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Fair Credit Reporting: 16.5.2.1.4 Length of credit history

This category includes information on the age of a consumer’s accounts, including the age of the oldest account and an average age of all accounts. Generally, consumers with longer credit histories are seen as less risky. This category also considers the time that has elapsed since the last use of an account.

Fair Credit Reporting: 16.5.2.1.5 New credit

This category includes information about new accounts as well as inquiries by lenders for the consumer’s credit file. Evidence of opening several accounts in a short period of time is seen as an indicator of risk.245 Excessive inquiries will lower a credit score.

Fair Credit Reporting: 16.5.2.1.6 Types of credit in use

This category considers the mix of credit accounts that a consumer has. A good mix includes some credit cards, a mortgage loan, an installment loan and retail store cards. Given that a good mix includes a mortgage loan, it appears FICO’s scoring models favor homeowners over renters.251 Only the latest FICO model considers rental payments,252 and such payments are often not even reported to the nationwide CRAs.

Fair Credit Reporting: 16.5.2.2 FICO Scorecards

The guts of FICO scoring models are called “scorecards.”255 These are preset tables, with the factors listed on the left-hand side (e.g., number of recent inquiries) and attributes for each factor on the top row (e.g., 0, 1, 2). Each attribute is assigned a point value, which can be positive or negative, and the point values fill the cells in the scorecard. Points are developed based on a sample of previous borrowers whose creditworthiness (i.e., whether their loans were good or bad) is already known.

Fair Credit Reporting: 16.5.4 Ideas on How to Peek into the Black Box

Even with these revelations by the credit score industry, much of the “black box” nature of credit scoring systems still persists. Those seeking detailed information about how credit scores are calculated in general or for a specific person will be told initially that the actual process is a trade secret.

Fair Credit Reporting: 16.6.1 Industry’s Advice

Since they are based on consumer credit files that are constantly changing, credit scores will also change over time. Consumers can take steps to improve their credit score, although it may take time for some of their actions to be reflected in a new score. FICO gives the following advice on improving a credit score:270

Fair Credit Reporting: 16.6.2.1 Generally

There are other steps consumers can take themselves to attempt to improve their credit scores, or at least avoid the negative effect of a low score. However, some of these steps can be tricky or controversial.

Fair Credit Reporting: 16.6.2.4 Remove Duplicative or Old, Closed Accounts

Have information on duplicate or old, closed accounts removed from the consumer report. Sometimes an account with negative information gets reported twice, especially if there is a collection agency involved.277 A consumer may also want to have extraneous accounts removed if a consumer’s score is being lowered because of too many credit card or revolving accounts. Be careful to ensure that this does not lower the “age of credit history” factor.

Fair Credit Reporting: 16.6.2.5 Do Not Pay Collection Accounts Without Reaching an Agreement with the Furnisher

Do not pay off old collection accounts without reaching an agreement with the creditor or collection agency that addresses the consumer credit reporting issues. Paying off a collection account does not remove it from a credit report. Also, payment may “refresh” the age of the account, showing it as current collection activity.279 According to practitioners, there have been examples in which payment of an older collection account has decreased a credit score by fifty or more points.

Fair Credit Reporting: 16.6.2.6 Pay Off Credit Cards Before the Billing Statement Is Generated

Find out on what day a credit card issuer furnishes information to the consumer reporting agencies. Pay the balance off before that day to create a zero ratio of credit used to credit limit, which will increase the “available credit” factor. If a consumer carries a balance on more than one credit card, move the debt so it is evenly spread over these cards and uses up less than thirty percent of the cards’ credit limits.285

Fair Credit Reporting: 16.7.1 Lack of Flexibility

A fundamental discomfort with credit scoring systems is the idea that a person’s entire “credit persona” is reduced to a number. The rigidity of a credit scoring system and its mechanistic application leave no room for the exercise of human insight and discretion in evaluating applicants.

Fair Credit Reporting: 16.7.2 Credit Scores, Risk-Based Pricing, and Subprime Loans

Credit scores are used to determine, not only whether a consumer will be approved for credit, but at what price the credit will be provided. Essentially, the lower the credit score, the higher the price for credit. The website for FICO even provides interest rates quotes for home mortgages based upon a consumer’s credit score. Note that the FCRA requires creditors to give consumers a notice when they receive a higher-priced loan on the basis of their credit score, which includes a copy of that score.301

Fair Credit Reporting: 16.8.1 Garbage In, Garbage Out: The Effect of Consumer Reporting Inaccuracies on Credit Scores

No matter how valid a model may be, it is no better than the data it is given. If a consumer’s credit history contains inaccuracies, their credit score will be inaccurate. In other words, credit scoring models are developed to assume perfection in credit reporting, which is a fundamentally flawed assumption. Credit history files at the nationwide consumer reporting agencies are notorious for their lack of accuracy.332

Fair Credit Reporting: 16.8.2.1 Generally

Because of the way credit scoring models weigh data from a credit file, certain information that is not negative in the abstract will have an adverse effect on a credit score. This information may or may not be accurate.

Fair Credit Reporting: 16.8.2.2 Credit Limits

One of the most significant problems affecting credit scores had been the failure of certain credit card issuers to report the credit limits on their cardholder’s accounts. Instead, the CRAs would substitute the highest balance on that account as the credit limit for that tradeline.343 Since one of the factors in a scoring model is the ratio of credit used to credit available, this practice would depress a credit score by making it seem that a consumer had “maxed out” on the account.

Fair Credit Reporting: 16.8.2.4 Duplicate Accounts

Sometimes a credit account will show up multiple times in a credit file,361 or derogatory information within an account history might show up multiple times, even though it only occurred once.362 If it is an account in collection, it may be reported by both the collection agency and the creditor, creating a false double negative effect on the creditor score.363 The failure of the CRA

Fair Credit Reporting: 16.8.2.5 Wrong Account Type

Misreporting the type of account may lower a credit score.365 For example, consider if a mortgage account is reported as a revolving account. Suddenly, the consumer seems very over-extended. For example, a common error by furnishers is the designation of mortgage accounts as “installment loans.”366 At first glance, this would not seem like a critical error, but it creates substantial problems for the consumers’ credit scores.

Fair Credit Reporting: 16.8.2.6 Too Many Accounts

Even simply reporting old, closed credit card accounts with no balance may hurt a credit score, if the consumer is considered to have too many of these accounts.368 Because they are not technically negative, these accounts are not subject to the FCRA’s seven-year limit for adverse information, although positive accounts are generally deleted after ten years.369

Fair Credit Reporting: 16.8.4.1 Lack of Validation and Re-Validation

Credit scoring models must be initially validated when they are developed. This means the model must be tested against databases of loan files where the results of the loans (good or bad) are known. The models must also be re-validated periodically. Without re-validation, a credit scoring model can lose its accuracy.