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Credit Scoring Models: How They Work and Why They Might Explain Score Drops

Despite reducing their debt balance, a client of mine recently noticed a drop in their credit score, which seemed counterintuitive. If they paid down debt, why would their credit score be getting worse?

As I’ve written before, keeping credit balances low is a key component of a good credit score because your debt-to-income ratio is an important factor for credit scoring models. Clearly, some other factor at play was bringing down my client’s credit score.

I reached out to the folks at CreditXpert and asked one of their representatives for an explanation of what was really happening here. CreditXpert explained my client’s credit score drop by telling me that, as of April 1, they were being scored on a different “credit scorecard.”

Now, unless you’re a credit expert, you probably haven’t heard of a credit scorecard. So let’s use this moment to break down credit scorecards, credit scoring models, and how they are related to your overall credit score.

What's a Credit Scorecard?

Credit expert John Ulzheimer writes that credit scorecards are effectively an engine that “analyzes the information on your credit report and then calculates a score based on that information.” Scorecards inform various credit models that then compute your credit score for each major company or service that measures your credit.

The credit scorecard is a type of credit scoring model that quantifies the risk level associated with various borrower characteristics. For example, a FICO credit scorecard could judge you based on income, age, credit history, marital status, employment history, homeownership, and more.

What’s included on a credit scorecard isn’t based on publicly available information, but an example of something that might be included is your age. In this case, depending on your age bracket, you’ll be assigned a certain number of points depending on the risk that the major credit bureaus associate with your age.

Statistically, older people present less of a credit risk, so they’ll get more points based on their age than a younger person would. So a 50-year-old will typically get more points added to their score than a 20-year-old.

However, in reality, many other factors besides age come into play and are weighted more heavily, such as credit history and debt-to-income ratios.

To arrive at a credit score, the scoring model then adds up all the points assigned to you based on your characteristics. But what exactly is a scoring model?

What's a Credit Scoring Model?

Now that we’ve explained credit scorecards, it’s easier to understand that these scorecards play a role in building a credit scoring model. The VantageScore scoring model, for example, is used by the three big credit rating agencies — Equifax, Experian, and TransUnion — to assign you an overall credit score between 300 and 850.

Outside of the big three agencies, there are many other credit scoring models in use. One that is noteworthy is the FICO scoring model, which has been used by financial institutions since 1989.

In the world of homeowners and future homebuyers, the FICO credit scoring model is particularly important. More than 90% of top lenders use FICO to suss out a borrower’s credit score, and FICO uses its own set of credit scorecards to evaluate your risk.

Both VantageScore and FICO scoring models take into account factors such as your payment history, credit utilization, credit usage, and new credit applications. Though exactly how each model weighs each factor is different.

Put simply, if you pay bills on time, don’t use too much of your available credit, and don’t apply for new credit frequently, you can stay in good standing.

Scoring Based on Different Credit Scorecards

While you now have a basic understanding of credit scorecards and credit scoring models, the original explanation from the CreditXpert representative still needs a little more detail.

CreditXpert said my client was being “scored on a different scorecard,” and that this was “expected to occur as they crossed a key boundary associated with the age of their accounts.”

This demonstrates something important you should know — people with different characteristics are evaluated on different scorecards. For example, someone with a bankruptcy on record will be evaluated using a different scorecard than someone without a bankruptcy. 

And because these two people are evaluated on different scorecards, the actions they take, such as taking out a new loan or paying down a balance, are also evaluated differently. Basically, this means there are thousands of different scorecards in use because each person has a unique set of traits on which they are evaluated.

The underlying reason for this is that the credit bureaus want to be as accurate as possible in evaluating any given borrower’s credit risk. They can’t do that if they score every person in exactly the same way.

What Does This Mean for You?

Credit scores drop and rise, often for reasons that don’t seem clear or intuitive. Even the representative from CreditXpert admitted, “A scorecard change can result in an increase, a decrease, or no change at all. The outcome is often not intuitive.”

Thus, scorecards and credit scoring models can be difficult to interpret. But if you can wrap your head around how credit scorecards and credit scoring models work generally, you’ll understand common reasons why your credit score goes up and down.

My client’s score dropped because a change in the “age of their accounts” altered which scorecard they were evaluated on. (Most likely the average age of the credit accounts decreased, which can occur from closing a credit account.) On that new scorecard, everything in their credit history was now subject to a new scoring mechanism.

The same thing could happen to you at some point. But over the long term, you’ll always be better off reducing debt balances and paying bills on time and in full to maximize your overall credit score whether it’s from VantageScore, FICO, or another scoring model.

How to Get Help

At The Mortgage Hub, we’ve always helped clients navigate the challenges of credit scores and credit history when it comes to getting a mortgage. Click the button below and schedule a free consultation so our mortgage advisors can help you better understand your credit and mortgage availability.

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