Understanding FICO Groups
One often-misunderstood aspect of credit evaluation is a little known sorting system at Fair Isaacs that uses scorecards to segment borrowers into ten different types of groups. What type of group you end up in is based on the information in your credit report. These groups are casually nicknamed “scorecards.”
The first thing this form of calculation looks for in your report is credit history with only positive information. The FICO calculation considers number of accounts, the age of the accounts and the age of the youngest account that you have. If your account shows any kind of delinquency the calculation looks for the presence of any type of public record such as a tax lien or bankruptcy and the very worst delinquency if there is more than one on the file.
After the above information is accumulated and assessed by the FICO credit scoring system your credit rating is then assigned to one of the ten scorecards. These are basic groups of other borrowers with similar borrowing characteristics, history and habits of your own.
Unfortunately, Fair Isaac keeps the exact details of how the scorecards are used to divide you into groups very secret. It is however known there are scorecards (groups) for people with a bankruptcy in the past, another for people who have no information in their reports and another for people with perfect credit.
Grouping people according to their scorecards is a conceit that is supposed to enhance the predictive abilities of the FICO formulas. In essence, scorecards allow the FICO formula to give different weight to the same information. Once labeled in a group you might also be subjected to different treatments, direct mailings and of course, various interest rates based on the credit worthiness that is expressed by your group as a whole.
However sometimes the results of scorecard grouping can be a little off the mark. For example there have been examples where people have spent years rebuilding their credit. These people may have waited as long a seven years for negative judgments on their report to pass as a credit expert may have told them that these were the only things holding their good credit back. However imagine the dismay when after seven years are up and the negative items are dropped their credit scores drop by twenty points! To many this feels like falling off a financial cliff it is so disappointing.
How can this happen? Sometimes when you have been working very hard on improving your credit score you can be transferred to another group with higher standards. This can happen immediately after black marks are removed from your record. The reason your credit score suddenly drops is because you were at the top of your last scorecard group which was a lousy group full of losers that were easy to beat with your old score. Your good performance however put you in a tougher but better class of borrowers. Unfortunately you are at the bottom of that better class of borrowers and still have to work your way up to achieve good credit.
To overcome this common problem the firm of Fair Isaac says its next credit formula, NextGen divides borrowers into many more different groups so individuals can avoid dramatic falls in their credit as they are automatically transposed from one scorecard group to the next. This also creates more opportunities for lenders to extend direct target marketing to buyers of credit products. For instance, if you already own a house, you may not receive direct mail about buying your first house as you belong to a NexGen group that has owned more than one house in a lifetime.