Introduction to Credit Scoring
What is in a credit report?
Although each consumer reporting agency formats and reports this information differently, all credit reports contain basically the same categories of information.
- Identifying Information – Your name, address, Social Security number, date of birth and employment information. This information is not used in calculating FICO® Scores; it is only used to identify you. Updates to this information come from information you supply to your lenders.
- Credit Accounts – Most lenders report information about each account you have established with them. They report the type of credit account, the date you opened the account, your credit limit or loan amount, the account balance, and your payment history.
- Credit Inquiries – Your credit reports list the inquiries that lenders have made for your credit reports within the last two years. When you apply for a loan, you authorize your lender to ask for a copy of your credit reports. This is how inquiries appear on your reports.
- Bankruptcies and Collections – Consumer reporting agencies also collect bankruptcy (often found in the public record segment of a credit report) information from state and county courts, and delinquencies reported by collection agencies.
How do I check my credit report for free?
You may get a free copy of your credit report from each of the three major consumer reporting agencies annually. To request a copy of your credit report, please visit: www.annualcreditreport.com. Please note your free credit report will not include your FICO® Score. Because your FICO® Score is based on the information in your credit report, it is important to make sure that the credit report information is accurate.
What if there's an error on my credit report?
If you find an error on one or more of your credit reports, contact the consumer reporting agency or the organization that provided the information to the agency. Both parties are responsible for correcting inaccurate or incomplete information in your report as required by the Fair Credit Reporting Act.
What is a credit score?
A credit score is a number summarizing your credit risk, based on your credit data. A credit score helps lenders evaluate your credit profile and influences the credit that’s available to you, including loan and credit card approvals, interest rates, credit limits and more.
About FICO Scores
What is FICO?
FICO, formerly known as Fair Isaac Corporation, is the company that invented FICO® Scores. Starting in the 1950s, FICO sparked a revolution in credit risk assessment by pioneering credit risk scoring for credit grantors. This new approach to measuring risk enabled banks, retailers and other businesses to improve their performance and to expand consumers’ access to credit. Today, FICO® Scores are widely recognized as the industry standard for measuring credit risk.
It is important to note that while FICO works with the consumer reporting agencies to provide your FICO® Scores, it does not have access to or store any of your personal data or determine the accuracy of the information in your credit file.
What are FICO scores?
FICO® Scores are the most widely used credit scores. Each FICO® Score is a three-digit number calculated from the data on your credit reports at the three major consumer reporting agencies—Experian, TransUnion and Equifax. Your FICO® Scores predict how likely you are to pay back a credit obligation as agreed. Lenders use FICO® Scores to help them quickly, consistently and objectively evaluate potential borrowers credit risk.
How are FICO Scores different?
Not all credit scores are FICO® Scores. Because FICO® Scores are the credit scores most widely used by lenders—FICO® Scores are used in over 90% of U.S. credit lending decisions1—knowing your FICO® Scores is the best way to understand how potential lenders could evaluate your credit risk when you apply for a loan or credit. Other credit scores, which use scoring formulas different from FICO’s, may not give you an accurate representation of the scores your lender uses when assessing your credit profile.
What goes into FICO Scores?
FICO® Scores are calculated from the credit data in your credit report. This data is grouped into five categories; below is a detailed breakdown of the relative importance of each category. As you review this information, keep in mind that:
- FICO® Scores take into consideration all of these categories, not just one or two.
- The importance of any factor (piece of information) depends on the information in your entire credit report.
- FICO® Scores look only at the credit-related information on a credit report.
- FICO® Scores consider both positive and negative information on a credit report.
The five categories the data is grouped in includes:
- Payment History
- The Amounts You Owe
- Length of Credit History
- New Credit
- Types of Credit in Use
See more detailed information on what this information is based on here.
What is left out of FICO Scores?
FICO® Scores consider a wide range of information on a credit report. However, they do NOT consider:
- Race, color, religion, national origin, age, sex and marital status
- Salary, or other employment information (however, lenders may consider this information separately)
- Where the consumer lives
- Any interest rate being charged on a credit card or other account
- Any items reported as child/family support obligations
- Certain types of inquiries
- Any information not found in the credit report
What is a good FICO Score?
FICO® Scores generally range from 300 to 850, where higher scores demonstrate lower credit risk and lower scores demonstrate higher credit risk (note: some types of FICO® Scores have a slightly broader range). What’s considered a “good” FICO® Score varies, since each lender has its own standards for approving credit applications, based on the level of risk it finds acceptable. So one lender may offer its lowest interest rates to people with FICO® Scores above 730, while another may only offer it to people with FICO® Scores above 760.
The chart below provides a breakdown of ranges for FICO® Scores found across the U.S. consumer population. Again, each lender has its own credit risk standards, but this chart can serve as a general guide of what a FICO® Score represents.
FICO’s research shows that people with a high FICO Score tend to:
- Make all payments on time each month
- Keep credit card balances low
- Apply for new credit only when needed
- Establish a long credit history
What are score factors?
Score factors are delivered with a consumer’s FICO® Score, these are the top areas that affected that consumer’s FICO® Scores. The order in which the score factors are listed is important. The first factor indicates the area that most affected the score and the second factor is the next most significant influence. Addressing these factors can benefit the score.
What are the minimum requirements to calculate a FICO Score?
A credit file must contain these minimum requirements (Note: The requirements vary slightly for FICO® Scores NG):
- At least one account that has been open for six months or more
- At least one account that has been reported to the consumer reporting agency within the past six months
- No indication of deceased on the credit file (if you shared an account with a person reported as deceased, it is important to check your credit file to make sure you are not affected)
How can FICO Score help me?
A FICO® Score gives lenders a fast, objective and consistent estimate of your credit risk. Before the use of credit scoring, the credit granting process could be slow, inconsistent and unfairly biased. Keep in mind that FICO® Scores are only one of many factors lenders consider when making a credit decision. Here’s how FICO® Scores may benefit you.
Get credit faster – FICO® Scores can be delivered almost instantaneously, helping lenders speed up credit card and loan approvals.
Unbiased credit decisions – Factors such as your gender, race, religion, nationality and marital status are not considered by FICO® Scores. When a lender uses your FICO® Score, they’re getting an evaluation of your credit history that is fair and objective.
May save you money – A higher FICO® Score can help you qualify for better rates from lenders—generally, the higher your score, the lower your interest rate and payments.
More credit available – Because FICO® Scores allow lenders to more accurately associate risk levels with individual borrowers, they allow lenders to offer different prices to different borrowers. Rather than making strictly “yes-no” credit decisions and offering “one-size-fits-all” credit products, lenders use FICO® Scores to approve consumers who might have been declined credit in the past. Lenders are even able to provide higher-risk borrowers with credit that they are more likely to be able to manage.
Do I have more than one FICO Score?
To keep up with consumer trends and the evolving needs of lenders, FICO periodically updates its scoring model, resulting in new FICO® Score versions being released to market every few years. Additionally, different lenders use different versions of FICO® Scores when evaluating your credit. Auto lenders, for instance, often use FICO® Auto Scores, an industry-specific FICO® Score version that’s been tailored to their needs.
What is my FICO Score different than other scores I have seen?
There are many different credit scores available to consumers and lenders. FICO® Scores are the credit scores used by most lenders, and different lenders may use different versions of FICO® Scores. In addition, FICO® Scores are based on credit file data from a consumer reporting agency, so differences in your credit files may create differences in your FICO® Scores.
Why do FICO Scores fluctuate/change?
There are many reasons why a score may change. FICO® Scores are calculated each time they are requested, taking into consideration the information that is in your credit file from a consumer reporting agency at that time. So, as the information in your credit file at that CRA changes, FICO® Scores can also change. Review your key score factors, which explain what factors from your credit report most affected a score. Comparing key score factors from the two different time periods can help identify causes for a change in a FICO® Score. Keep in mind that certain events such as delinquent payments or bankruptcy can lower FICO® Scores quickly.
Does a FICO Score alone determine whether I get credit?
No. Most lenders use several factors to make credit decisions, including a FICO® Score. Lenders may 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 review of this information, as well as their specific underwriting policies, lenders may extend credit to you even with a low FICO® Score, or decline your request for credit even with a high FICO® Score.
What is a typical FICO Score for someone new to credit?
FICO® Scores are generated by complex mathematical algorithms based on unique credit report data, so there is no “typical” or “entry-level” score. While someone new to credit may have difficulty scoring in the highest score ranges due to a limited number of active accounts and length of history, it is possible to have a FICO® Score that meets lenders’ criteria for granting credit. FICO® Scores consider the extent to which people can demonstrate a good track record of making payments on time. In fact, payment history is more important for FICO® Scores (about 35%) than length of credit history (about 15%).
How is a credit history established?
There are a few ways to establish a credit history, including the following.
- By applying for and opening a new credit card, a person with no or little credit history may not get very good terms on this credit card—such as a high annual percentage rate (APR). However, by charging small amounts and paying off the balance each month, you won’t be paying interest each month so the high APR won’t hurt your financial position.
- Those unable to get approved for a traditional credit card may be able to open a secured credit card to build credit history, provided the card issuer reports secured cards to the consumer reporting agency. This type of card requires a deposit of money with the credit card company. Charges can then be made on the secured card, typically up to the amount deposited.
With both traditional and secured credit cards, keeping balances low, paying off balances each month, and not missing payments are important for responsible financial health management.
What is a credit ``inquiry``?
When you apply for credit, you authorize those lenders to ask or “inquire” for a copy of your credit report from a consumer reporting agency. When you later check your credit report, you may notice that their credit inquiries are listed. You may also see inquiries by businesses that you don’t know. But the only inquiries that count toward your FICO® Scores are the ones that result from your applications for new credit.
Soft inquiry – Soft inquiries are all credit inquiries where your credit is NOT being reviewed by a prospective lender. FICO® Scores do not consider involuntary (soft) inquiries made by businesses with which you did not apply for credit, inquiries from employers, inquiries from lenders for account review purposes for which you already have a credit account, or your own requests to see your credit file.
Hard inquiry – Hard inquiries include credit checks when you’ve applied for an auto loan, mortgage, credit card or other types of loans. Each of these types of credit checks count as a single inquiry. One exception occurs when you are “rate shopping”. Your FICO® Scores consider all hard inquiries within a reasonable shopping period for an auto, student loan or mortgage as a single inquiry.
Will my FICO Scores drop if I apply for new credit?
If so, they probably won’t drop much. If you apply for a credit account, a request for your credit report information (called a “hard inquiry”) will appear on your report. Looking for new credit can indicate higher risk to a lender, but multiple inquiries from auto, mortgage or student loan lenders within a short period of time are treated as a single inquiry rather than multiple inquiries and tend to have little effect on your FICO® Scores.
How can I minimize the effect t my FICO Score when seeking new credit?
Applying for new credit only accounts for about 10% of a FICO® Score, so the affect is relatively modest. Exactly how much applying for new credit affects your score depends on your overall credit profile and what else is already in your credit reports. For example, applying for new credit can have a greater effect on your FICO® Scores if you only have a few accounts or a short credit history.
That said, there are definitely a few things to be aware of depending on the type of credit you are applying for. When you apply for credit, a credit check or “inquiry” can be requested to check your credit standing. Let’s look at the common inquiries you might find in your credit reports.
Credit Cards – If you only need a small amount, credit card companies will sometimes provide an increased credit limit (for accounts already opened). While a request for an increased limit may count as an inquiry just like opening a new card would, it won’t reduce the average age of your credit accounts, which is also important to your FICO® Scores.
If getting the limit raised on an existing card isn’t an option, then applying for the fewest number of credit cards will have the least negative affect to your FICO® Scores. For example, if a person needed an extra $5,000, getting one card with a $5,000 has less effect on your score than getting two cards each with $2,500 limits. That’s because when applying for new credit cards, each application is counted separately as an individual inquiry in your credit file, and the more inquiries you have, the more that could hurt your FICO® Scores. Having more inquiries makes you look riskier to potential lenders.
Home, Auto, and Student Loans – FICO® Scores do not penalize people for rate shopping for a home, car or student loan. During rate shopping, multiple lenders may request your credit reports to check your credit. But FICO® Scores de-duplicate these and consider inquiries within a reasonable shopping period for an auto, student loan or mortgage each as a single inquiry. Doing the entire rate shopping and getting the loan within 45 days, will have no immediate effect to your FICO® Score.
Given rate shopping for home, auto and student loans has no immediate effect, why do you even see an inquiry in your credit files? While these types of inquiries may appear in your files, FICO® Scores count all those inquiries that fall in a typical shopping period as just one inquiry. So, again, doing rate shopping within a matter of weeks as opposed to a matter of months limits the longer-term affect to your scores as well.
Should I take advantage of promotional credit card offers?
Generally, opening new accounts can indicate increased credit risk and can hurt your FICO® Scores. Every individual’s situation is unique, but in general consumers with a moderate number of revolving accounts on their credit reports generally represent lower risk than consumers with either a relatively large number or a very limited number of revolving accounts. However, please keep in mind that opening a new account, and to a lesser extent the resulting credit inquiry, may demonstrate higher risk in the short term.
Will closing a credit card account affect a FICO Score?
Yes, but not in the way you might expect. And, while closing an account may be a good strategy for responsible financial health management in some cases, it also may have a negative effect on your FICO® Scores.
FICO® Scores take into consideration something called a “credit utilization ratio”. This ratio looks at your total used credit in relation to your total available credit; the higher this ratio is, the more it can negatively affect your FICO® Scores. Closing an old or unused card essentially wipes away some of your available credit and thereby increases your credit utilization ratio.
What's the best way to manage my growing credit card debt?
There are several things to consider when managing credit card debt. People who only have one credit card available and are coming close to maxing out that card, might consider applying for another card, since credit utilization affects their FICO® Scores.
However, it is also important to keep in mind that consumers with a moderate number of revolving accounts on their credit report generally represent lower risk than consumers with either a relatively large number, or a very limited number of revolving accounts.
What is the effect of paying student loans while in college versus after graduation?
Once you start paying your student loan, it will be part of your credit information considered by FICO® Scores. Deferred loans do not harm FICO® Scores. The existence of the loan is a factor used to demonstrate the length of credit history and mix of credit.
Keep in mind that missing or late payments have a negative impact on FICO® Scores.
How are FICO Scores affected by the combination of interest and principal?
Most installment loans are a combination of interest and principal. The inputs into your FICO® Scores are based on data in your credit report, which generally does not break out the interest and principal components, but instead reports the overall debt. Therefore the fact that loan payments are a combination of interest and principal does not have an impact on a score.
Does moving loans into forbearance affect FICO Scores?
Forbearance is a period of time during repayment in which a borrower is permitted to temporarily postpone making regular monthly payments. The debt is not forgiven, but regular payments are suspended until a later time. As an example, forbearance may be granted if a borrower is experiencing temporary financial difficulty. The consumer may be making reduced payments, interest-only payments or no payments. FICO® Scores do not consider the fact that a loan is in forbearance. Therefore, the fact that a loan moved into forbearance would not impact the score. However, even when a loan is in forbearance, other information about the loan may still continue to impact the score.
How long will a foreclosure affect a FICO Score?
A foreclosure remains in your credit files for seven years, but its effect on your FICO® Scores will lessen over time. While a foreclosure is considered a very negative event by FICO® Scores, it’s a common misconception that it will ruin your scores for a very long time. In fact, if all other credit obligations remain in good standing, your FICO® Scores can begin to rebound in as little as two years. The important thing to keep in mind is that a foreclosure is a single negative item, and if you keep this item isolated, it will be much less damaging to your FICO® Scores than if you had a foreclosure in addition to defaulting on other credit obligations.
Are the alternatives to foreclosure any better as far as FICO Scores are concerned?
The common alternatives to foreclosure, such as short sales, and deeds-in-lieu of foreclosure, are all “not paid as agreed” accounts, and considered the same by FICO® Scores. This is not to say that these may not be better options in some situations; it’s just that they will be considered no better or worse than a foreclosure by FICO® Scores.
Bankruptcies as an alternative to foreclosure may have a greater effect on a FICO® Score. While a foreclosure is a single account that you default on, declaring bankruptcy can affect multiple accounts and therefore has potential to have a greater negative affect on your FICO® Scores.
How do loan modifications affect a FICO Score?
Your servicer will likely use a FICO® Score, along with other factors, to help determine the new terms of your loan, such as your mortgage rate. In general, your FICO® Scores play a key role any time you apply for new credit or change the terms of a loan.
FICO® Scores are calculated from the information in consumer credit files. Whether a loan modification affects the borrower’s FICO® Scores depends on whether and how the lender reports the event to the consumer reporting agencies, as well as on the person’s overall credit profile. If a lender indicates to a consumer reporting agency that the consumer has not made payments on a mortgage as originally agreed, that information in the consumer’s credit reports could cause the consumer’s FICO® Scores to decrease or it could have little to no effect on his or her FICO® Scores.
How does refinancing affect my FICO Score?
Refinancing and loan modifications can affect your FICO® Scores in a few areas. How much these affect the score depends on whether it’s reported to the consumer reporting agencies as the same loan with changes or as an entirely new loan.
If a refinanced loan or modified loan is reported as the same loan with changes, three pieces of information associated with the loan modification may affect your score: the credit inquiry, changes to the loan balance, and changes to the terms of that loan. Overall, the effect of these changes on your FICO® Scores should be minimal.
If a refinanced loan or modified loan is reported as a “new” loan, your score could still be affected by the inquiry, balance, and terms of the loan—along with the additional effect of a new “open date.” A new or recent open date typically indicates that it is a new credit obligation and, as a result, can affect the score more than if the terms of the existing loan are simply changed.
How will a bankruptcy affect my FICO Scores?
A bankruptcy is considered a very negative event by FICO® Scores, and will affect your FICO® Scores for as long as it is listed on your credit files. However, as the bankruptcy item ages, its effect on a FICO® Score gradually decreases.
If you file for bankruptcy, here are some things you should do to make sure your creditors are accurately reporting the bankruptcy filing:
- Check your credit files to ensure that accounts that were not part of the bankruptcy filing are not being reported with a bankruptcy status.
- Make sure your bankruptcy is removed as soon as it is eligible to be “purged” from your credit file.
More about FICO Scores & Financial Health
Do employers use FICO Scores in hiring decisions?
No. While Federal law allows review of credit reports for employment screening, FICO® Scores are not included with the reports.
Are FICO Scores used in insurance underwriting?
FICO® Scores were designed to help lenders by rank-ordering consumers according to the likelihood they will become at least 90 days late repaying a creditor within the next 24 months. FICO also offers FICO® Insurance Scores, credit-based insurance scores specifically designed for the insurance industry to help predict future auto and home insurance losses.
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 FICO® Scores are not unfair to minorities or people with little credit history. FICO® Scores have proven to be an accurate and consistent measure of repayment risk.
How are FICO Scores calculated for married couples?
Married couples don’t have joint FICO® Scores, they each have individual scores. The difference is that when you are single you usually only need to worry about your own credit habits and credit profile. However, if you and your spouse open a credit account under both your names, the spending and payment behavior on that account will impact both your FICO® Scores.
How can I manage my credit and FICO Score responsibly?
Higher FICO® Scores are a result of healthy credit behaviors, and the best way to have higher FICO® Scores is to demonstrate healthy credit behaviors over time. Here are a few tips you can follow.
Pay your bills on time. Delinquent payments and collections can have a major negative impact on your FICO® Scores. If you’re behind on payments, get current and stay current.
Avoid collections. Paying off a collection account will not remove it from your credit report. It will stay on your report for seven years.
Keep balances low. It’s okay to use your credit cards, just be careful about using a large percentage of your available credit — high utilization rates can have a major impact on your FICO® Scores.
Do your rate shopping within a short period of time. FICO® Scores distinguish between a search for a single loan and a search for a mortgage, student or auto loan, in part by the length of time over which inquiries occur.
Have credit and manage it responsibly. Ultimately, having a mixture of credit is a good thing — as long as you make your payments regularly and on time. Someone with no credit cards tends to be higher risk than someone who has managed credit cards responsibly
What's the ideal utilization ratio?
There is no single utilization percentage that equates to optimal points. Generally, lower utilization means less credit risk and positive affect to FICO® Scores.
Will spending less and saving more affect a FICO Score?
While putting more money towards savings is usually a good idea, it’s not necessarily going to affect your FICO® Scores. FICO® Scores do not consider the amount of cash you have, therefore the amount of money you save doesn’t affect your FICO® Scores.
As far as spending less, that could have an effect on your FICO® Scores. For example, if you typically use your credit cards for purchases and you don’t always pay off the balance on those credit cards, then you may notice a change in your FICO® Scores. FICO® Scores factor in the balance on revolving credit accounts.
Do accounts that are not on my credit reports affect my FICO Scores?
Though your FICO® Scores capture a pretty accurate picture of your credit history, not every account is recorded. Your positive rental and utility payment history may not be listed in your credit reports, however not paying these bills on time can have a negative effect on your FICO® Scores:
- Reported delinquencies: Even though your good payment history isn’t reported, your landlord and utility companies have the right to report delinquencies to the consumer reporting agencies. If the bill continues to go unpaid your account could be turned over to a collection agency. A collection can show up in your credit reports and can be as harmful to your FICO® Scores as the more commonly reported delinquencies on loans or credit cards.
- Future referrals: The next time you need to move, your potential landlord is likely to require a copy of your credit report and a FICO® Score. They may also want to contact your current landlord to check if you paid your rent on time. Even if you have a high FICO® Score, a potential landlord could choose another candidate if your current landlord reports late or incomplete payments, since people who consistently pay their bills on time appear less risky.
What are the factors of late payments, and how do they affect FICO Scores?
FICO® Scores consider late payments in these general areas; how recent the late payments are, how severe the late payments are, and how frequently the late payments occur. This means that a recent delinquencies could be more damaging to a FICO® Score than several late payments that happened a long time ago.
You may have noticed on your credit reports that late payments are listed by how late the payments are. Typically, creditors report late payments in one of these categories: 30-days late, 60-days late, 90-days late, 120-days late, 150-days late, or charge-off. While a 90-day late is worse than a 30-day late, the important thing to understand is that people who continually pay their bills on time tend to appear less risky to lenders.
A history of payments is the largest factor in FICO® Scores. Sometimes circumstances cause people to be unable to keep current with their bills—maybe an unexpected medical emergency or losing a job. Creditors and legitimate credit counselors may be able to provide direction to people when they are having trouble responsibly managing their financial health. Late payments hurt scores and credit standing, but paying off late debt before goes to a collections agency will have a positive effect on a score.
How long will negative information remain on my credit files?
It depends on the type of negative information. Here’s the basic breakdown of how long different types of negative information will remain on your credit files:
- Late payments: 7 years
- Bankruptcies: 7 years for a completed Chapter 13, and 10 years for Chapters 7 and 11
- Foreclosures: 7 years
- Collections: About 7 years, depending on the age of the debt being collected
Keep in Mind: The older the negative item is, the less affect it will have on your FICO® Scores.