The always secret FICO scoring system has dozens of variables, but what could be one of the most important factors in your FICO score is never seen: your “scorecard.” In some cases, a scorecard can penalize your credit rating for doing nothing. While you cannot really affect which scorecard the Fair Isaac Company uses for your credit rating, knowing the concept of the scorecard can help you understand the logic behind your credit rating.
What is a Scorecard?
As if the FICO system — and several close variants employed by the major credit report bureaus — wasn’t confusing enough, the FICO system has separate scoring models for different types of individuals based on the presence of certain negative items on a credit report – these are called “scorecards.”
To add to the confusion, FICO does not publish a list of these scorecards nor much detail on them. The most we know is that there are 12 scorecards and consumer agencies have made some logical deductions about the most common scorecards and why certain users fall into those categories. For instance, FICO probably has a scorecard for consumers with a bankruptcy on file and a scorecard for users with very few accounts.
How the Scorecard Impacts Your Rating
The FICO system changes the weight of certain variables for each scorecard. The FICO system also places a credit rating cap on users that fall with certain scorecards. For example, users with a bankruptcy scorecard can never achieve the maximum FICO score of 850, according to Leslie McFadden of Bankrate.
Switching from one scorecard to another can have a dramatic impact on your credit rating because FICO only compares consumers to other people with the same scorecard. For example, you might look like a great credit risk (above 760) when compared to users with only one account on file, but only receive an average rating (about 700) when compared to season credit handlers, who usually have three or more accounts.
Removing a negative event from your credit record often lowers your credit rating, even though you technically have a better credit history. For instance, a bankruptcy on file lumps you in with people who tend to have the worst credit rating, so you will look worse once you return to a scorecard that tends to have more responsible borrowers.
What Can You Do About Your Scorecard?
Ultimately, there is little you can do about your scorecard, but FICO constantly looks for ways to judge borrowers more fairly. For example, FICO revised its scorecard system in 2008 to ease the transition from scorecard to another, so dramatic jumps are less common than in prior years.
If you see your credit score drop as you move to a new category of borrowers, keep in mind that you probably can achieve a higher rating once you reach the upper echelon of borrowers in your new scorecard, whereas you probably maxed out your rating under your old scorecard.
The best thing you can do to improve your credit rating is to always pay your bills on time and limit your total debt load. As long as you do not have any negative items on your credit report, you should eventually receive a very high credit rating – usually considered somewhere above the 760 mark on the FICO scale.