Credit

Can Your Previous Credit Scores Haunt You?

haunted

The following credit score question was submitted via the SmartCredit.com blog.

Question: When your credit score is accessed and analyzed, do they only look and care about the current score, or do they also look at how high or low the score had been in the past?

Meaning, do they look at how much debt you may have carried or how careless you may have been in the past?

Answer: This is a very good question. In fact, it’s so good that it prompted me to write this article.

The question can really be paraphrased as, “Is my credit past going to haunt me in the present?”

This can be tackled from two angles: credit reporting and credit scoring.

A credit report is also commonly referred to as a credit history, and it’s called a “history” for a reason — credit reports contain historical credit relationships and credit management practices.

The good stuff can stay as long as the credit bureaus want. The bad stuff has to be removed eventually (normally, after 7 to 10 years).

Can your past credit mistakes haunt you today?

Yes, they can.

In fact, that’s the reason lenders pull your credit report. They want to see if you’re creditworthy today and if you’ve been creditworthy in the past.

When it comes to your past credit scores, it gets a little complicated. Credit scores are not a part of your credit report.

I know that doesn’t make any sense, especially since it seems like every credit report has a score attached to it. Many people incorrectly use the terms interchangeably as if they’re one in the same.

Credit scores are products sold along with your credit reports. Think of them as a leather interior of a car. They’re not a standard part of the car, but you can pay a little extra for the upgrade.

Because they are not a permanent part of your credit report, they are NOT a part of the Federal law that allows consumers to get one free credit report each year.

And because they’re not a part of your credit report, there is no “credit score history” that lenders can see.

One Day at a Time

Credit scores are dynamic because they can change day to day. If I applied for a loan with Bank of America today and they pulled my credit report, they’d see my score as of today.

That score then disappears, never to be seen again. For example, if I applied for a loan with Citibank a couple of weeks later, a completely new credit score would be calculated.

If my credit reports changed materially in that time, then the newer score would likely be different than the older score.

The newer lender (Citi) would not see the same exact score that the older lender (Bank of America) saw unless my credit report had not changed, which is very unlikely, especially over period of a few weeks.

Good and Bad News

Taking this concept of dynamic scores even further, the same applies for much older credit scores that were calculated perhaps during a time when your credit management practices weren’t very good.

If 36 months ago my credit report looked like a train wreck with late payments and excessive credit card debt, then my credit score at that time wouldn’t have been very good.

However, if I have since changed my credit management practices, stopped missing payments and gotten myself out of debt, I’d have a much more impressive score today.

Thankfully, a lender cannot access that older score and the credit bureaus cannot recreate those older scores.

This sounds like good news, but it might not be so good in the grand scheme of things.

Creatures of Habit

Research performed by FICO, the king of the credit score, suggests most consumers are creatures of habit when it comes to their credit scores and it’s rare that our scores change drastically.

Over the time period from October 2006 to April 2011, 33.5% of the credit bureau population (67 million consumers) maintained “high creditworthiness during a severe economic downturn” with scores near or above 800.

During the same period of time, 14.3% of the population (28.6 million consumers) were defined as “medium and high risk” consumers, with scores near or below 600.

Only 2.15% of the population (4.3 million consumers) went from a low risk score range (scores that were mid to high 700s) to a high risk range (scores approaching 600) and saw their scores fall by more than 150 points.

Conversely, only 1.5% of the same population (3 million consumers) saw their scores increase by more than 100 points.

So, out of 200 million consumer credit files, only 3.65% (7.3 million) saw their scores transcend from good to bad or bad to good.

We certainly are creatures of habit!

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. The opinions expressed in his articles are his and not of Mint.com or Intuit. Follow John on Twitter.