Jerry had reached the bottom of the barrel when it came to credit. He wasn’t even trying to make it better, because he thought it was no use.
He had late payments, collections, and even a car repossession on his record. So he just accepted the fact that he had no credit and got along the best he could.
But then a few friends started encouraging him to try to get his credit scores rebuilt. After all, he was still a young man and someday he would want to buy a home. He might even want to own a car that was too expensive to buy with cash. He needed to get with building a new credit reputation.
So Jerry took their advice. The first step was to get a copy of his credit report with scores. He saw that the collections were nearing the 7 year mark, when they should automatically fall off his report.
They did, and when he saw the boost it gave his scores, he was encouraged. He got a “bad credit credit card” and began using it wisely, and after a few months he saw another little jump in his credit scores. Now he was cooking!
The next thing was to get another car loan. He was careful… he chose a low priced used car with a payment he knew he could afford, even though he was paying a pretty high rate of interest.
The next time he checked his credit scores he expected to see an even better number.
But… instead it was lower.
Jerry was in shock. Here he’d been working so hard to raise his credit scores and be a responsible consumer, and his scores just fell! What went wrong?
What went wrong was that Jerry had been moved to a different risk category.
Credit scoring models place each consumer in a risk category with others who have a similar credit history. Jerry started out in a category that included late payments, collections, and a car repossession. His scores were determined by comparing him to others with a similar history.
When those collections “aged out” of his credit report and he began using credit responsibly, his scores improved. But then, when he added the car loan and began making payments on time, he got moved to a “better” risk category, where he compared less favorably to others in his category. And… his scores decreased.
So, while most of us believe that all consumers are scored by the same standards, it isn’t so. We’re each scored by comparison to others in our risk category. And interestingly, a late payment will have less effect on a person in a high-risk category much less than it will on a person in a low-risk category. When low-risk consumers make a credit mistake, their scores tumble quickly.
Jerry got over his shock and kept working to improve his financial picture – and he’s well on his way to a place in a low-risk category. But seeing his scores drop when he was working hard to establish credit nearly caused him to give up the goal.
CreditScoreQuick.com
