Credit Scores 101

When you apply for credit - whether it's an auto loan, a credit card, a mortgage or a personal loan, lenders want to know how worthy or risky you are as a borrower. A credit scrore is a number lenders use to help them predict how you likely you are to make payments on time. A score is an estimate of your credit risk based on a snapshot of your credit report at a particular point in time. The higher your score, the lower the risk to lenders. Your credit score plays a vital role in getting you better deals particularly in terms of loans and interest rates that lenders offer you. Understanding your credit score can help you in making decisions that can lower your credit risk and raise your credit score over time.

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  • FICO
  • How FICO Scores Work
  • What is a Good Score?
  • Credit Report
  • Tips
  • FAQs

What is a FICO score?

A FICO score is a credit score developed by Fair Isaac & Co. Credit scoring is a method of determining the likelihood that credit users will make credit payments on time.

Advantages
  • Getting loan is easier and faster.
  • Credit decisions are fairer.
  • Less credit "mistakes".
  • More credit is available.
  • Overall low credit rates.
Disadvantages
  • If low slightly high interest rates.
  • Terms may not be as favorable.
  • Possible low credit limits for low FICO scores.

Understanding Your FICO Credit Scores

As a rule, credit scores analyze the credit-related information on your credit report. How they do this varies. Since FICO scores are frequently used, here is how these scores assess what is on your credit report.

  • Your payment history - about 35% of a FICO score
    Have you paid your credit accounts on time? Late payments, bankruptcies and other negative items can hurt your credit score. But a solid record of on-time payments helps your score.
  • How much you owe - about 30% of a FICO score
    FICO scores look atthe amounts you owe on all your accounts, the number of accounts with balances, and how much of your available credit you are using. The more you owe compared to yourcredit limit, the lower your score will be.
  • Length of credit history - about 15% of a FICO score
    A longer credit history will increase your score. However, you can get a high score with a short credit history if the rest of your credit report shows responsible credit management.
  • New credit - about 10% of a FICO score
    If you have recently applied for or opened new credit accounts, your credit score will weigh this fact against the rest of your credit history. 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. If you need a loan, do your rate shopping within a focused period oftime, such as 30 days, to avoid lowering your FICO score.
  • Other factors - about 10% of a FICO score
    10% of a FICO score Several minor factors also can influence your score. For example, having a mix of credit types on your credit report-credit cards, installment loans such as a mortg'age or auto loan, and personal lines of credit-is normal for people with longer credit histories and can add slightly to their scores.

How FICO Scores Work

Along with the credit report, lenders can also buy a FICO score based on the information in the report.

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 identifies your level of future credit risk.

In order for a FICO score to be calculated on your credit report, the report must contain enough information-and enough recent information-on which to base a 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.

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 identifies your level of future credit risk.

In order for a FICO score to be calculated on your credit report, the report must contain enough information-and enough recent information-on which to base a 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.


About FICO Scores

Credit scores are often called "FICO scores" because most credit scores used in the US and Canada are produced from software developed by Fair Isaac Corporation (FICO). FICO scores are provided to lenders by the three major credit reporting agencies: Equifax, Experian and TransUnion.

FICO scores provide the best guide to future risk based solely on credit report data. The higher the score, the lower the risk. But no score says whether a specific individual will be a "good" or "bad" customer. And while many lenders use FICO 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.


You Have Three FICO Scores

In general, when people talk about "your score;' they're talking about your current FICO score. But in fact there are three different FICO scores developed by Fair Isaac-one at each of the three main US credit reporting agencies. And these scores have different names.

The FICO scores from all three credit reporting agencies are widely used by lenders. The FICO score from each credit reporting agency considers only the data in your credit report at that agency. Fair Isaac develops all three FICO scores using the same methods and rigorous testing. These FICO scores provide the most accurate picture of credit risk possible using credit report data.


Will Your Scores Be Different?

FICO scores range from 300 to 850. Fair Isaac makes the scores as consistent as possible between the three credit reporting agencies. If your information was exactly identical at all three credit reporting agencies, your scores might still differ because the models for the three credit reporting agencies are developed separately. However, all three scores would be within a few points of each other.

Some people will find that their scores at the different bureaus will vary by more than a few points. The differences in scores can be caused by a couple of different factors:

  • The way lenders and other businesses report information to the credit reporting agencies sometimes results in different information being in your credit report at the three agencies.
  • The agencies may also record the same information in different ways. Even small differences in the information at the three credit reporting agencies can affect your scores

Since lenders may review your score and credit report from any of the three credit reporting agencies, it's a good idea to check your credit report from all three and make sure they're all accurate.


Frequently Asked Questions

Are FICO scores unfair to minorities?

No. FICO scores do not consider your gender, race, nationality or marital status. In fact, the Equal Credit Opportunity Act prohibits lenders from considering this type of information when issuing credit.

Independent research has shown 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.


Are FICO scores the only credit risk scores?

No. While FICO scores are the most commonly used credit r"lsk scores in the US, lenders may use other scores to evaluate your credit risk. These include:

  • Application risk scores - Many lenders use scoring systems that include the FICO score but also consider information from your credit application.
  • Customer risk scores - A lender may use these scores to make credit decisions on its current customers. Also called "behavior scores," these scores generally considerthe FICO score along with information on how you have paid that lender inthe past.
  • Other credit scores - These scores may evaluate your credit report differently than FICO scores, and in some cases a higher score may mean more risk, not less risk as with FICO scores. When purchasing a credit score for yourself. make sure to get the FICO score, as this is the score most lenders use when making credit decisions.

What do FICO scores ignore?

FICO scores consider a wide range of information on your credit report, as describes in what a FICO score considers. However, they don’t consider:

  • Your race, color, religion, national origon, sex and marital status - US law prohibits credit scoring from considering these facts, as well as any receipt of public assistance, or the excersize of any consumer right under Consumer Credit Protection Act.
  • Your age - Other types of scores may consider your age, but FICO scores don’t.
  • Your salary, occupation, title, employer, data emploed, or employment history - Lenders may consider this information, however.
  • 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 type of inquiries (requests for your credit report or score) - Your FICO score does not count any inquiries you initiate, any inquiries from employers, or any inquiries lenders make without your knowledge.
  • Any information not found in your credit erport.
  • Any information that is not proven to be predictive of future credit performance.

What is a Good FICO Score?

When lenders talk about "your score," they usually mean the FICO® score developed by Fair Isaac Corporation. It is today's most commonly used scoring system. FICO scores range from 300-850, and most people score in the 600s and 700s (higher FICO scores are better). Lenders buy your FICO score from three national credit reporting agencies (also called credit bureaus): Equifax, Experian and TransUnion.

In the eyes of most lenders, FICO credit scores above 700 are very good and a sign of good financial health. FICO scores below 600 indicate high risk to lenders and could lead lenders to charge you much higher rates or turn down your credit application.


Not Just One Score

There are many types of credit scores. They are developed by independent companies, credit reporting agencies, and even some lenders. As a rule, the higher the score, the better.

  • Each credit reporting agency calculates your score and each score may be different because the credit history each agency has about you may be different. Lenders may make a credit card or auto loan decision based on a single agency's score, although others such as mortgage lenders often will look at all three scores.
  • Your credit score changes when your information changes at that credit reporting agency. This is good news! It means you can improve a poor score over time by improving how you handle credit.
  • Many insurance companies use something similar when setting your insurance rates, called a "credit-based insurance score." You may be able to improve your insurance score by improving how you handle credit, which in turn may lower your premium payments on auto or homeowners insurance.
  • Some credit scores offered to consumers are just estimates and are different from the credit risk scores lenders actually use, although they may appear similar. Consumer reporting agencies and other companies sometimes use an estimated score to illustrate a consumer's general level of credit risk. How might you tell whether a score is estimated? Ask the company if the score is used by most lenders. If it isn't, it is likely to be an estimated score.

  • Learn Your Scores

    It's now easy to get your credit scores to check your financial health. Different sources provide credit scores to consumers via the internet, telephone or U.S. Mail. For most scores, you will need to pay a small amount. You also will be asked to prove your identity to make sure your financial information isn't given to the wrong person.

    Recommended places where you can get your credit scores:

    ANNUAL CREDIT REPORT SERVICE
    Web: www.annualcreditreport.com
    Phone: 1-877-322-8228
    U.S. Mail:
    Annual Credit Report Request Service
    P. O. Box 105281
    Atlanta, GA 30348-5281

    MYFICO.COM
    Web: www.myfico.com
    Phone: 1-800-342-6726

    Equifax
    Web: www.equifax.com
    Phone: 1-800-685-1111

    Experian
    Web: www.experian.com
    Phone: 1-866-200-6020

    TransUnion
    Web: www.transunion.com
    Phone: 1-800-888-4213

    Your Credit Report

    The Basis of Your FICO Score

    Credit reporting agencies maintain files on millions of borrowers. lenders making credit decisions buy credit reports on their prospects, applicants and customers from the credit reporting agencies.

    Your report details your credit history as it has been reported to the credit reporting agency by lenders who have extended credit to you. Your credit report lists what types of credit you use, the length of time your accounts have been open, and whether you've paid your bills on time. It tells lenders how much credit you've used and whether you're seeking new sources of credit. It gives lenders a broader view of your credit history than do other data sources, such as a bank's own customer data.

    Your credit report contains many pieces of informa­ tion that reveal many aspects of your borrowing activities. The ability to quickly, fairly and consistently consider all this information, including the relation­ ships between different types of information, is what makes credit scoring so useful.


    Check Your Credit Report!

    You should review your credit report from each credit reporting agency at least once a year and especially before making a large purchase, such as a house or car. By September 1, 2005, people in all 50 states will have the right to obtain one free copy of their credit report a year from each of the three major credit reporting agencies.

    For more information, contact the Annual Credit Report Request Service at:

    P.O. Box 105281 Atlanta
    GA 30348-5281
    1-877-FACT-ACT (1-877-322-8228)
    www.annualcreditreport.com

    You can buy additional copies of your credit reports from www.myF1CO.com.

    If you find an error, the credit reporting agency must investigate and respond to you within 30 days. If you are in the process of applying for a loan, immediately notify your lender of any incorrect information in your report.


    What's In Your Credit Report?

    Although each credit reporting agency formats and reports this information differently, all credit reports contain basically the same categories of information.

    • PERSONAL INFORMATION
      Your name, address, Social Security number, date of birth and employment information are used to identify you. These factors are not used in credit bureau scoring. Updates to this information come from information you supply to lenders.
    • ACCOUNTS
      These are your credit accounts. Lenders report on each account you have established with them. They report the type of account (bankcard, auto loan, mortgage, etc.), the date you opened the account, your credit limit or loan amount, the account balance and your payment history.
    • INQUIRIES
      When you apply for a loan, you authorize your lender to ask for a copy of your credit report. This is how inquiries appear on your credit report. The inquiries section contains a list of lenders who accessed your credit report within the last two years. The report you see lists "voluntary" inquiries, spurred by your own requests for credit, and may also list "involuntary" inquires, such as when lenders order your report before making you a preapproved credit offer in the mail. See page 15 for more information on inquiries.
    • NEGATIVE ITEMS
      Lenders report delinquency information when you have missed a payment. Credit reporting agencies also collect information on overdue debt from collection agencies, and public record information from state and county courts. Public record information includes: bankruptcies, foreclosures, tax liens, garnishments, legal suits and judgments.

    Frequently Asked Questions

    How can mistakes get on my credit report?

    If your credit report contains errors, it is often because the report is incomplete, or conta'ins information about someone else, This typically happens because:

    • You applied for credit under different names (Mary Jones, Mary Jones-Smith, etc.)
    • Someone made a clerical error in reading or entering name or address information from a hand­ written application.
    • You gave an inaccurate Social Security number, or the number was misread by the lender.
    • Loan or credit card information was inadvertently applied to the wrong account.

    Helpful FICO Tips

    • When you get your credit scores, make sure you also learn the highest and lowest scores possible, as well as the most important factors that influenced your scores. These factors can give you an idea of how you can improve your scores.
    • Getting your own credit scores or credit reports won't affect your scores, as long as you order them from one of the sources we list here.
    • Review your credit reports for accuracy. Mistakes and omissions on your credit reports probably will affect your credit scores. If you spot an error, contact the credit reporting agency and the creditor whose information is wrong.
    • If you have questions or problems with your credit scores, contact the company that provided them to you.

    Boosting Your Scores

    Your credit scores change when new information is reported by your creditors. So your scores will improve over time when you manage your credit responsibly.

    Here are some general ways to improve your credit scores:

    • Pay your bills on time. Delinquent payments and collections can really hurt your score.
    • Keep balances low on credit cards. High debt levels can hurt your score.
    • Payoff debt rather than moving it between credit cards.
    • The most effective way to improve your score in this area is to pay down your revolving credit.
    • Apply for and open new credit accounts only when you need them.
    • Check your credit report regularly for accuracy and contact the creditor and credit reporting agency to correct any errors.
    • If you have missed payments, get current and stay current.
    • The longer you pay your bills on time, the better your score.

    FICO FAQs

    Q: What is a credit score?

    A: A credit score is an indication of your credit history and assist in measuring your ability to repay a debt in the future.


    Q: Are FICO scores unfair to minorities?

    A: No. While FICO scores are the most commonly used credit r"lsk scores in the US, lenders may use other scores to evaluate your credit risk. These include:

    • Application risk scores. Many lenders use scoring systems that include the FICO score but also consider information from your credit application.
    • Customer risk scores. A lender may use these scores to make credit decisions on its current customers. Also called "behavior scores," these scores generally considerthe FICO score along with information on how you have paid that lender inthe past.
    • Other credit scores. These scores may evaluate your credit report differently than FICO scores, and in some cases a higher score may mean more risk, not less risk as with FICO scores. When purchasing a credit score for yourself. make sure to get the FICO score, as this is the score most lenders use when making credit decisions.

    Q: Does my FICO score alone determine whether I get credit?

    A: No. Most lenders use a number of facts to make credit deci­ sions, including your FICO score. Lenders look at information such as theamount 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 FICO score is low, or decline your request for credit although your FICO score is high.


    Q: How fast does my FICO score change?

    A: Your FICO score can change whenever your credit report changes. But your score probably won't change a lot from one month to the next. In a given three-month time period, only about one in four people has a 20-point change in their FICO score.

    While a bankruptcy or late payments can lower your FICO score fast, improving your FICO score takes time. That's why it's a good idea to check your FICO score 6-12 months before applying for a big loan, so you have time to take action if needed. If you are actively working to improve your FICO score, you'd want to check it quarterly or even monthly to review changes.


    Q: How can mistakes get on my credit report?

    A: If your credit report contains errors, it is often because the report is incomplete, or conta'ins information about someone else, This typically happens because:

    • You applied for credit under different names (Mary Jones, Mary Jones-Smith, etc.)
    • Someone made a clerical error in reading or entering name or address information from a hand­ written application.
    • You gave an inaccurate Social Security number, or the number was misread by the lender.
    • Loan or credit card information was inadvertently applied to the wrong account.
    .

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