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Cleaning Up Your Credit Report

Credit Scoring


Learn what your credit score is and how to improve it.

You may not even know that you have a credit score, but you do -- and it's used by credit card companies, home equity lenders, auto loan lenders, and finance companies when you apply for credit or a loan. Produced with a computer model created, most often, by Fair, Isaac & Co. (or "FICO," leading to the somewhat generic term "FICO score"), a credit score is intended to be a snapshot, or summary, of your credit history. A low score can mean you don't get a credit card or loan, or that if you do, you will pay a higher interest rate. Also, some lenders use your credit score and other information to set the "price" for your loan.

Factors Affecting Your Credit Score

Although we don't know exactly how a credit score is determined, FICO considers the following factors (the approximate weight it assigns to each factor is in parentheses):

  • Payment history (35%). Your score is negatively affected if you have paid bills late, had an account sent to collection, or declared bankruptcy. The more recent the problem, the lower your score -- a 30-day late payment today hurts more than a bankruptcy five years ago.
  • Outstanding debt (30%). If the amount you owe is close to your credit limit, that is likely to have a negative effect on your score. A low balance on two cards is better than a high balance on one.
  • Length of your credit history (15%). The longer your accounts have been open, the better.
  • Recent inquiries on your report (10%). If you have recently applied for many new accounts, that may negatively affect your score. Promotional inquiries don't count.
  • Types of credit in use (10%). Loans from finance companies generally lower your credit score. FICO says this is most important when there isn't a lot of other information upon which to base a score.

Although this is a good guide as to what credit scoring companies deem important, keep in mind that some companies may consider different factors.

What the Numbers Mean

Credit scores range from 300 to 900, with the average around 750. According to the model, as your score increases, your risk of default decreases. Industry experience shows a direct correlation between low scores and high default rates.

This means that you may have a hard time convincing a creditor to make you an affordable loan (or any loan at all) if your score is far below average. But just as your credit history can vary from credit bureau to credit bureau, so can your credit scores. It is possible to have a high score with one credit bureau (Equifax, Experian, or TransUnion) and a low credit score with another, just as you might have a clean credit history with one bureau and a muddied record with another.

Wide-ranging credit scores are rare, however, although some lenders admit to seeing borrowers with scores that vary by 100 points or more. To combat this, a lender usually uses the middle score -- but that can be of little comfort if you have scores of 550, 570, and 700, and the interest rate for a borrower with a score of 570 is two points higher than the rate for a borrower who scores 700. Narrow ranges are more typical. For example, a person with good credit might have scores something like 685, 702, and 710.

How to Get Your Credit Score

You may now obtain your credit score from credit bureaus that develop or distribute credit scores by paying a fee (the Federal Trade Commission will set the fee). The bureau must provide your score, the range of possible scores under the scoring model used, four key factors that affected the score, the date on which the score was created, and the name of the entity that provided the score (such as Fair, Isaac). Be aware, however, the score and the scoring model that you receive may be different than those your lender uses. Fair, Isaac, in partnership with Equifax (one of the "big three" credit bureaus) made credit scores available online to consumers for a fee of $14.95. To get your credit score, visit www.myfico.com or www.equifax.com or www.scorepower.com.

If you get your credit score from one or more credit scorer, keep in mind that your score may vary from one scoring company to the next.

Improving Your Credit Score

If you want to improve your credit score, Fair, Isaac offers these tips:

  • pay your bills on time
  • make up missed payments and keep all your payments current
  • maintain low balances on credit cards and other "revolving debt"
  • pay off debt rather than transferring it to a new account
  • don't close unused credit card accounts just to raise your credit score
  • don't get new credit cards that you don't need just to increase the credit available to you, and
  • see more tips in "Understanding Your Credit Score" on the Fair, Isaac website, www.myfico.com.

Finally, don't give up hope just because you have a low score. If you think there are mistakes on your credit report, you can get a copy of the report, fix the problem, and explain the situation to the lender. (See Rebuilding Credit FAQ to learn how to do this.) Most lenders will override credit scores if they think you are a good risk despite problems with your score.

To learn more about credit scoring -- particularly its pitfalls -- you might want to visit the website of one of credit scoring's biggest critics, Greg Fisher. He beat the scoring proponents to the punch by scooping up the Web address www.creditscoring.com, from which he launches often strident, sometimes wacky, but usually well-documented attacks on the credit-scoring concept and the industries that support it. If you're interested in the other side of the story, get the booklet "Understanding Your Credit Score" from Fair, Isaac at www.myfico.com.

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