1 About your credit score Your credit score influences the credit that s available to you and the terms (interest rate, etc.) that lenders offer you. It s a vital part of your credit health. When you apply for credit whether for a credit card, a car loan, or a mortgage lenders want to know what risk they'd take by loaning money to you. When lenders order your credit report, they can also buy a credit score that s based on the information in the report. A credit score helps lenders evaluate your credit report because it is a number that summarizes your credit risk, based on a snapshot of your credit report at a particular point in time. Credit scores are often called FICO Scores because most credit bureau scores used in the U.S. are produced from software developed by FICO (Fair Isaac and Company). But it s important to understand that not every credit score you can buy online is a true FICO Score. How scoring helps me About FICO Score The most widely used credit score is the FICO Score, the credit score created by Fair Isaac Corporation. Lenders use the FICO Score to help them make billions of credit decisions every year. Fair Isaac calculates the FICO Score based solely on information in consumer credit reports maintained at the credit reporting agencies. FICO credit scores range from 300 to 850. That FICO Score is calculated by a mathematical equation that evaluates many types of information from your credit report, at that agency. By comparing this information to the patterns in hundreds of thousands of past credit reports, the FICO Score estimates your level of future credit risk. Understanding Your FICO Score booklet (PDF) Other names for FICO Score The FICO Score has a different name at each of the credit reporting agencies. All of these scores, however, are developed using the same methods by Fair Isaac, and have been rigorously tested to ensure they provide the most accurate picture of credit risk possible using credit report data. Credit Reporting Agency FICO Score
2 Equifax BEACON Score Experian Experian/Fair Isaac Risk Model TransUnion EMPIRICA What makes a good FICO Score FICO credit scores have a score range. The higher the score, the lower the risk. But no score says whether a specific individual will be a good or bad customer. While many lenders use FICO credit scores to help them make lending decisions, each lender has its own strategy, including the level of risk it finds acceptable for a given credit product. There is no single cutoff score used by all lenders and there are many additional factors that lenders use to determine your actual interest rates. What s in my FICO Score How to improve my FICO Score Reasons for your credit score When a FICO Score is calculated from your credit report, the credit reporting agency will also provide up to five reasons for that particular score. While these reasons are usually negative, because it is the reasons why the credit score isn t higher. For a very high score, it can include those positive reasons contributing to that score. How to improve my FICO Score The minimum required to calculate a FICO Score For your FICO Score to be calculated, your credit report with the bureau from which you want your score must contain enough information and enough recent information on which to base your credit score. Generally, that means you must have at least one account that has been open for six months or longer, and at least one account that has been reported to the credit reporting agency within the last six months. What are the minimum requirements to have a FICO Score?
3 3 different FICO credit scores You have three FICO credit scores, one for each of the three credit bureaus: Equifax, TransUnion and Experian. Each FICO Score is based on information the credit bureau keeps on file about you. The FICO Score from each credit reporting agency considers only the data in your credit reports at that agency. Your credit score may be different at each of the main credit reporting agencies. If your current scores from the credit reporting agencies are different, it's probably because the information those agencies have on you differs. If your information is identical at all three credit reporting agencies, each FICO Score should be very close. Why are my scores different for the 3 credit bureaus? Your FICO Score will change over time As the information in your credit report changes, so will any new credit score based on your credit report. So your FICO Score from a month ago is probably not the same score a lender would get from the credit reporting agency today. Do FICO Scores change that much over time? More than one credit score In general, when people talk about "your score" they're talking about your current FICO Score. While the FICO Score is the most commonly used credit risk scores in the US, there is no one credit score used to make decisions about you. Lender s own credit scores Lenders will often evaluate the FICO Score as well as other information that they have about you. This includes information gathered if you are a previous or current customer of theirs. Other credit bureau scores There are other credit bureau scores, although FICO credit scores are by far the most commonly used. Other credit bureau scores may evaluate your credit report differently than the FICO Score, and in some cases a higher score may mean more risk, not less risk as with FICO credit scores.
4 Application risk scores Many lenders use scoring systems that include the FICO Score but also consider information from your credit application. Customer risk scores (aka behavior scores ) A lender may use customer risk scores to make credit decisions on its current customers. Also called behavior scores, these scores generally consider the FICO Score along with information on how you have paid that lender in the past. Other credit scores These scores may evaluate your credit report differently than the FICO Score, and in some cases a higher score may mean more risk, not less risk as with FICO credit scores. When purchasing a credit score for yourself, most experts recommend getting the FICO Score, as this is the score most lenders use when making credit decisions. What s in my FICO Score How my FICO Score is calculated The FICO Score is calculated from several different pieces of credit data in your credit report. This data is grouped into five categories as outlined below. The percentages in the chart reflect how important each of the categories is in determining how your FICO Score is calculated. Your FICO Score considers both positive and negative information in your credit report. Late payments will lower your FICO Score, but establishing or re-establishing a good track record of making payments on time will raise your score. How a FICO Score breaks down These percentages are based on the importance of the five categories for the general population. For particular groups for example, people who have not been using credit long the relative importance of these categories may be different. Learn more about what a FICO Score ignores How to improve my FICO Score? How credit scoring helps me? Credit score facts & fallacies Understanding your FICO Score booklet (PDF)
5 Importance of categories varies per person Your FICO credit score is calculated based on these five categories. For some groups, the importance of these categories may vary; for example, people who have not been using credit long will be factored differently than those with a longer credit history. The importance of any one factor in your credit score calculation depends on the overall information in your credit report. For some people, one factor may have a larger impact that it would for someone with a much different credit history. In addition, as the information in your credit report changes, so does the importance of any factor in determining your FICO Score. Therefore, it s impossible to measure the exact impact of a single factor in how your credit score is calculated without looking at your entire report. Even the levels of importance shown in the FICO Score chart are for the general population, and will be different for different credit profiles. Your FICO Score only looks at information in your credit report Your credit score is calculated from your credit report. However, lenders look at many things when making a credit decision including your income, how long you have worked at your present job and the kind of credit you are requesting. What the FICO Score ignores? What are the minimum requirements to have a FICO Score? What's in my credit report? Payment history (35%) The first thing any lender wants to know is whether you've paid past credit accounts on time. This is one of the most important factors in a FICO Score. How is credit score calculated from payment history? Amounts owed (30%) Having credit accounts and owing money on them does not necessarily mean you are a high-risk borrower with a low FICO Score. How is credit score calculated from amount owed?
6 Length of credit history (15%) In general, a longer credit history will increase your FICO Score. However, even people who haven't been using credit long may have a high FICO Score, depending on how the rest of the credit report looks. Your FICO Score takes into account: how long your credit accounts have been established, including the age of your oldest account, the age of your newest account and an average age of all your accounts how long specific credit accounts have been established how long it has been since you used certain accounts Community forums: Calculating Average Account Age Types of credit in use (10%) The score will consider your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans. How is credit score calculated from types of credit in use? New credit (10%) Research shows that opening several credit accounts in a short period of time represents a greater risk - especially for people who don't have a long credit history. How is credit score calculated from new credit? What's not in my FICO Score FICO scores consider a wide range of information on your credit report. However, they do not consider: Your race, color, religion, national origin, sex and marital status. US law prohibits credit scoring from considering these facts, as well as any receipt of public assistance, or the exercise of any consumer right under the Consumer Credit Protection Act. Your age. Other types of scores may consider your age, but FICO scores don't. Your salary, occupation, title, employer, date employed or employment history.
7 Lenders may consider this information, however, as may other types of scores. Where you live. Any interest rate being charged on a particular credit card or other account. Any items reported as child/family support obligations or rental agreements. Certain types of inquiries (requests for your credit report). The score does not count consumer-initiated inquiries requests you have made for your credit report, in order to check it. It also does not count promotional inquiries requests made by lenders in order to make you a pre-approved credit offer or administrative inquiries requests made by lenders to review your account with them. Requests that are marked as coming from employers are not counted either. Any information not found in your credit report. Any information that is not proven to be predictive of future credit performance. Whether or not you are participating in a credit counseling of any kind. How credit scoring helps me Credit scores give lenders a fast, objective measurement of your credit risk. Before the use of scoring, the credit granting process could be slow, inconsistent and unfairly biased. Credit scores especially FICO scores, the most widely used credit bureau scores have made big improvements in the credit process. Because of credit scores: People can get loans faster. Scores can be delivered almost instantaneously, helping lenders speed up loan approvals. Today many credit decisions can be made within minutes. Even a mortgage application can be approved in hours instead of weeks for borrowers who score above a lender's score cutoff. Scoring also allows retail stores, Internet sites and other lenders to make instant credit decisions. Credit decisions are fairer. Using credit scoring, lenders can focus only on the facts related to credit risk, rather than their personal feelings. Factors like your gender, race, religion, nationality and marital status are not considered by credit scoring. Credit mistakes count for less. If you have had poor credit performance in the past, credit scoring doesn't let that haunt you forever. Past credit problems fade as time passes and as recent good payment patterns show up on your credit report. Unlike so-called knock out rules that turn down borrowers based solely on a past problem in their file, credit scoring weighs all of the credit-related information, both good and bad, in your credit report.
8 More credit is available. Lenders who use credit scoring can approve more loans, because credit scoring gives them more precise information on which to base credit decisions. It allows lenders to identify individuals who are likely to perform well in the future, even though their credit report shows past problems. Even people whose scores are lower than a lender's cutoff for automatic approval benefit from scoring. Many lenders offer a choice of credit products geared to different risk levels. Most have their own separate guidelines, so if you are turned down by one lender, another may approve your loan. The use of credit scores gives lenders the confidence to offer credit to more people, since they have a better understanding of the risk they are taking on. Credit rates are lower overall. With more credit available, the cost of credit for borrowers decreases. Automated credit processes, including credit scoring, make the credit granting process more efficient and less costly for lenders, who in turn have passed savings on to their customers. And by controlling credit losses using scoring, lenders can make rates lower overall. Mortgage rates are lower in the United States than in Europe, for example, in part because of the information - including credit scores - available to lenders here. Knowing and improving your score can also lead to more favorable interest rates. Check out an example of the national averages of interest rates and see exactly how much money you might be able to save. How to repair my credit and improve my FICO credit score It's important to note that repairing bad credit is a bit like losing weight: It takes time and there is no quick way to fix a credit score. In fact, out of all of the ways to improve a credit score, quickfix efforts are the most likely to backfire, so beware of any advice that claims to improve your credit score fast. The best advice for rebuilding credit is to manage it responsibly over time. If you haven't done that, then you need to repair your credit history before you see credit score improvement. The tips below will help you do that. They are divided up into categories based on the data used to calculate your credit score. 3 Important Things You Can Do Right Now Check Your Credit Report Credit score repair begins with your credit report. If you haven't already, request a free copy of your credit report and check it for errors. Your credit report contains the data used to calculate your score and it may contain errors. In particular, check to make sure that there are no late payments incorrectly listed for any of your accounts and that the amounts owed for each of your open accounts is correct. If you find errors on any of your reports, dispute them with the credit bureau and reporting agency. Read more about Disputing Errors on Your Credit Report
9 Setup Payment Reminders Making your credit payments on time is one of the biggest contributing factors to your credit score. Some banks offer payment reminders through their online banking portals that can send you an or text message reminding you when a payment is due. You could also consider enrolling in automatic payments through your credit card and loan providers to have payments automatically debited from your bank account, but this only makes the minimum payment on your credit cards and does not help instill a sense of money management. Reduce the Amount of Debt You Owe This is easier said than done, but reducing the amount that you owe is going to be a far more satisfying achievement than improving your credit score. The first thing you need to do is stop using your credit cards. Use your credit report to make a list of all of your accounts and then go online or check recent statements to determine how much you owe on each account and what interest rate they are charging you. Come up with a payment plan that puts most of your available budget for debt payments towards the highest interest cards first, while maintaining minimum payments on your other accounts. More Tips on How to Fix a Credit Score & Maintain Good Credit Payment History Tips Contributing 35% to your score calculation, this category has the greatest effect on improving your score, but past problems like missed or late payments are not easily fixed. Pay your bills on time. Delinquent payments, even if only a few days late, and collections can have a major negative impact on your FICO score. If you have missed payments, get current and stay current. The longer you pay your bills on time after being late, the more your FICO score should increase. Older credit problems count for less, so poor credit performance won't haunt you forever. The impact of past credit problems on your FICO score fades as time passes and as recent good payment patterns show up on your credit report. And good FICO scores weigh any credit problems against the positive information that says you're managing your credit well. Be aware that paying off a collection account will not remove it from your credit report. It will stay on your report for seven years. If you are having trouble making ends meet, contact your creditors or see a legitimate credit counselor. This won't rebuild your credit score immediately, but if you can begin to manage your credit and pay on time, your score should increase over time. And seeking assistance from a credit counseling service will not hurt your FICO score. Amounts Owed Tips
10 This category contributes 30% to your score's calculation and can be easier to clean up than payment history, but that requires financial discipline and understanding the tips below. Keep balances low on credit cards and other "revolving credit". High outstanding debt can affect a credit score. Pay off debt rather than moving it around. The most effective way to improve your credit score in this area is by paying down your revolving (credit cards) debt. In fact, owing the same amount but having fewer open accounts may lower your score. Don't close unused credit cards as a short-term strategy to raise your score. Don't open a number of new credit cards that you don't need, just to increase your available credit. This approach could backfire and actually lower your credit score. Length of Credit History Tips If you have been managing credit for a short time, don't open a lot of new accounts too rapidly. New accounts will lower your average account age, which will have a larger effect on your score if you don't have a lot of other credit information. Also, rapid account buildup can look risky if you are a new credit user. New Credit Tips Do your rate shopping for a given loan within a focused period of time. FICO scores distinguish between a search for a single loan and a search for many new credit lines, in part by the length of time over which inquiries occur. Re-establish your credit history if you have had problems. Opening new accounts responsibly and paying them off on time will raise your credit score in the long term. Note that it's OK to request and check your own credit report. This won't affect your score, as long as you order your credit report directly from the credit reporting agency or through an organization authorized to provide credit reports to consumers. Types of Credit Use Tips Apply for and open new credit accounts only as needed. Don't open accounts just to have a better credit mix it probably won't raise your credit score. Have credit cards but manage them responsibly. In general, having credit cards and installment loans (and paying timely payments) will rebuild your credit score. Someone with no credit cards, for example, tends to be higher risk than someone who has managed credit cards responsibly.
11 Note that closing an account doesn't make it go away. A closed account will still show up on your credit report, and may be considered by the score. To summarize, "fixing" a credit score is more about fixing errors in your credit history (if they exist) and then following the guidelines above to maintain consistent, good credit history. Raising your score after a poor mark on your report or building credit for the first time will take patience and discipline. Credit score facts & fallacies Fallacy: My score determines whether or not I get credit. Fact: Lenders use a number of facts to make credit decisions, including your FICO score. Lenders look at information such as the amount of debt you can reasonably handle given your income, your employment history, and your credit history. Based on their perception of this information, as well as their specific underwriting policies, lenders may extend credit to you although your score is low, or decline your request for credit although your score is high. Fallacy: A poor score will haunt me forever. Fact: Just the opposite is true. A score is a snapshot of your risk at a particular point in time. It changes as new information is added to your bank and credit bureau files. Scores change gradually as you change the way you handle credit. For example, past credit problems impact your score less as time passes. Lenders request a current score when you submit a credit application, so they have the most recent information available. Therefore by taking the time to improve your score, you can qualify for more favorable interest rates. See how improved scores can lead to savings. Fallacy: Credit scoring is unfair to minorities. Fact: Scoring considers only credit-related information. Factors like gender, race, nationality and marital status are not included. In fact, the Equal Credit Opportunity Act (ECOA) prohibits lenders from considering this type of information when issuing credit. Independent research has been done to make sure that credit scoring is not unfair to minorities or people with little credit history. Scoring has proven to be an accurate and consistent measure of repayment for all people who have some credit history. In other words, at a given score, non-minority and minority applicants are equally likely to pay as agreed. Fallacy: Credit scoring infringes on my privacy. Fact: Credit scoring evaluates the same information lenders already look at - the credit bureau report, credit application and/or your bank file. A score is simply a numeric summary of that information. Lenders using scoring sometimes ask for less information - fewer questions on the application form, for example. Fallacy: My score will drop if I apply for new credit. Fact: If it does, it probably won't drop much. If you apply for several credit cards within a short period of time, multiple requests for your credit report information (called inquiries ) will appear on your report. Looking for new credit can equate with higher risk, but most credit scores are not affected by multiple inquiries from auto or mortgage lenders within a short period of
12 time. Typically, these are treated as a single inquiry and will have little impact on the credit score.