Understanding credit scoring can help you better
manage your credit. While there are many types of credit scores, the
scores most commonly used are developed by Fair, Isaac. Collectively
these are called FICO® scores but they are also known as
BEACON® at Equifax, EMPIRICA® at Trans Union and the
Experian/Fair, Isaac Risk Model at Experian.
FICO
scores are based solely on information in consumer credit reports
maintained at one of the credit reporting agencies. They evaluate
the same information in your credit report that a lender looks
at.
What is a FICO score?
A FICO score is a
number that tells a lender how likely you are to repay a loan or
make credit payments on time. Click on the areas below that interest
you.
- What a FICO score
looks at and how you can improve a score over time.
- How scoring helps
people in different ways.
- Some myths about
scoring and what is really true.
What a FICO® Score Considers
Listed in the hypertext
links below are the five main categories of information that
FICO scores evaluate, along with their general level of
importance. Within these categories is a complete list of the
information that goes into a FICO score.
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- PAYMENT
HISTORY What is your track
record?
Payment History
What is your track record?
APPROXIMATELY 35% OF YOUR SCORE IS BASED ON
THIS CATEGORY.
The first thing any lender would want to know is whether you have paid past
credit accounts on time. This is also one of the most important factors in a
credit score.
| However, late payments are
not an automatic "score-killer." An overall good credit
picture can outweigh one or two instances of, say, late credit card
payments. By the same token, having no late payments in your
credit report doesn't mean you will get a "perfect score."
Some 60%-65% of credit reports show no late payments at all — your
payment history is just one piece of information used in calculating
your score. |
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Your score takes into account:
- Payment information on many types of accounts. These will include
credit cards (such as Visa, MasterCard, American Express and Discover),
retail accounts (credit from stores where you do business, such as
department store credit cards), installment loans (loans where you make
regular payments, such as car loans), finance company accounts and mortgage
loans.
- Public record and collection items — reports of events such as
bankruptcies, foreclosures, suits, wage attachments, liens and judgments.
These are considered quite serious, although older items and items with
small amounts will count less than more recent items or those with larger
amounts.
- Details on late or missed payments ("delinquencies") and
public record and collection items — specifically, how late they were, how
much was owed, how recently they occurred and how many there are. A
60-day late payment is not as risky as a 90-day late payment, in and of
itself. But recency and frequency count too. A 60-day late payment made just
a month ago will count more than a 90-day late payment from five years ago.
Note that closing an account on which you had previously missed a payment or
satisfying a judgment or collection item does not make the late payment or
item disappear from your credit report.
- How many accounts show no late payments. A good track record on
most of your credit accounts will increase your credit score.
2. AMOUNTS
OWED How much is too much?
Amounts Owed
How much is too much?
APPROXIMATELY 30% OF YOUR SCORE IS BASED ON
THIS CATEGORY.
| Having credit accounts and
owing money on them does not mean you are a high-risk borrower with a
low score. However, owing a great deal of money on many accounts can
indicate that a person is overextended, and is more likely to make some
payments late or not at all. Part of the science of scoring is
determining how much is too much for a given credit profile. |
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Your score takes into account:
- The amount owed on all accounts. Note that even if you pay off your
credit cards in full every month, your credit report may show a balance on
those cards. The total balance on your last statement is generally the
amount that will show in your credit report.
- The amount owed on all accounts, and on different types of accounts.
In addition to the overall amount you owe, the score considers the amount
you owe on specific types of accounts, such as credit cards and installment
loans.
- Whether you are showing a balance on certain types of accounts. In
some cases, having a very small balance without missing a payment shows that
you have managed credit responsibly, and may be slightly better than no
balance at all. On the other hand, closing unused credit accounts that show
zero balances and that are in good standing will not generally raise your
score.
- How many accounts have balances. A large number can indicate higher
risk of over-extension.
- How much of the total credit line is being used on credit cards and
other "revolving credit" accounts. Someone closer to "maxing
out" on many credit cards may have trouble making payments in the
future.
- How much of installment loan accounts is still owed, compared with the
original loan amounts. For example, if you borrowed $10,000 to buy a car
and you have paid back $2,000, you owe (with interest) more than 80% of the
original loan. Paying down installment loans is a good sign that you are
able and willing to manage and repay debt.
3 LENGTH OF CREDIT
HISTORY How established is
yours?
Length of Credit History
How established is yours?
APPROXIMATELY 15% OF YOUR SCORE IS BASED ON
THIS CATEGORY.
| In general, a longer credit
history will increase your score. However, even people who have not been
using credit long may get high scores, depending on how the rest of the
credit report looks. |
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Your score takes into account:
- How long your credit accounts have been established, in general. The score
considers both the age of your oldest 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.
4. NEW
CREDIT Are you taking on more
debt?
New Credit
Are you taking on more debt?
APPROXIMATELY 10% OF YOUR SCORE IS BASED ON
THIS CATEGORY.
People tend to have more credit today and to shop for credit — via the
Internet and other channels — more frequently than ever. Fair, Isaac scores
reflect this fact. However, research shows that opening several credit accounts
in a short period of time does represent greater risk — especially for people
who do not have a long-established credit history. This also extends to requests
for credit, as indicated by certain "inquiries" to the credit
reporting agencies, resulting from your requests for new credit. An inquiry is a
request by a lender to get a copy of your credit report.
| FICO® scores do a good job
of distinguishing between a search for many new credit accounts and rate
shopping, which is generally not associated with higher risk. |
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Your score takes into account:
- How many new accounts you have. The score looks at how many new
accounts there are by type of account (for example, how many newly opened
credit cards you have). It also may look at how many of your accounts are
new accounts.
- How long it has been since you opened a new account. Again, the
score looks at this by type of account.
- How many recent requests for credit you have made, as indicated by
inquiries to the credit reporting agencies. Inquiries remain on your
credit report for two years, although FICO scores only consider inquiries
from the last 12 months. Note that if you order your credit report from a
credit reporting agency — such as to check it for accuracy, which is a
good idea — the score does not count this, as it is not an indication that
you are seeking new credit. Also, the score does not count requests a lender
has made for your credit report or score in order to make you a
"pre-approved" credit offer, or to review your account with them,
even though you may see these inquiries on your credit report.
- Length of time since credit report inquiries were made by lenders.
- Whether you have a good recent credit history, following past payment
problems. Re-establishing credit and making payments on time after a
period of late payment behavior will help to raise a score over time.
5. TYPES OF CREDIT
USE Is it a "healthy"
mix?
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Types of Credit in Use
Is it a "healthy" mix?
APPROXIMATELY
10% OF YOUR SCORE IS BASED ON THIS CATEGORY.
| The score
will consider your mix of credit cards, retail accounts,
installment loans, finance company accounts and mortgage loans. It
is not necessary to have one of each, and it is not a good idea to
open credit accounts you don't intend to use. The credit mix
usually won't be a key factor in determining your score — but it
will be more important if your credit report does not have a lot
of other information on which to base a score. |
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Your score takes into account:
- What kinds of credit accounts you have, and how many of each.
The score also looks at the total number of accounts you have. For
different credit profiles, how many is too many will vary.
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Please note that:
- A score takes into consideration all these categories of
information, not just one or two. No one piece of information
or factor alone will determine your score.
- The importance of any factor depends on the overall
information in your credit report. For some people, a given
factor may be more important than for someone else with a
different credit history. In addition, as the information in your
credit report changes, so does the importance of any factor in
determining your score. Thus, it's impossible to say exactly how
important any single factor is in determining your score — even
the levels of importance shown here are for the general
population, and will be different for different credit profiles.
What's important is the mix of information, which varies
from person to person, and for any one person over time.
- Your FICO score only looks at information in 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.
- Your score considers both positive and negative information
in your credit report. Late payments will lower your score,
but establishing or re-establishing a good track record of making
payments on time will raise your
score.
- 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.
How Credit Scoring Helps You
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: |
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- 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 "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.
- 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.
Tips for Raising Your Score #1
It's important to note that raising your score is a bit like losing weight: It
takes time and there is no quick fix. In fact, quick-fix efforts can backfire.
The best advice is to manage credit responsibly over time.
- Pay your bills on time. Delinquent payments and collections can
have a major negative impact on your score.
- If you have missed payments, get current and stay current. The
longer you pay your bills on time, the better your score.
- 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 improve your score
immediately, but if you can begin to manage your credit and pay on time,
your score will get better over time.
Tips for Raising Your Score #2
- Keep balances low on credit cards and other "revolving
credit." High outstanding debt can affect a score.
- Pay off debt rather than moving it around. The most effective way
to improve your score in this area is by paying down your revolving credit.
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 score.
Tips for Raising Your Score #3
- 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.
Tips for Raising Your Score #4
- 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 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.
Tips for Raising Your Score #5
- 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
score.
- Have credit cards — but manage them responsibly. In general,
having credit cards and installment loans (and paying timely payments) will
raise your score. Someone with no credit cards, for example, tends to be
higher risk than someone who has managed credit cards responsibly.
- 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.
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.
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 time.
Typically, these are treated as a single inquiry and will have little impact on
the credit score.
Date: September 1, 2000
Credit Score: 670
Source of score: Equifax (BEACON®)
Reason codes: 10 14 5 8
Your BEACON score: 670
The information in your Equifax credit report has been summarized in a BEACON®
score of 670. Most U.S. consumers score between 300 and 850. Generally, the
higher your score, the more favorably a lender will view your application for
credit. Compared to the national population, you are in the 30th percentile of
consumers by credit risk. A score of 670 is below average. Studies show that for
consumers with scores similar to yours, the odds of becoming seriously
delinquent on one or more credit accounts are 3.45 times higher than for people
with an average score.
Understanding your percentile. Compared to the national population,
your FICO® score is in the 30th percentile. This means that roughly 30% of
consumers have scores lower than or equal to your own score, and 70% have
scores which are higher.
How lenders view your FICO score
Many lenders use FICO scores. Frequently, there is more to consider in a credit
decision than just a person's credit history. Because the FICO score is based
solely on the information in your credit report, many lenders bring other
factors into their decisions as well, such as your income or employment history.
So the FICO score itself, while important, is not always the only criterion on
which your credit application is evaluated.
It is also important to understand that every lender sets their own policies and
tolerance for risk when making decisions. Though many lenders incorporate FICO
scores into their decisions, there is certainly no single cutoff score
used by all lenders. In fact, since they often factor in additional information
or special circumstances, some lenders may extend you credit even if your score
is low, or decline your request although your score is high. Nonetheless, the
FICO score is the most widely used and recognized credit rating, so it's
important that you know and understand your own score.
Lenders may view consumers with a score of 670 as a slightly higher risk.
Usually, lenders will evaluate other factors besides the score in their review
of your application for credit. The factors will likely differ from one lender
to the next, as each creditor has its own decision strategies, credit policies,
and customer focus. While there are many lenders who approve loan applicants
with a score of 670, they may do so with higher rates or more restrictive terms.
Distribution. This chart shows the percentage of people who score in
specific FICO score ranges. For example, about 5% of U.S. consumers have a
FICO score between 500 and 549. Your score of 670 places you in the 650-699
range, along with 16% of the total population. (Note that the score ranges
shown above are provided for your information, but they do not necessarily
correspond to any particular lender's policies for extending credit.)
Credit repayment. The second chart demonstrates the delinquency rate
(or credit risk) associated with selected ranges of the FICO score. In this
illustration, the delinquency rate is the percentage of borrowers who reach 90
days past due or worse on any credit account over a two-year period. For
example, the delinquency rate of consumers in the 500-549 range is 71%. This
means that for every 100 borrowers in this range, approximately 71 will
default on a loan, file for bankruptcy, or fall 90 days past due on at least
one credit account in the next two years. As a group, the consumers in your
score range, 650-699, have a delinquency rate of 15%.
Factors affecting your score
In addition to the score, you received four reason codes. These represent the
top four reasons your score was not higher. The order in which these codes were
returned to you is significant: the first code represents the factor with the
strongest negative impact on your score, the second code had the next strongest
impact, and so on. The best way to understand how you scored and what you can do
to improve your score over time is to consider these top reasons.
First Reason Code: 10 Your first reason code is 10, "Proportion of
balances to credit limits on bank/national revolving or other revolving accounts
is too high". This is the single most important factor affecting your
score. Analysis of consumer credit behavior repeatedly finds that owing a
substantial balance on revolving accounts relative to the amount of revolving
credit available to you represents increased risk. In fact, evaluation of your
level of revolving debt is one of the most important factors in the FICO score.
The score evaluates your total balances in relation to your total available
credit on revolving accounts, as well as on individual revolving accounts. For a
given amount of revolving credit available, a greater amount owed indicates a
greater risk, and lowers the score. (For credit cards, the total outstanding
balance on your last statement is generally the amount that will show in your
credit report. Note that even if you pay off your credit cards in full each and
every month, your credit report may show the last billing statement balance on
those accounts.)
Paying down your revolving account balances is a good sign that you are able and
willing to manage and repay your debt, and this will increase your score. On the
other hand, shifting balances among revolving accounts, opening up new revolving
accounts, and closing down other revolving accounts will not necessarily improve
your score, and could possibly decrease your score.
Second Reason Code: 14 Your second reason code is 14, "Length of
time accounts have been established". This is the second most important
factor affecting your score. This reason is based on a measurement of the age of
the accounts on your credit report (i.e., the age of the oldest account, the
average age of accounts, or both.) Research shows that consumers with longer
credit histories have better repayment risk than those with shorter credit
histories. Also, consumers who frequently open new accounts have greater
repayment risk than those who do not. Therefore, only apply for needed credit
and wait before you apply for more. All other factors being equal, your score is
likely to improve as your credit history ages.
Third Reason Code: 5 Your third reason code is 5, "Too many accounts
with balances". Analysis repeatedly finds that carrying balances on too
many credit accounts at once is a predictor of future repayment risk. (For
credit cards, note that even if you pay off your balance in full every month,
your credit report may show a balance on those cards. The total balance on your
last statement is generally the amount that will show in your credit report.) In
order to improve your credit score, pay down the balances on your credit
obligations. For revolving accounts, once they are paid down keep your balances
low. Note that consolidating your debt by transferring balances from many
accounts onto fewer accounts will not necessarily raise your score, because the
same total amount is still owed.
Fourth Reason Code: 8 Your fourth reason code is 8, "Too many
inquiries last 12 months". Research shows that consumers who are seeking
several new credit accounts are riskier compared to consumers not seeking
credit. This reason appears when your credit report contains too many inquiries
posted as a result of your applying for credit. Inquiries are the only
information lenders have that indicates a consumer is actively seeking credit.
There are different types of inquiries that reside on your credit report. The
score only considers those inquiries that were posted as a result of you
applying for credit. Other types of inquiries, such as promotional inquiries
(where a lender has pre-approved you for a credit offer) or consumer disclosure
inquiries (where you have requested a copy of your own report) are not
considered by the score.
The scores can identify "rate shopping" in the mortgage- and
auto-lending environment, so that you are not penalized with multiple inquiries
related to one credit transaction.
Typically, the presence of inquiries on your credit file has only a small impact
on FICO scores, carrying much less importance than delinquencies, current levels
of indebtedness, and the length of time you have used credit. This reason rarely
appears as a primary or secondary reason except in high scoring files. As time
passes the age of your most recent inquiry will increase, and your score will
rise as a result, provided you do not apply for additional credit in the
meantime. Typically inquiries are purged from the credit bureau files after two
years.
A common misperception is that every single inquiry will drop your score a
certain number of points. This is not true. The impact of inquiries on your
score will vary - depending on your overall credit profile. Inquiries will
usually have a larger impact on the score for consumers with limited credit
history and on consumers with previous late payment behavior. The most prudent
action to raise your score over time is by applying for credit only when
you need it.
Summary
Lenders may view consumers with a score of 670 as a slightly higher risk.
Different lenders will evaluate other factors besides the score in their review
of a loan application. While there are many lenders who might approve loan
applicants with a score of 670, they may do so with higher rates or more
restrictive terms.
- Paying down your revolving account balances will increase your score.
- Your score is likely to improve as your credit history ages.
- Paying off your debt on one or more accounts can raise your score.
- To improve your score over time, apply for credit only when you need it.
Review your credit report from each credit reporting agency at least once a year
and especially before making a large purchase, like a house or a car. You should
make sure the information in your credit report is correct. You don't need to be
concerned if the balance doesn't exactly match your credit card statement. But
you do need to worry if the credit report includes late payments that you
believe are in error. And you should verify that the accounts listed on your
credit report are accounts that you own. Your credit score is based on your
credit report, and lenders also review this information when making credit
decisions.
If you feel that the information contained in your credit report is not
accurate, you should contact the credit reporting agencies directly:
Equifax: (800) 685-1111 www.equifax.com
Experian: (888) 397-3742 www.experian.com
Trans Union: (800) 916-8800 www.transunion.com