@Anonymous wrote:Can someone please explain the logic in the way FICO does not restore an equal amount of points as those that are deducted from your score for reversed actions and in the same time frame. Example: if points are deducted immediately for late payments it does not stand to reason that on time payments must accumulate "OVER TIME" to see a reversal and retrieve an equal number of points back.
I'm sure this is covered elsewhere, but the logic behind the FICO is very similar to the logic used to reduce risk in actuarial science. The FICO score model was designed to predict risk. The risk factors were identified in a reverse engineering manner based on correlations among credit histories that already had a demonstrated expression of the risk. Basically the factors were found by linking things that people with bad credit histories had in common. If something apparently benign like putting a student loan on deferment was ever found to be associated with an increased risk of becoming 90 days behind on any one account, chances are that student loan deferment would become a new risk factor.
This is correlation, not causation. This helps explain many of the credit 'mysteries' like why inquiries damage your score. Clearly applying for new credit does not in and of itself cause you to miss payments, get judgments, or max-out your revolving lines of credit; but time after time, the people who have more inquiries are the people who are more likely to miss payments, get judgment, or max-out their credit. Correlation may not prove true for any one individual, but is generally useful when looking at large groups of people.
As to why you cannot make an error and lose points one month and then receive the same number of points back the following by correcting the mistake you have to look at trending and correlations. It is a commonly held truth of behavioral science that an action that occurs once is more likely to occur again. If you steal a candy bar when you are a teenage it doesn't directly lead to a life of crime...but you do have a greater chance of stealing something again as compared to the general population. The same is true with credit scoring, making one late payment does not automatically cause you to stop paying all you bills or file bankruptcy, but it is statistically associated with a increased risk of paying more bills late.
While this may not be true in every situation, it is true enough of the time to be a concern. Generally, this increased risk is associated with a period of time. If you have a late payment within the past 6 months you have a much higher risk of delinquency than the consumer who had a late payment 24 months ago. The same story is true with many other risk assessment calculations.
Automobile insurance makes a good parallel example. You may be an excellent driver, and then suddenly get rear-ended by a less cautious driver. Neither your skill or caution level has changed, but due to your accident you are no placed in a higher risk category of drivers. You may not be a higher risk yourself, but in general drivers who have made an insurance claim in the past three years are much more likely to make a second claim. The correlations help factor out all risk not just risk associated from the consumer. Back to the driving scenario, your increased risk may actually be caused by outside factors--deteriorating road conditions, higher percentages of intoxicated or distracted drivers, or even a change of driving route; the source of the risk is much less important than its presence.
By paying one payment late, increasing your utilization ratios, or getting a collection you are adding a unusual trend on your credit history. While surprising to many, most consumers have 'good scores' and do not have late payments, collections or judgments. By accumulating any of these risk factors, you cause your credit profile to appear outside the norm. It takes more time than a single month to show that the unusual act was not normal for you.
Think of it this way, if your employer bounced your paycheck, how long would it be before you trusted that the bounced check was just a momentary oversight and not an indication of further trouble. Your risk works the same. If you charge up a revolving account to max, you lose points. The number of points are not fully recovered until several months after paying the account down--essentially to make sure that you don't do it again.
