Figuring credit scores not an exact science

By PAUL WENSKE

Maybe you had a class you tried to ace but were denied by a picky teacher who always found ways to shave points. It’s kind of the same with credit scores.

Truth is, you can’t ace your credit score, no matter how hard you try.

Now, in the big picture it probably doesn’t matter too much. A high credit score shows you can handle credit well and guarantees you favored treatment on loans and insurance rates.

But it still rankles folks with solid credit histories who call up the paper wondering why their scores aren’t even higher.

I had the same question recently when I refinanced a home equity loan to get a lower interest rate. The bank gave me the better rate in part because my FICO credit score from TransUnion was 796.

That’s high, but still short of 850 — the highest you can get. Official FICO scores range from 300 to 850. A good score typically is above 760. A bad score is below 600.

What I learned may not be startling but it is revealing. As scores get higher, credit bureaus get more picky and, seemingly, more arbitrary. Scores and reasons for them vary between bureaus. Ambiguous language can make you look worse than you are. And some dings are just wrong:

•One of the most revealing things is that nobody can ever get the top score.

That’s according to Barry Paperno, consumer operations manager for Fair Isaac Corp., the data analysis firm that invented FICO scores, used now by most creditors to assess consumer risk.

Paperno said when FICO created the scores, it gave itself wiggle room. That way, when new versions are created, lenders don’t have to reprogram their computers. “There really is not an 850 score,” he said. So the best you can ever do is somewhere between 820 and 840, he said.

•Credit bureaus often cite one to four major negatives. They can seem pretty picky at higher ranges.

TransUnion, for example, said the amount I owed “on revolving accounts is too high.” Bureaus don’t like high credit-card balances relative to credit limits. The worry is you might max out beyond your limit.

But I had only one credit card with any balance. And it was only $758, with a credit limit of $7,000. A TransUnion official assured me not to worry, that it cost me only a few points. Still, you need a credit card to qualify for a credit history. Yet, with higher scores, a balance is apparently an excuse to ding you.

•If you get all three bureau scores, you will find your FICO score jumps around.

For example, Experian gave me a score of 802. Equifax scored me at 784. Why the variance? It has to do with statistics. The FICO score assesses risks based on a statistical sampling of consumers.

But each bureau bases its scores on an analysis of a separate and distinct sampling of a million consumers. So you end up with three samplings, each with a different mix of risk factors. In essence, Paperno said, each bureau compares you against different people. You may compare better in one bureau than in another.

Some variances are simply at odds. Experian also nailed me for a too-high “proportion of balances to credit limits,” even though I had only one card with a balance. Yet, Equifax praised me for having “a low proportion of balances to credit limits” on my cards. But gave me a lower score.

•But if scoring seems ambiguous, bureau-speak is so imprecise it makes things seem worse.

Bureaus use terms such as “relatively high” for stuff without saying relative to what. They like the plural form, as in you have too many high-balance “revolving accounts” when you have only one. Equifax dinged me for “multiple accounts” with missing payments. But it only listed one late payment — back in 2001.

Paperno said bureaus are trying to be more precise. For years only lenders saw credit scores. Consumers only recently have had access to them. He said the wording made sense to lenders, who were measuring relative risk. For example, even one missed payment might be judged “too many” to get a top score.

But Paperno said language that worked in the past may confuse consumers now. “In some ways we have a lot of catching up to do,” he said. Can’t argue with that.

I probably shouldn’t complain. I still got a lower-rate loan. But the scoring process remains as mysterious to me as the theory of relativity. Right after I refinanced my loan, TransUnion dropped my score 30 points to 766, apparently viewing my refinance as a new loan with added risk, rather than as a replacement loan with a better rate.

Statistics are like that. They don’t measure the context of what humans do. That won’t hurt me much. But to a guy starting out with a 766 score, a 30-point drop is a costly credit dent.

Figuring FICO

Your FICO score is based on five key credit factors:

•Payment history is worth about 35 percent. Do you pay your bills on time?

•Outstanding debt is worth about 30 percent. Do you owe too much?

•Length of credit history is worth about 15 percent. How established is your credit?

•New accounts and inquiries you initiate are worth about 10 percent. Are you taking on more debt?

•Mix of credit is worth about 10 percent. Do you maintain a healthy mix?

For more information, go to www.myfico.com.