Ask FICO is a Q & A column where our credit scoring expert, Tom Quinn, answers common credit score and credit-related questions that you have. Post your questions on our Understanding FICO Scoring and General Credit Topics threads on the myFICO Forums.
This month’s question: “How are negative items viewed? All the same?
Your credit reports contain a great deal of information about how you manage your credit. A credit report is an important piece of information lenders will access and thoroughly evaluate when assessing your request for credit.
The credit report consists of five main “information zones”:
|This area includes information such as your name, address, and social security number, which are used to locate your credit report and FICO® Score when requested by a lender.|
|This zone forms the heart of the credit report and consists of information on your credit cards, auto loans, mortgage and other credit accounts that are reported to the credit bureaus by the lender – on both new accounts and updates to existing account information.|
|Every time your credit report is accessed, an inquiry is placed on the file. Only inquiries that are placed for the extension of new credit are seen by other lenders and considered in the formulation of a FICO® Score.|
|Collection information can appear on a credit report in its own section or with other account information. Collections are most often reported by collection agencies, but can be reported by the creditor as well.|
|This information comes from state and county civil court records. It includes information such as bankruptcies.|
The presence of negative information such as missed payments reported on your credit accounts, obligations that have gone into collections or the presence of a derogatory public record may have a substantial impact on a FICO® Score.
FICO® Scores evaluate negative items in terms of severity, recency and frequency.
- Severity – for example, is the negative information being reported a 30-day late payment or a charged off account? Generally speaking, the more severe the negative item, the greater impact on a FICO®
- Recency – did the negative item take place recently (2 months ago for example) or in the distant past (e.g., 6 years ago)? The presence of recent delinquency is heavily weighted by the FICO® Score as analysis consistently shows it is very predictive of future credit risk.
- Frequency – is there a pattern of negative items reported or is there only an isolated one-time occurrence? A credit report reflecting multiple negative items is generally more risky.
The more severe, recent or frequent the negative information reported on the credit report, the greater impact it will likely have on a FICO® Score.
What about the type of credit obligation on which the negative item is reported? For example, is a missed payment on a mortgage considered more negative than a missed payment on a credit card? With base FICO® Scores, the answer is generally no. After evaluating the negative information in terms of severity, recency and frequency – the type of account on which the negative item was posted does not alter the FICO® Score’s predictive power. It should be noted, however, that a lender may have its own rules or criteria that indeed consider the type of account on which negative information is reported.
If you are in a situation where you have negative information reported on your credit file, it’s likely being considered as part of and impacting your FICO® Scores. The good news, however, is that, as the negative information ages and your more recent credit behavior reflects that you are consistently paying as agreed and keeping amounts owed low, your FICO® Scores will likely increase over time.
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