Credit Report Question: Credit Cards

[nivlac]

@Gfactor

Not according to Fair Isaac, the creator of the current FICO scoring model. They say “Inquiries don’t affect scores that much.” http://www.myfico.com/Downloads/Files/myFICO_uycs%20booklet.pdf at 14.

Inquiries are part of “New Credit” which only accounts for 10% of your score.

http://www.myfico.com/CreditEducation/CreditInquiries.aspx?fire=5

Since this is GQ, I was passing along first-hand information. This was from a quant jock who creates and runs the scoring models. My advice is to be careful about getting too many credit inquiries if you want to keep your score high.

[MrPeabody]

@SusanStoHelit

She does have an extensive history, her score dropped from mid 720s to mid 680s, there were no public records, I don’t know how many tradelines, but she has a few credit cards (some with balances), two auto loans, and no mortgage or educational loans open right now. She pays on time or a little ahead and she hasn’t payed off or closed anything since she last looked.

Having no mortgage actually hurts your score. I subscribe to a credit monitoring service that lets me change my credit scenario to see how my actions would affect my score. One of the items was mortgage or no mortgage, or mortgage not current. Only the no mortgage and not current dropped my score.

At the time I did not have a mortgage but in the last 90 day I have acquired one and my score immediately went up about 20 points.

The logic behind it is that the more people who think you are credit worthy helps your score.

[Gfactor]

@MrPeabody

The logic behind it is that the more people who think you are credit worthy helps your score.

There isn’t actually much “logic” behind credit scores at all. The FICO model is a statistical one. If having a mortgage increases one’s score (and it certainly can) it is because people who have mortgages are less likely to declare bankruptcy or default on loans. The FICO score is designed to predict defaults. It’s logic is numerical. If people with mortgages are less likely to default on their debts, then they get higher scores.

As FICO told the Senate Committe on Banking, Housing, and Urban Affairs in 2003:

To develop the models that generate the credit scores, Fair Isaac analyzes anonymous credit report data to statistically determine what factors are most predictive of future credit performance.

http://banking.senate.gov/_files/stjohn.pdf

In SusanStoHelit’s example, the boss’s lack of a mortgage would not be a factor in the change in score because it was the same for both reports. The only change that she referred to in her question was an inquiry, although it is possible, as she has acknowledged, that an old account might have dropped off of the report.

Here is a FICO simulator for the curious.

FICO’s written statement, written to convince the Senate that FICO should not be compelled to disclose its scoring model because people already had access to plenty of information about credit scoring, has a pretty good summary of the publicly available information about credit scoring. It also has a good collection of reference materials.

[NurseCarmen]

@furt

Untrue. Unused credit almost always works in your favor.

Well, almost. My credit score was 825 last time I checked. The reason it wasn’t the full 850? Because I was carrying no balance on my credit cards. Or to put it another way, because I was too responsible!

[Gfactor]

@NurseCarmen

Well, almost. My credit score was 825 last time I checked. The reason it wasn’t the full 850? Because I was carrying no balance on my credit cards. Or to put it another way, because I was too responsible!

We discussed that a bit here. And see, Understanding Your Credit Score (pdf) at 10:

**In some cases, having a very small balance without missing a payment shows that you have managed credit responsibly, and may be slightly better than carrying no balance at all. **On the other hand, closing unused credit accounts that show zero balances and that are in good standing will not raise your score.

(Emphasis added.)

[Nimue]

Just wanted to add one other point of consideration concerning cancelling unused credit cards. I’ve read this in a couple of sources, but I believe one of them was a recent issue of Consumer Reports. Evidently, it used to be recommended that you cancel unused credit cards because it was more favourable for your credit score to have fewer lines of credit open. Now, however, experts are advising that cancelling those unused lines of credit could potentially damage your credit score because they could bring down the average length of history of your credit. I.e., if you have an old credit card that you never use and so you decide to cancel it, but most of your other lines of credit are fairly recent (say, a newer credit card and a new mortgage), you hurt yourself by taking the older card out of the equation because suddenly the average age of your credit lines has dropped.

Unfortunately, I didn’t learn that little tidbit until after I had gone and cancelled several unused store cards that I had initially opened to build a little credit history in this country. So now most of my credit looks pretty new. :smack:

[Gfactor]

@nivlac

Since this is GQ, I was passing along first-hand information. This was from a quant jock who creates and runs the scoring models. My advice is to be careful about getting too many credit inquiries if you want to keep your score high.

But you said, “the #1 thing that impacts your credit score is the number of credit inquiries you get.” That’s just not true. Nobody disputes that inquiries will reduce one’s score. The questions are “how much?” “how many?” and “how long?” Fair Isaac says that both the number of inquiries, and the time since they were made, are part of a group of factors that, when aggregated, normally account for 10% of the important information affecting a FICO score. http://www.myfico.com/CreditEducation/WhatsInYourScore.aspx.

Furthermore, they say:

FICO scores only consider the voluntary inquiries listed on your credit report from the past twelve months.These include mortgage, credit card, auto loan and other requests for credit you may have made. FICO scores are engineered so that your score is not lowered from the multiple inquiries that may occur when you shop for the best auto or home loan.

http://www.myfico.com/Products/FICOOne/Sample/Sample_Inquiries.aspx?fire=5&ProductID=16

And:

Looking for a mortgage or an auto loan may cause multiple lenders to request your credit report, even though you’re only looking for one loan. To compensate for this, the score counts multiple inquiries in any 14-day period as just one inquiry. In addition, the score ignores all inquiries made in the 30 days prior to scoring. So if you find a loan within 30 days, the inquiries won’t affect your score while you’re rate shopping.

http://www.myfico.com/Offers/myFICO_UYCS%20booklet.pdf

OTOH, they do say that

People with six inquiries or more on their credit reports are eight times more likely to declare bankruptcy than people with no inquiries on their reports.

*Id. *

So avoiding large numbers of unrelated inquiries over long periods of time is definitely a good idea if you want your score to be as high as possible.

[Mr.Slant]

Re: inquiries hurting your score

I followed this kind of stuff for YEARS on the Creditnet [1] web site’s discussion forums.
The gist of what I learned is that THE HIGHER YOUR SCORES, the HIGHER THE IMPACT OF MORE INQUIRIES. Conversely, THE LOWER YOUR SCORES, the LOWER THE IMPACT OF MORE INQUIRIES.
Basically, if your credit is the suck already (under 600), more inquiries really won’t hurt you much at all.
If your credit is really good (over 750) inquiries have been observed to damage scores by 30 points.
I would submit my personal opinion that the scoring model is very accurate at detecting complete deadbeats, good at detecting people who pay the vast majority of their bills on time and carry reasonable % used on their cards, and much less useful in determining the difference between a highly responsible borrower and a highly, highly responsible borrower.
I realize the system demonstrably WORKS even at higher scores, but it seems like it makes a lot more sense for individuals I know that I see in the 500-680 range than it does at either end of the scale.

[Mr.Slant]

@nivlac

I heard this from someone whose job is developing and maintaining the math models and programs that figure out the credit scores. He said that the #1 thing that impacts your credit score is the number of credit inquiries you get. Every time you apply for some credit (like another credit card or a loan), your credit score will ge dinged. Having unused credit cards is not the big factor.

I should have mentioned my theory on your friend in my last post.
I believe that what he said is wholly correct, assuming that the “your” and “you” in that statement was you, nivlac, and he knew or expected that you would already have a good credit score and generally be on sound financial footing.
Even though some of us challenge your beliefs on this matter, your associate may have been wholly accurate with what he said.

[Mr.Slant]

ARGH. The cite [1] from my post two posts up from this one should have been:

[1] http://consumers.creditnet.com/straighttalk/board/

[Gfactor]

Fair Isaac is now promoting its FICO NextGen score, btw, which:

1. Reduces the requirments for getting a score. (Some people have no score reported because they have an insufficient credit record).
2. Extends the buffer period in which inquiries are not counted from 30 to 45 days.
3. No longer considers collection accounts with balances under $100.
4. Does not penalize consumers for tradelines from consumer finance companies.

http://www.fairisaac.com/NR/rdonlyres/D8F746FC-9034-4405-A93C-F6C13A3C19AD/0/NextGenFICO20_PS.pdf
http://www.fairisaac.com/NR/rdonlyres/8B0637F7-5079-41F4-B218-689DE6F519C9/0/NextGenFICO_CBRisk_PS.pdf
http://www.fairisaac.com/NR/rdonlyres/DE0A8012-2226-47EE-99BF-28CB28E67249/0/NextGenFICOMortg_PS.pdf
http://www.fairisaac.com/Fairisaac/Solutions/Product+Index/NextGen+Risk+Scores/

So far, few lenders are using the NextGen scores. http://www.fairisaac.com/NR/rdonlyres/C77AF033-FFF1-4153-8FF0-AABEB1CEC16C/0/VP262_HowandWhy_AR.pdf. Contra, http://www.ezinearticles.com/?Understanding-The-Different-Types-Of-FICO®-Credit-Scores&id=82880 (“The NextGen FICO is currently being widely adopted by lenders and is becoming increasingly popular in retail.”)