I talk to my clients a lot about the “two steps forward, one step back” of credit scoring, especially when their score dips unexpectedly.
One of my clients recently saw a ten-point decrease for no apparent reason. She had been improving her score, following the seven steps, so she was confused about the decrease. I explained that FICO’s scoring formulae places consumers into categories, and the formula changes slightly depending on which category you are in.
Let’s take a hypothetical situation and look at how this works. Pretend that you had a foreclosure a little less than two years ago. You fall into the category of “people with foreclosures in the past two years.” You also had a ton of late payments, before and after the foreclosure. Late payments represent “normal behavior” for people in this category, so each individual late payment isn’t judged as harshly. For instance, a person might have 20 late payments, and each one causes her score to drop by two points. Considering all of your late payments and the foreclosure, your score is 620. Now let’s say that her foreclosure becomes 25 months old. Suddenly, she’s moved into the “people without foreclosures in the past two years” category, and in this category, late payments aren’t considered normal behavior, so each late payments gets dinged more heavily. The good news is that her foreclosure aged, so her score jumped 50 points. The bad news was that her late payments are now worth five points instead of two points.
Previous score: 620
Foreclosure ages: +50 points
Difference in late payment: -60 points (20 late payments now worth five points each instead of two points each, a three point difference)
Current Credit Score: 610
In this scenario, your score actually decreases. But don’t worry, this really is a two steps forward, one step back process, and eventually, your score can increase much, much more. As your late payments age, your score will start jumping five points at a time, and within months, you will be well above the 620 mark and climbing toward 720.
