How You Score
Posted by John Draper | Filed under Credit Wise
Credit score! Credit Score! CREDIT SCORE! OMG! Everyone is so creeped out, wary of, obsessed with their credit score. I must get 40 or 50 emails a month on credit score: from what makes it tick to how to improve it.
Your credit score is a number that is calculated based on a bunch of factors that lenders use to decide whether or not to lend to you. Way back when I started in the biz, lenders used their own credit scoring software. They’d plug in your info and out would pop the score they’d use to decide whether or not to lend to you, and what interest premium to charge. With the growth in popularity of the FICO score, lots of lenders have given up their own credit scoring tools in favour of The Biggie.
The FICO score is a credit score developed by Fair Isaac & Co. which began its pioneering work with credit scoring in the late 1950s. The point of the score is consolidate a borrowers credit history into a single number. While Fair, Isaac & Co. and the credit bureaus do not reveal how these scores are computed, there are a number of factors that affect the score you receive.
The “Credit Scoring System” is a numbers game: The more “points” you score, the better you do. People are sometimes surprised at the reasons they’ll be declined. I’ve received a ton of letters from people who want to know why they’ve been declined for a credit card because they don’t have a land line. Read on and you’ll see why.
While you may be tempted to lie about your age especially if your boy-toy is looking over your shoulder, don’t. If a creditor catches you in a lie, they aren’t going to trust the rest of the information you provide either, and you won’t get the loan. Hey, that’s character, right? Of course, vanity isn’t the only reason people lie about their age. If you’re under 21 you might be tempted to lie because you’re afraid they won’t like your tender age. And you’d be right. Under 21s score zero points. Between the ages of 24 to 64 years give yourself a point. You’re probably working. Over 65? Zero points… you’re old!
Creditor’s think people who are unmarried are a higher risk. If you are married, give yourself one point. Now you’d think that being divorced might work against you (all that spousal and child support), but most creditors don’t give a whit.
No dependents? Score zero. You’re probably still drinking your money away like a teenager since you haven’t yet “settled down.” And with no “ties that bind” you could skip town at a moment’s notice. Not good for collections. One to three dependents? Score one point. You’re a solid citizen. More than three dependents? Score zero. Have you no self control! And don’t you know you that with all those mouths to feed you could get in debt over your head?
Home address? Live in a trailer park or with your parents? Oooops. Bad risk. Score zero points. You’re showing no stability and could skip town with nary a look over your shoulder. Rent an apartment? Give yourself one point. Own a home with a big fat mortgage? Good for you. Score three points. Someone has already done some checking and you qualified for a mortgage, so you can’t be all bad. Own your home free and clear? Even better. Take four points. You’ve proven you can pay off a sizable debt and now you have a pile of equity that the card company would loooove to help you spend.
Previous Residence? Zero to five years (some applications only go to three years), score zero points. You move around too much! Over five years? You’re stable so score one point.
Years on Job? The longer the better. If you have less then one year at your present employer you’ll earn no points at all, which explains all the whining from the newly working who can’t get approved for a credit card. One to three years on the job will earn you one point. Four to six years is worth two. Over seven years at the same company and you’re probably bored out of your mind but you’ll score three points.
It’s pretty obvious, but the more you make, the better.
Most creditors belong to at least one reporting agency and share their information liberally with each other. Of course they’re more likely to believe their own information than somebody else’s. So if you paid off a loan with them, give yourself five points. Good record with other creditors should earn you two or three points.
Having a savings and/or checking account with a balance over $500 will earn you a couple of points providing you didn’t open up the account last week.
Having a landline in your own name earns you a couple of points because creditors have a way to contact you if you fall behind in payments. Since they can’t use your cell phone to actually locate you physically, it doesn’t count. (See, I told you if you were patient you’d get your answer.)
I don’t have the best credit score going. Does that surprise you? The main reason is that I’m determined to pay off my credit cards in full every month so I incur no interest. Hmmmm. Not very profitable, am I? And that’s why my score is lower. If I made my minimum payment every month, my score would be higher. No wonder people who are over-extended are going further into the hole all the time. Credit card companies love minimum payment people and keep throwing higher limits and more cards at them.
And no wonder the economy is in such a mess right now. What do you think would happen if all the people with credit card balances Just Said NO! and stopped making their payments? Hmmmm.
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September 30, 2008 at 8:49 am
This system is perverse. A credit score is all about how much companies should lend to us for maximum profits, and if we don’t buy into it by getting into debt to show we have a solid record of paying it off, it’s hard to do something as basic as rent an apartment.
September 30, 2008 at 9:10 am
Rebecca – you don’t need to have debt to get a credit score. Getting a credit card, putting some money on it each month and paying it off in full counts too.
September 30, 2008 at 9:19 am
Such a good indication of why financial institutions are in trouble. They’ve switched to an obviously flawed, set-in-stone, formula instead of making basic sane business decisions.
It’s like putting your car on cruise control and leaving it there.
September 30, 2008 at 9:20 am
Unfortunately, credit card companies loved me when I was young, in college and stupid with money & credit.Now its a stuggle to make the minimum payments and I have more debt then I can handle. I am considering a consumer proposal and just wondered if anyone out there has went this route and had any advice or experience to offer? Thanks!
September 30, 2008 at 9:22 am
I checked my credit history a few years ago and was astonished to see that my mortgage was not even on it! Then I read somewhere that mortgages often are not reported. Somehow that seems really strange….
September 30, 2008 at 10:07 am
I was so fascinated to read the paragraph about Gail having a lower score because she pays off her cards monthly! That certainly explains how the people on the show get in so deep. I always wonder whether people could really get in as deep as Gail predicts they will in 5 years-I always figure that at some point, people will stop giving them more credit, and they’ll have to smarten up, but apparenty, if you make pitiful minimum payments with everyone, you can have almost limitless credit-frightening!
September 30, 2008 at 12:44 pm
Shelley: I haven’t been down that route, but I have watched a lot of Gail’s shows and one of the things you have to do right away is call all of your credit card companies and tell them you’re having a hard time paying them, ask them to reduce their interest rates. If they say No, they’re lying. Ask to speak to a supervisor, tell them your only other option is to declare bankruptcy.
Next, stop using your credit cards.
Next, watch a few episodes of TDDUS for free on Slice’s website, it’ll really motivate you.
Hope this helps!
September 30, 2008 at 1:07 pm
You did a good job of revealling the formulas behind the mystery surrounding that nonsense!
They are in it to make money, so whatever formula works for them is alright from a purely business standpoint. Unfortunately it’s not exactly NICE to be weighed, measured and manipulated out of money.
Good thing Gail is here to educate the masses!!!! Knowing how it works takes the teeth out of it. After all, you can’t be manipulated into spending more than you make if you really don’t want to play their numbers game, now can you?
September 30, 2008 at 1:24 pm
Thanks Super_E. I have been watching Gail’s show for about a year now and love it. I did call my credit card company and was passed around and eventually put on hold only to be disconnected. The next statement later, I was advised that my interest rate was going up 5% to 24.5% because my payment the month previous was 2 business days late. Needless to say I called them back again and same routine. I have been very aggressive with them on the phone (as is my nature) but to no avail. I have also been paying my student loans for about 9 years and with the new laws regarding their inclusion after 7 years, I must say the comsumer report option is looking like a good solution. I do not want to declare bankrupty as I do have the means to repay a good portion of my debt – I just need the interest to stop.
September 30, 2008 at 3:28 pm
Shelley – I could be wrong, but I thought consumer proposals were pretty well as bad as declaring bankruptcy? Unless I have it confused with something else, but I remember an episode of TTDUP where Gail talked to couple’s about the havock it would still reak on their finances. Have you tried transferring balances to the introductory rates of a new card (freezing the card itself, of course) and then just paying off as much as you can as quickly as you can by cutting back everywhere you can?
(If you’re a TTDUP fan, you’ve probably already done these…)
Best of luck to you.
October 1, 2008 at 8:03 am
Hi ~K – yes I have tried the balance transfer – but was approved for $500 – which isn’t feasible for the $10k owing on the now high interest card. We are considering the consumer proposal knowing that it will effect my credit almost as bad as a bankruptcy for about 7 years but given our financial make up it could be worthwhile. I have about $40k in unsecured debt in my name only. My husband has about $2k. (over the years his debt was transferred over to my cards etc.) Otherwise, we only have our mortgage and about $4k owing on our car (book value is about $5500.00). For what I can tell – without even realizing it, we have the set up of doing this without effecting his credit, our car or the house. Just wondering if there was more information out there that I wasn’t aware of yet that could spin this differently. I guess the next step is setting up a free evaluation with the professionals
or 
(not sure yet!)
October 1, 2008 at 8:52 am
“Getting a credit card, putting some money on it each month and paying it off in full counts too.”
The whole idea of needing to have a credit card is what annoys me. You’re rewarded more for putting a purchase on a credit card and then paying it off than you are for paying for it with cash or debit. For consumers it is senseless – just a trap to trick you into spending more than you can afford.
October 1, 2008 at 9:40 am
Rebecca – I understand your frustration but try to see it from the lender’s point of view – they can’t see if you’re good at paying back a loan until you’ve actually borrowed something and paid it back. Its kind of like a baseball scout wanting to see the star player hit a few balls in the game as opposed to seeing how they hit in practice. Saving up and paying for something in cash shows good intent but doesn’t prove credit worthiness since there’s no penalty if you choose not to rebuild up your cash supplies after initial expense. Not entirely fair I’ll agree but I can’t think of a reasonable alternative. What’s really not fair is not getting the same amount of ‘points’ for paying off the balance each month vs. carrying a balance.
Ultimately though and here’s where I may disagree with Gail – personal accountability shines through. Even though an evil credit card company may increase a person’s credit limit, it’s the person’s choice to ratchet up the spending, there’s no gun to anyone’s forehead.
October 1, 2008 at 5:32 pm
Hey Shelley
My husband and I have just gone through the consumer proposal route.
We had amassed a substantial amount of unsecured debt, the majority of which was school debt, but not OSAP. Needless to say we got married and got pregnant, and having our daughter got our butts into gear.
I understand the impact a crappy FICO score has on your life, but it was the only feasable solution for us, with over 50% of our income going to debt repayment we could hardly afford to eat let alone feed out daughter.
The consumer proposal has allowed us to start over, live our life.
We make a decent $5000 take home each month, and with the debt repayment we have set up with our consumer proposal it is much more manageable. All I know is that it made sense to us and it has allowed us to live again.
Yes it dinged our credit score, lots but now we can start over, we both have secured credit cards but after a year or two they will be regular ones and it will improve our credit score, we also obtained a car loan this week for a new to us van, since we are expecting again. This two will help us improve our credit rating. After two years we can refinance the open ended loan and get a lower interest rate.
Yes the consequences of a low credit score suck, but I have my life back and I still have a credit card for emergencies and we obtained a car loan.
Life does not end after a consumer proposal or bankruptcy.
If you need any info or have any more questions about the process contact me weronika.vanbuel@rogers.com
Hopefully you can start your life over too.
Ps. Im only 24 and I have an entire life time to improve my credit score.
Weronika
October 1, 2008 at 11:13 pm
gail can you (or someone else) elaborate on how long it might take for your score to rise once you’ve stopped being silly about credit (ie. making late payments, or applying for too much credit, or having too large a ratio). i’m always curious to know how much you can expect your score to rise in 6 months or 1 year or 2 years.
thanks in advance!
& ps: me and my hubby started contributing to an emergency fund a couple months ago. last weekend we had a flat tire and it was so nice to be able to turn to the fund to buy a new tire instead of putting the money on a credit card or our line of credit! it was heartwarming to know that money was there and that there is still some money left in the account! thank you so much gail.
October 2, 2008 at 6:33 am
Dinah, I’m sorry, but I don’t have a definitive answer for you since it depends on the types of problems you’ve had on your credit history. Negative changes in scores result from the addition of a negative element, like a collection or delinquency, to your credit history. Typically, delinquencies and anything else that’s on public record remain on your credit report for seven years. Some bankruptcies stay for 10 years. Inquiries remain on your credit history for two years. With credit tightening — meaning that it’s going to be harder to get credit — I’m not sure how scoring will be affected.
October 2, 2008 at 9:39 am
thank you for the answer.
i didn’t realize that different ‘problems’ affect the score in different ways. i always assumed that it was affected the same. & it’s interesting to know that scores are affected by outside issues (ie. recession).
cheers!
October 4, 2008 at 9:29 am
Lisa: Mortgages do not report to the credit bureau. That is normal.
Shelley: Beware of the “free consultation” from a consumer proposal company. Even beware of a consultation from a bankruptcy attorney. They will almost ALWAYS tell you that CP or Bankruptcy is your best option. Why? Because it’s in their own best interest if you do. When I was a banker I once had a client who had previously gone bankrupt and his debt totalled only $5000! I asked him why he went bankrupt and he told me that when he consulted with a solicitor that they told him he should. I’m sorry, but no one should go bankrupt over $5000.
People, credit score isn’t something anyone should worry about. If you manage your finances and credit responsibly then the credit score will take care of itself.
October 6, 2008 at 8:42 am
Thanks Blaine – I am very aware of that and nobody is making this decision for me.
October 6, 2008 at 9:48 am
Why so defensive? Ask for suggestions/advice/ideas, you’re gonna get em, so how about just saying thanks, and you can take it or leave it. We’re fortunate to have Gail’s site available to help us.
October 6, 2008 at 11:04 am
Mary – writing on the internet can make statements seem different then how they were intended. I said thanks to Blaine and truly meant it. I also wanted to assure him that I will be cautious. Sorry if you didn’t feel I was being grateful.
November 7, 2008 at 3:15 pm
puzzles me, that with good credit, maintaining one card which i have been paying off, i used one additional card during the month of my grandbabies birth, with motel expenses, etc. charging about $500. my score with several of the credit services jumpied over 20 points. when i paid it down to about 335, same score. paid it off and dropped back down over 20 points. is there a magic quantity like two or three debts over a couple hundred dollars that need to maintain a balance without being paid off every month or what?
January 8, 2009 at 10:56 pm
Ok this frustrates me, I went to this site that looked good to get my free credit rating. I fill out all the necessary areas avoid anything that tries to charge me for something and i get an email after i submit my information telling mey they are going to charge my credit card for this service.
How does that end up being free? Ok so clicking back i saw where they said they would charge you for the service. i missed that part, although it is the first 7 days so im cancelling it before they charge me.
I just don’t get it though how can they get away with saying its a free service and charge you. Its very misleading and some people don’t read the fine print at all and don’t look at their credit card statements.
June 3, 2010 at 12:53 pm
Great post and information. I really like the detail as it is hard to impossible to get information from equifax or transunion on what all really goes into coming up with the score.