5 unintended consequences of FICO credit scoring

This post originally appeared August 13, 2015 on CreditCards.com as “5 credit score oddities

By Barry Paperno

Dear Speaking of Credit,
I reported my credit card lost and wonder if it will it hurt my credit score. I was reading something online and it said it won’t hurt, but sometimes it would help. Just wonder if that is true — Cora

Dear Cora,
Your question provides a great example of a situation where your credit score may not be helped or hurt directly, but indirectly, could end up slightly better or worse. Along with addressing your question about how the score treats accounts reported as lost (or stolen), I’ve also listed a few additional examples of credit actions that, while not affecting your score directly, can have unintended consequences.

These are not major factors that change a good score to bad or take a low score to high, nor should knowing these scoring facts change the way you manage your credit. Rather, think of them simply as little-known credit scoring oddities that may help explain some of those head-scratching unexplainable changes to your credit score that can drive you crazy.

1. Credit card lost or stolen creates duplicate entry. As soon as your card is reported lost or stolen, it is closed by the creditor and reported to the credit bureaus as “closed — lost or stolen.” Providing the account is in good standing, a new card with a new account number is issued and the existing balance, credit limit and credit history are transferred to this “new account.” If the card is past due or over-limit when lost, a new account and/or card may not be forthcoming until the problem has been resolved.

The newly created account also becomes a new trade line on your credit report, while the old now-closed card continues to appear as well. The result is a duplication of some account information — most notably, the open date — that can affect your credit score a little differently than when reported as a single trade line.

This duplicating of the open date on your credit report can lend some truth to what you read about reporting a card lost possibly helping your score. For the scoring calculations that measure an account’s “length of credit history” (about 15 percent of your score), the open date provides the starting point for this measurement. And since all accounts on a credit report, whether open or closed, are included in your length of credit history, the duplicating of an account can give extra weight to its age within that category’s “average age of accounts” calculations.

Whether this extra weight is good or not-so-good for your score depends on whether the account is older or younger than the average age of all accounts on your credit report. The score can increase by a few points if the card reporting in duplicate is older than the average age of all accounts, thus increasing the average age or, if younger, take away a few points by lowering the average age.

2. Past credit utilization doesn’t matter, but unreported credit limit does. Despite credit utilization (balance/limit ratio) being one of the most important aspects of a credit score — 30 percent — prior utilization is not included in your score.

Yet, while past utilization has no direct effect on today’s score, a past card balance can come back to help or haunt you if, for some reason, the card issuer is not reporting a credit limit for that card on your credit report. Here’s where things can get interesting.

When no credit limit is reported for an account, the “high credit” amount — actually the highest past balance — takes the place of the missing limit to calculate the card’s credit utilization. In other words, instead of dividing the current balance by the credit limit, as is done in typical utilization equations, utilization with a missing limit consists of the current balance divided by the “high credit” (highest balance) amount.

The result is that, since you now have the high credit amount working like a credit limit in these calculations, essentially the higher your highest past balance, the lower your current utilization, and the higher your score. That’s right. When the credit limit isn’t being reported, the higher your highest past balance, the better it is for your score. Go figure!

3. Denial of credit won’t hurt, at least not directly. While credit card approval is indicated by the appearance of a new account on your credit report, the denial of credit is neither noted on the credit report nor considered by the scoring formula. Thus, being turned down for credit has a mostly neutral effect on your score.

However, while being denied won’t hurt your score, the addition of a hard inquiry to your Equifax, Experian or TransUnion credit report as part of the credit evaluation process could lower it by about 5 points on average.

4. Infrequent account activity: Your score doesn’t care, but your card issuer may. Contrary to what you may have read elsewhere, credit scores don’t consider either the frequency of your card purchases or the amount of individual charges. That information just isn’t passed along from your card issuer to the credit bureaus, so it can’t be included on your credit report.

Still, an extended period of inactivity, such as a year or more, can lead the card company to close the card, which will then exclude the card’s zero utilization percentage from ever again contributing positively to your credit utilization calculations. Long-term inactivity can also lead to the card’s removal from your credit report and its positive credit history from your score

5. Loan-shopping protected by 30-day loan inquiry buffer period. Many consumers are not aware that inquiries resulting from most mortgage, auto and student loan applications are ignored entirely by the credit score during the 30-day period following the inquiry date. This, of course, is a good thing for your score.

Just be aware that when that “30-day buffer period” expires and the inquiry begins to affect your score, you may be surprised to see slightly fewer points despite your credit report looking much as it did 30 days ago.

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