite another. What’s used for mortgage lending may be a custom job, and your insurance score is possibly different than any of the above.

It’s like trying to drive somewhere using three maps, none of which agree.


A little common sense goes a long way.

If you suspect that Automotive- Enhanced FICO is being used, it’s a fair assumption that more attention will be paid to previous auto loans. A good automotive history can somewhat override otherwise spotty credit to an automotive lender.

And the reverse is true- pay everything on time except your car payment- and you’ll have a nasty surprise next time you buy a car.

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