Observations from Fifteen Years of Credit Reports

I’ve looked at a bunch of credit reports.  Part of my job over the last fifteen years required reviewing credit reports.  Specifically between 2004 and 2018, I reviewed hundreds of credit reports a year as part of loan decision and annual reviews.  This included looking at credit scores, individual line items, lifetime payment history, and providing an analysis on an individual’s score.   Patterns started to emerge, patterns I didn’t realize until I moved into a management role and found myself explaining the “why” behind a borrower’s score.  Today I share fifteen years worth of observations from reviewing credit reports:

Disclaimers and Disclosures:  

These comments are observational only. I did not collect/store any proprietary/personal/confidential information from my employer.  There will be no numerical statistics shared in these observations as that would be proprietary data.

These comments are related to Equifax reports, the scoring service my employer used for the majority of my employment career.  Equifax uses the Fair Issac Credit Scoring model (FICO).  FICO is utilized by all three credit bureaus and official education material is available through myFICO.

My responsibility was for small business lending.  The reports I reviewed were primarily from entrepreneurs, but there were a good mix of here was a good mix of traditional employees who were buying an investment property or were a partner in a business.

Scoring/Reporting Observations 

Payment History Matters the Most.  This sounds so simple, but the majority of the reports with issues were from not paying bills on time.  Specifically two to three delinquent payments in the last twenty four months caused large drops in a credit score.  The credit reporting agency doesn’t report something as delinquent until 30 days past the original due date.  A reported delinquency is a major issue.  Some credit reports provided to Banks will show the original date the report was opened and how many times delinquent a borrower has been in their life.  

Credit Scores are on a Bell Curve:  The average credit score in the United States was just above 700 in 2018.  The majority of scores I saw were within eighty points of this average.  People with multiple blemishes and late payments could still have a 620-650 score.   Alternatively, it was difficult to find any correlations in “why” someone’s score got above a 780.  I’d even argue this number down to 750 for being the maximum “controllable” credit score.

I occasionally saw a score below 620, but it required the borrower to be an unmitigated disaster with the laundry list of everything that could go wrong (late pays, charge offs, collections, bankruptcy, foreclosure).  The scores above 780 required both a report with no negative items, but also a long credit history and loans held for a long time.  At the upper end of the range, immaterial changes to your credit profile can cause a 20 point swing. (more below).  

Collection Companies Have Power: I consistently saw borrowers with otherwise perfect credit get an 80 to 120 point reduction due to a single collection.  It didn’t matter the size of the collection either, an $80 dispute could cause mass destruction to an individual’s credit report.   The problem with a collection is the individual is guilty until proven innocent.  If you’re a borrower needing to qualify for a mortgage, the collection company holds you hostage.  (It should come as no surprise that collection companies pay fees to the credit reporting agencies for this power) 

Entrepreneurs are exposed to this more than the average consumer because almost every “standard” contract for a business includes some sort of personal guarantee.  There are some unethical salespeople (ahem Credit Card processing) that use small ticket equipment leases buried inside 50 page contracts.  A few of the firm’s I’ve run into are better collection agencies than actual providers of the service. 

Revolving Credit Utilization:   This is how much available credit does a borrower have relative to available total credit?   My observation was someone’s score was driven down when they got past 70% total utilization on revolving credit.  If someone has $50,000 in open lines, going above $35,000 borrowed would drag down the score.  The largest impact from this measurement seemed to be when it was correlated with something else (one late pay or one collection).

I came across this situation more often than you would think – An entrepreneur might be using a variable rate home equity line because it was the lowest cost of borrowing or someone was maximizing personal rewards cards for business purchases.  High utilization alone didn’t drive someone’s score down past the acceptable level, but if there was one rouge collection combined with high utilization, the borrower would have serious credit issues.

Credit Inquiries:  The number of times your credit is pulled matters, btu less than it used to.  I started my career in the early 2000s and the number of inquires on a borrower’s report would drive the score down quickly.    This was an issue for entrepreneurs who provided their social security numbers to vendors to get credit terms.  The theory was a borrower that goes to multiple banks is “desperate” and “must be in trouble.”  That was the best explanation our classroom received in 2003 when we pointed out people should shop for loans. 

The credit reporting agencies were getting pressure back then to change.  The news would pickup on stories about a couple going car shopping, then by the time the 4th dealership checked their credit as part of a test drive their score would have fallen.  Everyone should shop interest rates and terms.  The creators of the scoring models came around and slowly made modifications.

More Information: The credit scoring models look at various data points going back two, five, and seven years, but that doesn’t mean its gone.   I got a chuckle at news stories that would say “a bankruptcy drops off your report after X number of years.”.    The credit report I would get would tell me when their credit file was initially opened (month/year).  It would tell me if they ever been bankrupt.  That report contained number of times they had been 30-60-90 days late in the entire life of their credit file.  This led to some surprising conversations when a 45 year old borrower would tell me their story about being “a knucklehead in their 20s”.

Speaking of seeing more, did you know some lenders can also order background checks?  I often receive a report from Lexis Nexus that includes any criminal history.   Remember when you fell asleep in the Whataburger Drive Thru and got arrested under suspicion of a DWI?  I had the pleasure of finding out.     

Cumulative Mistakes Matter:  The designers of the scoring model understood that mistakes happen.  One mistake is often “forgiven”, seeing someone’s score drop 30-50 points but still remaining in the high-acceptable range.  The borrower would simply give an explanation, we would notate the explanation, and move on.  Automated scoring models  still approve these scores and rate the borrower as good to excellent, and the worst case is the borrower pays a slightly higher rate.  

Once two mistakes showed up, the repayment risk models sounded an alarm.  The borrower who had an $80 collection and missed a payment saw a massive score drop.   One mistake is forgiven while two equal a pattern.

Should I Pay to Check My Score?

Probably not.   You should check your actual credit reports once a year, specifically looking for the rogue collection or past due account.   You can access all three of your reports for free without a score at Annual Credit Report.  This is the free service congress required the three credit bureaus to create and they will not contain a score. 

If you want to get your score, many credit card companies provide you a credit score estimate free of charge.  I only time I recommend paying for report requires meeting two requirements:

1. The credit card estimate has you at/below 750
2. You’re two months or less away from applying for a mortgage.  

The mortgage application process looks at all three scores from one or both borrowers and is a rigid process.  There are specific rates for specific scores and it is worth the $30-$40 to see this in advance.  

What is Success?  A 750+ Credit Score

Celebrate when you get past 750, then stop worrying!   Paying your bills on time, keeping your revolving balances low, and keeping collections away is 95% of the battle.  Once your score goes above 750, you are qualified for the “best” rate in almost every lender’s scoring model.  

The factors that drive your score above 750:  Age of your credit record and oldest trade lines.  Age is outside of your control and comparing your score to someone who is ten years older will often leave you in frustration.   Having an old trade line for the sake of a really high score is anywhere from curious to outright dumb.  

What do I mean by oldest tradeline?  This is the longest active loan on your credit report.  I’ve seen a couple of scores around 820 to 835, but often these scores were to the detriment of the borrower.  The 820 borrower kept the same mortgage for ten plus years instead of refinancing.  This borrower might have kept the same two credit cards for the past ten years.  Maybe they had a five year old car loan that should have been paid off early.

Is the incremental lift above 750 worth it?  Should you keep that crappy old credit card from college with an annual fee to have a 780 vs. a 750?  Should you avoid making money credit card hacking over the 10-20 points it costs you once you’re already at the high range?  What about keeping that car loan you could pay off or refinancing that mortgage when rates drop? 

I get a laugh out of debates I see around credit scores at the upper end of the bell curve.  That high score may come at the expense of opportunity for sign up bonuses or keeping a high interest rate loan. 

Have a question about credit you would like answered?  Please leave it in the comments below!