If you’re like most of us, you’ve probably been glued to your television to take in the 2018 Winter Olympics. It can be captivating to watch the best athletes in the world compete at the highest level in a battle for the gold.
Yet sometimes, Olympic events may leave you scratching your head about how the scoring works. Because no matter how flawless an athlete (or their fans) believe a performance to be, it really all comes down to the judges’ scorecard.
Does that sound familiar?
Whether it’s an Olympic event or a credit report, there will almost always be some level of discontent with the judging process if you don’t end up with the score you hoped for. And this feeling of discontent only becomes magnified when you can’t understand why you were penalized. Like Olympic scoring criteria, the credit scoring system is often very confusing to the average person.
What Is a Credit Scorecard?
Olympic judging employs complicated and precise scoring systems. Take figure skating, for example. In the 2018 Winter Olympics, the International Skating Union (ISU) Judging System is used to evaluate an athlete’s performance. Skaters can be awarded points for overall presentation and artistry, in addition to points awarded for jumps, spins, throws, lifts, and footwork sequences. Each move is assigned a base value, and then a skater can earn extra points for executing the move well — or lose points if the move is executed poorly.
Credit scoring systems are built to follow a very specific set of rules as well. However, unlike Olympic events, credit scores aren’t awarded subjectively. It’s not up to a judge to determine whether your credit report “performed” better than the next person’s report.
Instead, all credit scoring models are legally required under the Equal Credit Opportunity Act to be “empirically derived” and “demonstrably and statistically sound.” What this means is that credit scoring models must be built using a scientific process, not assumptions or subjective interpretations, and they must be proven to work reliably before a lender can use them.
At the heart of any credit scoring system is a series of scorecards. A scorecard is the actual engine that evaluates the information on your credit report, tallies up the points your report earned in different areas, and then awards you an overall score, which reflects your level of credit risk.
You can earn points for not having any missed payments, having low credit card usage, having a good mix of account types, and applying for credit sparingly. It is easy enough to understand at a high level, but when you dig in deeper, the process becomes more complicated.
Different Credit Report Types, Different Scoring Rules
Another way credit scoring differs from the scoring you might see in an Olympic event is the fact that, where credit scoring is concerned, not all people will be judged using the same set of rules.
Credit scoring systems employ a multi-scorecard approach. Homogeneous populations — those that have similarities in their credit profiles — are grouped together so that their reports may be scored in a similar fashion.
The reason different groups of people are judged using different systems is because each group poses a different level of risk to future lenders. Consumers with clean credit reports do not represent the same risk as people who have filed bankruptcy. Consumers with “thin” credit files (not much credit) represent a different risk than consumers with more extensive credit histories.
It’s also possible to hop from one scorecard to another. For example, as time passes and you establish more credit, you might move from a thin file scorecard to a clean credit scorecard (assuming you have no derogatory information on your report).
If you do hop to another scorecard, then the scoring rules change entirely. Everything on your credit report may be evaluated differently, and the score you’re awarded may change with very little notice or plausible explanation.
The bottom line is this: Regardless of the Olympic event, those who perform the best — the figure skaters who leap and land with grace and precision, the snowboarders who make a double cork 1080 look easy — generally walk away with the medals.
The same can be said for credit scores. Those with the cleanest credit reports — who religiously pay their bills on time and avoid testing their credit limits — generally end up with killer FICO and VantageScore credit scores.
- What Your Credit Score Is Trying to Tell You
- You Have to Trust the Process (Just Ask the 76ers)
- A 12-Month Plan to Raise Your Credit Score
John Ulzheimer is an expert on credit reporting, credit scoring, and identity theft. He has written four books on the topic and has been interviewed and quoted thousands of times over the past 10 years. With time spent at Equifax and FICO, Ulzheimer is the only credit expert who actually comes from the credit industry. He has been an expert witness in over 230 credit related lawsuits and has been qualified to testify in both federal and state courts on the topic of consumer credit.