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Understanding Your Credit Score

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Page 1: Understanding Your Credit Score Get the Facts About … Library/PDFs/Graphical Info Files...Lenders use FICO scores to make billions of credit decisions every year. Fair Isaac develops

Understanding Your Credit Score

Fair Isaac CorporationP.O. Box 11746

San Rafael, CA 94912-1746www.myfico.com

www.fairisaac.com

1557EB 11/03 10,000

Managing your credit health means knowing how your credit score works. This booklet answers your questions on credit scoring, including:

Get the Facts About Credit Scores

How can I fix errors on my credit report? . . . . 4

Which scores are the real FICO scores? . . . . . . 7

What are the five most important things my credit score considers? . . . . . . . . . . . . . . . 8

Will checking my credit score make it drop? . . 14

How much do inquiries affect my score? . . . . 14

Will closing old accounts raise my score? . . . 14

What’s a good score to get? . . . . . . . . . . . . . 16

How can I check my own credit score—and why should I? . . . . . . . . . . . . . . . . . . . . . 16

A Divis ion of Fair Isaac

Compliments of

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Your Credit Score—A Vital Part of Your Credit Health. . . . . . 1

How Credit Scoring Helps You . . . . . . . . 2

Your Credit Report—The Basis of Your Score. . . . . . . . . . . . . 4

How Scoring Works . . . . . . . . . . . . . . . . 6

What a FICO Score Considers . . . . . . . . 8

1. Payment History . . . . . . . . . . . . . . 9

2. Amounts Owed. . . . . . . . . . . . . . 10

3. Length of Credit History . . . . . . . 11

4. New Credit. . . . . . . . . . . . . . . . . 12

5. Types of Credit in Use. . . . . . . . . 13

How the FICO Score Counts Inquiries . . 14

Interpreting Your Score . . . . . . . . . . . . 15

Checking Your Score . . . . . . . . . . . . . . 16

Contents ORDERING YOUR SCORE AND MORE

FICO score delivery services are available through many banks, financial services sites, credit reporting agencies and Fair Isaac’s myFICOsite (www.myfico.com). These services include:

■ Your current FICO score—the credit score lenders use to measure your credit risk.

■ Your credit report, on which your FICO score is based.

■ A full explanation of your score, the positive and negative factors behind it, and how lenders view your credit risk.

■ A FICO score simulator you can use to see how specific actions, such as paying off all your card balances, would affect your score.

■ Specific tips on what you can do to improve your FICO score over time.

The myFICO site also features in-depthinformation on FICO scores, including a full list of the score factors and sound advice formanaging your credit health. In addition, you cansee current information on the average interestrates for home and auto loans for different FICOscore ranges.

BEFORE YOU BUY YOUR SCORE

Make sure you’re buying your FICO score. Somebusinesses will sell or give you credit scores thatare not FICO scores and may not be used by anylenders at all. These services may also give youcredit management advice that does not apply toFICO scores and could actually hurt your creditstanding with lenders.

The advice in this booklet and on www.myfico.comapplies to FICO scores only, not to all scores.FICO scores are the scores most lenders use. Your FICO score is the score to know.

Check your score and learn moreabout scoring at www.myfico.com

Fair Isaac, FICO and myFICO aretrademarks or registered trademarksof Fair Isaac Corporation, in theUni ted States and/or in othercountries. BEACON is a registeredtrademark of Equifax Inc. EMPIRICAis a reg is te red t rademark o fTransUnion LLC. Other product andcompany names herein may betrademarks of their respective owners.

Copyright © 2000 –2003 Fair IsaacCorporation. All rights reserved.This information may be freelycopied and distributed, withoutmodification.

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Your Credit Score—A VitalPart of Your Credit HealthWhen you’re applying for credit—whether it’sa credit card, a car loan, a personal loan or a mortgage—lenders will want to know your credit risk level. Tounderstand your credit risk, most lenders will look atyour credit score.

Your credit score influences the credit that’s available toyou, and the terms (interest rate, etc.) that lenders offeryou. It’s a vital part of your credit health.

Understanding credit scoring can help you manage yourcredit health. By knowing how your credit risk isevaluated, you can take actions that will lower yourcredit risk—and thus raise your score—over time. Abetter score means better financial options for you.

WHAT IS A CREDIT SCORE?

A credit score is a number lenders use to help themdecide: “If I give this person a loan or credit card, how likely is it that I will get paid back on time?” Ascore is a snapshot of your credit risk at a particularpoint in time.

The most widely used credit scores are FICO® scores.Lenders use FICO scores to make billions of creditdecisions every year. Fair Isaac develops FICO scoresbased solely on information in consumer credit reportsmaintained at the credit reporting agencies.

This booklet can help you improve your credit health by helping you understand how credit scoring works.

More information on credit scoring can be found online at www.myfico.com.

W h a t i s y o u rc r e d i t s c o r e ?Once you know how scoringworks, you may want to takethe next step by finding outwhat your FICO score is today,and what steps you could taketo improve it.

You can get your FICO scorethrough Fair Isaac’s myFICOSM

service. When you order yourscore through the myFICOservice, you also get the creditreport it’s based on, and tips on how to improve your scorespecifically.

You can check your FICO scoreonline at www.myfico.com. For information on servicesavailable through the myFICOservice, see page 16.

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F A I R I S A A C U N D E R S T A N D I N G Y O U R C R E D I T S C O R E

How Credit Scoring Helps YouCredit scores give lenders a fast,objective measurement of your creditrisk. Before the use of scoring, the credit grantingprocess could be slow, inconsistent and unfairly biased.

Credit scores—especially FICO scores, the most widelyused credit bureau scores—have made big improvementsin the credit process. Because of credit scores:

■ People can get loans faster. Scores can be deliveredalmost instantaneously, helping lenders speed up loanapprovals. Today many credit decisions can be madewithin minutes—or online, within seconds. Even amortgage application can be approved in hours insteadof weeks for borrowers who score above a lender’s“score cutoff.” Scoring also allows retail stores, Internetsites 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 yourgender, race, religion, nationality and marital status arenot considered by credit scoring.

■ Older credit problems count for less. If you have had poor credit performance in the past, credit scoringdoesn’t let that haunt you forever. Past credit problemsfade as time passes and as recent good payment patternsshow up on your credit report. And credit scores weighany credit problems against the positive informationthat says you’re managing your credit well.

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D o e s m y s c o r ea l o n e d e t e r m i n ew h e t h e r I g e tc r e d i t ?No. Most lenders use a number of facts to make credit decisions, including your FICO score. Lenders look at information such as theamount of debt you canreasonably handle given yourincome, your employmenthistory, and your credit history.

Based on their perception ofthis information, as well astheir specific underwritingpolicies, lenders may extendcredit to you although yourscore is low, or decline yourrequest for credit although your score is high.

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■ More credit is available. Lenders who use creditscoring can approve more loans, because credit scoringgives them more precise information on which to basecredit decisions. It allows lenders to identify individualswho are likely to perform well in the future, eventhough their credit report shows past problems. Evenpeople whose scores are lower than a lender’s cutoff for “automatic approval” benefit from scoring. Manylenders offer a choice of credit products geared todifferent risk levels. Most have their own separateguidelines, so if you are turned down by one lender,another may approve your loan. The use of credit scoresgives lenders the confidence to offer credit to morepeople, since they have a better understanding of therisk they are taking on.

■ Credit rates are lower overall. With more creditavailable, the cost of credit for borrowers decreases.Automated credit processes, including credit scoring,make the credit granting process more efficient and lesscostly for lenders, who in turn have passed savings onto their customers. And by controlling credit lossesusing scoring, lenders can make rates lower overall.Mortgage rates are lower in the United States than inEurope, for example, in part because of the information—including credit scores—available to lenders here.

H o w f a s t d o e s my sco re change?Your score can changewhenever your credit reportchanges. But your scoreprobably won’t change a lotfrom one month to the next. In a given three-month timeperiod, only about one in fourpeople has a 20-point change in their credit score.

While a bankruptcy or latepayments can lower your scorefast, improving your score takestime. That’s why it’s a good ideato check your score 6–12months before applying for abig loan, so you have time totake action if needed. If you areactively working to improveyour score, you’d want to checkit quarterly or even monthly toreview changes.

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Your Credit Report—The Basis of Your ScoreCredit reporting agencies maintain fileson millions of borrowers. Lenders makingcredit decisions buy credit reports on their prospects,applicants and customers from the credit reportingagencies.

Your report details your credit history as it has beenreported to the credit reporting agency by lenders whohave extended credit to you. Your credit report listswhat types of credit you use, the length of time youraccounts have been open, and whether you’ve paid yourbills on time. It tells lenders how much credit you’veused and whether you’re seeking new sources of credit.It gives lenders a broader view of your credit historythan do other data sources, such as a bank’s owncustomer data.

Your credit report reveals many aspects of yourborrowing activities. All pieces of information shouldbe considered in relationship to other pieces ofinformation. The ability to quickly, fairly andconsistently consider all this information is what makes credit scoring so useful.

CHECK YOUR CREDIT REPORT

You should review your credit report from each creditreporting agency at least once a year and especiallybefore making a large purchase, like a house or car. To request a copy, contact the credit reporting agencies directly:

■ Equifax: (800) 685-1111, www.equifax.com

■ Experian (formerly TRW): (888) 397-3742, www.experian.com

■ TransUnion: (800) 888-4213, www.transunion.com

If you find an error, the credit reporting agency mustinvestigate and respond to you within 30 days. If youare in the process of applying for a loan, immediatelynotify your lender of any incorrect information in your report.

How can m is takesge t on my c red i trepo r t ?If your credit report containserrors, it is often because the report is incomplete, orcontains information aboutsomeone else. This typicallyhappens because:

■ You applied for creditunder different names(Robert Jones, Bob Jones, etc.).

■ Someone made a clerical error in readingor entering name oraddress information from a hand-writtenapplication.

■ You gave an inaccurateSocial Security number,or the number wasmisread by the lender.

■ Loan or credit card payments were inadver-tently applied to the wrong account.

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WHAT’S IN YOUR CREDIT REPORT?

Although each credit reporting agency formats andreports this information differently, all credit reportscontain basically the same categories of information.

IDENTIFYING INFORMATION. Your name, address, Social Securitynumber, date of birth and employ-ment information are used to identifyyou. These factors are not used incredit bureau scoring. Updates to this information come frominformation you supply to lenders.

TRADE LINES. These are your creditaccounts. Lenders report on eachaccount you have established withthem. They report the type of account(bankcard, auto loan, mortgage, etc), the date you opened theaccount, your credit limit or loanamount, the account balance andyour payment history.

INQUIRIES. When you apply for aloan, you authorize your lender to ask for a copy of your credit report.This is how inquiries appear on yourcredit report. The inquiries sectioncontains a list of everyone whoaccessed your credit report withinthe last two years. The report yousee lists both “voluntary” inquiries,spurred by your own requests forcredit, and “involuntary” inquires,such as when lenders order yourreport so as to make you a pre-approved credit offer in the mail. See page 14 for more information.

PUBLIC RECORD AND COLLECTIONITEMS. Credit reporting agenciesalso collect public record informationfrom state and county courts, andinformation on overdue debt fromcollection agencies. Public recordinformation includes bankruptcies,foreclosures, suits, wage attachments,liens and judgments.

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I s c r e d i ts c o r i n g u n f a i rt o m i n o r i t i e s ?No. Scoring does not consideryour gender, race, nationality ormarital status. In fact, the EqualCredit Opportunity Act prohibitslenders from considering thistype of information whenissuing credit.

Independent research hasshown that credit scoring is notunfair to minorities or peoplewith little credit history. Scoringhas proven to be an accurateand consistent measure ofrepayment for all people whohave some credit history. Inother words, at a given score,non-minority and minorityapplicants are equally likely to pay as agreed.

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How Scoring WorksAlong with the credit report, lenders can also buy a credit score based on theinformation in the report. That score iscalculated by a mathematical equation that evaluatesmany types of information from your credit report atthat agency. By comparing this information to thepatterns in hundreds of thousands of past credit reports,the score identifies your level of future credit risk.

In order for a FICO score to be calculated on your creditreport, the report must contain at least one account whichhas been open for six months or greater. In addition, thereport must contain at least one account that has beenupdated in the past six months. This ensures that thereis enough information—and enough recent information—in your report on which to base a score.

ABOUT FICO SCORES

Credit bureau scores are often called “FICO scores”because most credit bureau scores used in the US andCanada are produced from software developed by FairIsaac Corporation (FICO). FICO scores are provided tolenders by the three major credit reporting agencies:Equifax, Experian and TransUnion.

FICO scores provide the best guide to future risk basedsolely on credit report data. The higher the score, thelower the risk. But no score says whether a specificindividual will be a “good” or “bad” customer. Andwhile many lenders use FICO scores to help them makelending decisions, each lender has its own strategy,including the level of risk it finds acceptable for a givencredit product. There is no single “cutoff score” used byall lenders.

Above 780740–780690–740620–690Below 620

Based on thegeneral US population’s

FICO scores.

20% 20% 20%20% 20%

How Do People Score?

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MORE THAN ONE FICO SCORE

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 developedby Fair Isaac—one at each of the three main US credit reporting agencies. And these scores havedifferent names.

The FICO scores from all three credit reportingagencies are widely used by lenders. The FICO scorefrom each credit reporting agency considers only thedata in your credit report at that agency.

Fair Isaac develops all three FICO scores using thesame methods and rigorous testing. These FICO scoresprovide the most accurate picture of credit risk possibleusing credit report data.

WILL YOUR SCORES BE DIFFERENT?

FICO scores range from about 300 to 850. Fair Isaacmakes the scores as consistent as possible between thethree credit reporting agencies. If your information wereexactly identical at all three credit reporting agencies,your scores from all three would be within a few pointsof each other.

But here’s why your FICO scores may in fact bedifferent at the three credit reporting agencies. The waylenders and other businesses report information to thecredit reporting agencies sometimes results in differentinformation being in your credit report at the threeagencies. The agencies may also report the sameinformation in different ways. Even small differences in the information at the three credit reporting agenciescan affect your scores.

Since lenders may review your score and credit reportfrom any of the three credit reporting agencies, it’s agood idea to check your credit report from all three andmake sure they’re all right.

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A r e F I C Os c o r e s t h eo n l y c r e d i tr i s k s c o r e s ?No. While FICO scores are themost commonly used credit riskscores in the US, lenders mayuse other scores to evaluateyour credit risk. These include:

■ Application risk scores.Many lenders use scoringsystems that include theFICO score but also considerinformation from your credit application.

■ Customer risk scores. Alender may use these scoresto make credit decisions onits current customers. Alsocalled “behavior scores,”these scores generallyconsider the FICO scorealong with information onhow you have paid thatlender in the past.

■ Other credit bureauscores. These scores mayevaluate your credit reportdifferently than FICO scores,and in some cases a higherscore may mean more risk,not less risk as with FICO scores.

When purchasing a credit scorefor yourself, make sure to getthe FICO score, as this is thescore most lenders will look atin making credit decisions on you.

Credit Reporting Agency FICO Score NameEquifax & Equifax Canada BEACON®

Experian Experian/Fair Isaac Risk Model

TransUnion & TransUnion Canada EMPIRICA®

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Payment History

New Credit

35%

30%

15%

10%10%

Types of Credit in Use

Length of Credit History

Amounts Owed

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G e t t i n g ab e t t e r s c o r eThe next few pages give sometips for getting a better FICOscore. It’s important to note thatraising your score is a bit likegetting in shape: It takes timeand there is no quick fix. In fact,quick-fix efforts can backfire.The best advice is to managecredit responsibly over time.

For information on how tomonitor your FICO score’sprogress, see page 16.

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How a Score Breaks Down

These percentages are based on theimportance of the five categories forthe general population. For particulargroups—for example, people who have not been using credit long—theimportance of these categories may be different.

What a FICO Score ConsidersListed on the next few pages are the fivemain categories of information that FICOscores evaluate, along with their generallevel of importance. Within these categories is acomplete list of the information that goes into a FICOscore. Please note that:

■ A score takes into consideration all these categoriesof information, not just one or two. No one piece ofinformation or factor alone will determine your score.

■ The importance of any factor depends on the overallinformation in your credit report. For some people, agiven factor may be more important than for someoneelse with a different credit history. In addition, as theinformation in your credit report changes, so does theimportance of any factor in determining your score.Thus, it’s impossible to say exactly how important anysingle factor is in determining your score—even thelevels of importance shown here are for the generalpopulation, and will be different for different creditprofiles.

■ Your FICO score only looks at information in yourcredit report. Lenders often look at other things whenmaking a credit decision, however, including yourincome, how long you have worked at your present joband the kind of credit you are requesting.

■ Your score considers both positive and negativeinformation in your credit report. Late payments willlower your score, but establishing or re-establishing agood track record of making payments on time willraise your score.

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✓ T I P Sf o r R a i s i n gY o u r S c o r e■ Pay your bills on time.

Delinquent payments andcollections can have a major negative impact onyour score.

■ If you have missed pay-ments, get current andstay current. The longeryou pay your bills on time,the better your score.

■ Be aware that paying off a collection account,or closing an account onwhich you previouslymissed a payment, willnot remove it from yourcredit report. The scorewill still consider thisinformation, because itreflects your past creditpattern.

■ If you are having troublemaking ends meet,contact your creditors orsee a legitimate creditcounselor. This won’timprove your score immedi-ately, but if you can begin tomanage your credit and payon time, your score will getbetter over time. And youwon’t lose points for seeinga credit counselor.

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1. Payment HistoryWhat is your track record?

Approximately 35% of your score is based on this category.

The first thing any lender would want to know iswhether you have paid past credit accounts on time.This is also one of the most important factors in a credit score.

Late payments are not an automatic “score-killer.” Anoverall good credit picture can outweigh one or twoinstances of, say, late credit card payments. But havingno late payments in your credit report doesn’t mean youwill get a “perfect score.” Some 60%–65% of creditreports show no late payments at all. Your paymenthistory is just one piece of information used incalculating your score.

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), retailaccounts (credit from stores where you do business,such as department store credit cards), installment loans(loans where you make regular payments, such as carloans), finance company accounts and mortgage loans.

■ Public record and collection items—reports of events such as bankruptcies, foreclosures, suits, wageattachments, liens and judgments. These are consideredquite serious, although older items and items with smallamounts will count less than more recent items or thosewith larger amounts. Bankruptcies will stay on yourcredit report for 7–10 years, depending on the type.

■ Details on late or missed payments (“delinquencies”)and public record and collection items. The scoreconsiders 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 latepayment, in and of itself. But recency and frequencycount too. A 60-day late payment made just a monthago will affect a score more than a 90-day late paymentfrom five years ago.

■ How many accounts show no late payments. A goodtrack record on most of your credit accounts willincrease your credit score.

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2. Amounts OwedHow 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 lowscore. However, owing a great deal of money on manyaccounts can indicate that a person is overextended, andis more likely to make some payments late or not at all.Part of the science of scoring is determining how muchis too much for a given credit profile.

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 differenttypes of accounts. In addition to the overall amount you owe, the score considers the amount you owe onspecific types of accounts, such as credit cards andinstallment loans.

■ Whether you are showing a balance on certain typesof accounts. In some cases, having a very small balancewithout missing a payment shows that you havemanaged credit responsibly, and may be slightly betterthan carrying no balance at all. On the other hand,closing unused credit accounts that show zero balancesand that are in good standing will not raise your score.

■ How many accounts have balances. A large numbercan indicate higher risk of over-extension.

■ How much of the total credit line is being used oncredit cards and other “revolving credit” accounts.Someone closer to “maxing out” on many credit cardsmay 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 paidback $2,000, you owe (with interest) more than 80% ofthe original loan. Paying down installment loans is agood sign that you are able and willing to manage andrepay debt.

✓ T I P Sf o r R a i s i n gY o u r S c o r e■ Keep balances low on

credit cards and other“revolving credit.” Highoutstanding debt can affecta score.

■ Pay off debt rather thanmoving it around. Themost effective way toimprove your score in thisarea is by paying down yourrevolving credit. In fact,owing the same amount buthaving fewer open accountsmay lower your score.

■ Don’t close unused credit cards as a short-term strategy to raiseyour score.

■ Don’t open a number of new credit cards that you don’t need, just toincrease your availablecredit. This approach couldbackfire and actually loweryour score.

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3. Length of Credit HistoryHow established is yours?

Approximately 15% of your score is based on this category.

In general, a longer credit history will increase yourscore. However, even people who have not been usingcredit long may get high scores, depending on how therest of the credit report looks.

Your score takes into account:

■ How long your credit accounts have beenestablished, in general. The score considers both theage of your oldest account and an average age of allyour accounts.

■ How long specific credit accounts have beenestablished.

■ How long it has been since you used certain accounts.

✓ T I P Sf o r R a i s i n gY o u r S c o r e■ If you have been manag-

ing credit for a short time,don’t open a lot of newaccounts too rapidly. Newaccounts will lower youraverage account age, whichwill have a larger effect onyour score if you don’t havea lot of other credit informa-tion. Also, rapid accountbuildup can look risky if youare a new credit user.

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W h a t F I C O s c o r e s i g n o r e

FICO scores consider a wide range of information on your credit report, as shown onpages 8–13. However, they do not consider:

■ Your race, color, religion, national origin, sex and marital status. US lawprohibits credit scoring from considering these facts, as well as any receipt ofpublic 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 employmenthistory. 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 types of inquiries (requests for your credit report or score). The score does not count any requests you make, any requests from employers,and any requests lenders make without your knowledge. For details, see page 14.

■ Any information not found in your credit report.

■ Any information that is not proven to be predictive of future credit performance.

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4. New CreditAre 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 forcredit—via the Internet and other channels—morefrequently than ever. Fair Isaac scores reflect this fact.However, research shows that opening several creditaccounts in a short period of time does represent greaterrisk—especially for people who do not have a long-established credit history.

Multiple credit requests also represent greater creditrisk. However, FICO scores do a good job ofdistinguishing between a search for many new creditaccounts and rate shopping for one new account.

Your score takes into account:

■ How many new accounts you have. The score looksat how many new accounts there are by type of account(for example, how many newly opened credit cards youhave). It also may look at how many of your accountsare new accounts.

■ How long it has been since you opened a newaccount. 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 reportingagencies. Inquiries remain on your credit report for two years, although FICO scores only consider inquiriesfrom the last 12 months. The scores have been carefullydesigned to count only those inquiries that truly impactcredit risk—see page 14 for details.

■ Length of time since credit report inquiries weremade by lenders.

■ Whether you have a good recent credit history,following past payment problems. Re-establishing creditand making payments on time after a period of latepayment behavior will help to raise a score over time.

✓ T I P Sf o r R a i s i n gY o u r S c o r e■ Do your rate shopping for

a given auto or mortgageloan within a focusedperiod of time. FICO scoresdistinguish between asearch for a single loan anda search for many newcredit lines, in part by thelength of time over whichinquiries occur.

■ Re-establish your credithistory if you have hadproblems. Opening newaccounts responsibly andpaying them off on time will raise your score in thelong term.

■ Note that it’s OK torequest and check yourown credit report andyour own FICO score. This won’t affect your score,as long as you order yourcredit report directly fromthe credit reporting agencyor through an organizationauthorized to provide creditreports to consumers, like the myFICO service. For more information, seepage 14.

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5. Types of Credit in UseIs it a “healthy” mix?

Approximately 10% of your score is based on this category.

The score will consider your mix of credit cards, retailaccounts, installment loans, finance company accountsand mortgage loans. It is not necessary to have one ofeach, and it is not a good idea to open credit accountsyou don’t intend to use. The credit mix usually won’t bea key factor in determining your score—but it will bemore important if your credit report does not have a lotof other information on which to base a score.

Your score takes into account:

■ What kinds of credit accounts you have, and howmany of each. The score also looks at the total numberof accounts you have. For different credit profiles, howmany is too many will vary.

✓ T I P Sf o r R a i s i n gY o u r S c o r e■ Apply for and open new

credit accounts only asneeded. Don’t openaccounts just to have a better credit mix—it probably won’t raise your score.

■ Have credit cards—butmanage them respon-sibly. In general, havingcredit cards and installmentloans (and making timelypayments) will raise yourscore. People with no creditcards, for example, tend tobe higher risk than peoplewho have managed creditcards responsibly.

■ Note that closing anaccount doesn’t make itgo away. A closed accountwill still show up on yourcredit report, and may beconsidered by the score.

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How the FICO ScoreCounts InquiriesAs explained in the last section, a search for new creditcan mean greater credit risk. This is why the FICOscore counts inquiries—requests a lender makes foryour credit report or score when you apply for credit.

FICO scores consider inquiries very carefully, as not allinquiries are related to credit risk. There are three thingsto note here:

■ Inquiries don’t affect scores that much. For mostpeople, one additional credit inquiry will take less thanfive points off their FICO score. However, inquiries canhave a greater impact if you have few accounts or ashort credit history. Large numbers of inquiries alsomean greater risk: People with six inquiries or more on their credit reports are eight times more likely todeclare bankruptcy than people with no inquiries ontheir reports.

■ Many kinds of inquiries aren’t counted at all. The scoredoes not count it when you order your credit report orcredit score from a credit reporting agency or themyFICO service. Also, the score does not countrequests a lender has made for your credit report orscore in order to make you a “pre-approved” creditoffer, or to review your account with them, even thoughyou may see these inquiries on your credit report.Requests that are marked as coming from employers are not counted either.

■ The score looks for “rate shopping.” Looking for amortgage or an auto loan may cause multiple lenders to request your credit report, even though you’re onlylooking for one loan. To compensate for this, the scorecounts multiple inquiries in any 14-day period as justone inquiry. In addition, the score ignores all inquiriesmade in the 30 days prior to scoring. So if you find aloan within 30 days, the inquiries won’t affect yourscore while you’re rate shopping.

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S h o u l d I c l o s eo l d a c c o u n t st o r a i s e m ys c o r e ?Generally, this doesn’t work. Infact, it might lower your score.First of all, any late paymentsassociated with old accountswon’t disappear from yourcredit report if you close theaccount. Second, long-established accounts show youhave a longer history ofmanaging credit, which is agood thing. And third, havingavailable credit that you don’tuse does not lower your score.

You may have reasons otherthan your score to shut downold credit card accounts thatyou don’t use. But don’t do itjust to get a better score.

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Interpreting Your ScoreWhen a lender receives your Fair Isaac credit bureaurisk score, up to four “score reasons” are also delivered.These are the top reasons why your score was nothigher. If the lender rejects your request for credit, andyour FICO score was part of the reason, these scorereasons can help the lender tell you why your scorewasn’t higher.

These score reasons are more useful than the scoreitself in helping you determine whether your creditreport might contain errors, and how you might improveyour credit health. However, if you already have a highscore (for example, in the mid-700s or higher) some ofthe reasons may not be very helpful, as they may bemarginal factors related to the last three categoriesdescribed previously (length of credit history, newcredit and types of credit in use).

To see your own FICO score and reason codes with adetailed explanation on how you can improve the scoreover time, visit www.myfico.com.

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W h a t i f I ’ mt u r n e d d o w nf o r c r e d i t ?If you have been turned downfor credit, the Equal CreditOpportunity Act (ECOA) givesyou the right to obtain thereasons why within 30 days.You are also entitled to a freecopy of your credit bureaureport within 60 days, whichyou can request from the credit reporting agencies.

If the score was a primary partof the lender’s decision, thelender will use the scorereasons (see left) to explainwhy you didn’t qualify for thecredit. To get more specificinformation on what your scoreis and how you could improveit, go to www.myfico.com.

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Checking Your ScoreSince lenders check your score, it makessense to see how lenders see you. It’s easyto check your own FICO score, and to find out specificthings you can do to raise it.

You can order your FICO score through online servicesdeveloped by Fair Isaac, in partnership with creditreporting agencies. Our score delivery services give youall the information you need to understand your score,the information it’s based on, and ways to improve yourcredit health.

An important time to check your score is six months or so before a major purchase, such as a car or homeloan. This gives you time to make sure your creditreport information is right, correct it if it’s not, andimprove your score if necessary. In general, any timeyou are applying for credit, taking out a new loan orchanging your credit mix is a good time to check yourFICO score.

MANAGE YOUR CREDIT HEALTH

Improving your FICO score can help you:

■ Get better credit offers

■ Lower your interest rates

■ Speed up credit approvals

The payoff from a better FICO score can be big. Forexample, with a 30-year fixed mortgage of $150,000,you could save approximately $131,000 over the life ofthe loan—or $365 on each monthly payment—by firstimproving your FICO score from a 550 to a 720.

W h a t i s a g o o d F I C Os c o r e t o g e t ?Since there’s no one “scorecutoff” used by all lenders, it’shard to say what a good scoreis outside the context of aparticular lending decision. Forexample, one auto lender mayoffer lower interest rates topeople with FICO scores above,say, 680; another lender mayuse 720, and so on. Your lendermay be able to give youguidance on the criteria for a given credit product.

10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

707Percentage of US consumers with a lower score than yours

0%

FICO score range

Highest risk Lowest risk

550 600 650 700 750 800

FICO® SCORE 707FOR

ON

JOHN SMITH

OCTOBER 5, 2001

Your Credit Profile

The myFICO service can help you understand how lenders see your credit risk picture.

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Your Credit Score—A Vital Part of Your Credit Health. . . . . . 1

How Credit Scoring Helps You . . . . . . . . 2

Your Credit Report—The Basis of Your Score. . . . . . . . . . . . . 4

How Scoring Works . . . . . . . . . . . . . . . . 6

What a FICO Score Considers . . . . . . . . 8

1. Payment History . . . . . . . . . . . . . . 9

2. Amounts Owed. . . . . . . . . . . . . . 10

3. Length of Credit History . . . . . . . 11

4. New Credit. . . . . . . . . . . . . . . . . 12

5. Types of Credit in Use. . . . . . . . . 13

How the FICO Score Counts Inquiries . . 14

Interpreting Your Score . . . . . . . . . . . . 15

Checking Your Score . . . . . . . . . . . . . . 16

Contents ORDERING YOUR SCORE AND MORE

FICO score delivery services are available through many banks, financial services sites, credit reporting agencies and Fair Isaac’s myFICOsite (www.myfico.com). These services include:

■ Your current FICO score—the credit score lenders use to measure your credit risk.

■ Your credit report, on which your FICO score is based.

■ A full explanation of your score, the positive and negative factors behind it, and how lenders view your credit risk.

■ A FICO score simulator you can use to see how specific actions, such as paying off all your card balances, would affect your score.

■ Specific tips on what you can do to improve your FICO score over time.

The myFICO site also features in-depthinformation on FICO scores, including a full list of the score factors and sound advice formanaging your credit health. In addition, you cansee current information on the average interestrates for home and auto loans for different FICOscore ranges.

BEFORE YOU BUY YOUR SCORE

Make sure you’re buying your FICO score. Somebusinesses will sell or give you credit scores thatare not FICO scores and may not be used by anylenders at all. These services may also give youcredit management advice that does not apply toFICO scores and could actually hurt your creditstanding with lenders.

The advice in this booklet and on www.myfico.comapplies to FICO scores only, not to all scores.FICO scores are the scores most lenders use. Your FICO score is the score to know.

Check your score and learn moreabout scoring at www.myfico.com

Fair Isaac, FICO and myFICO aretrademarks or registered trademarksof Fair Isaac Corporation, in theUni ted States and/or in othercountries. BEACON is a registeredtrademark of Equifax Inc. EMPIRICAis a reg is te red t rademark o fTransUnion LLC. Other product andcompany names herein may betrademarks of their respective owners.

Copyright © 2000 –2003 Fair IsaacCorporation. All rights reserved.This information may be freelycopied and distributed, withoutmodification.

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Understanding Your Credit Score

Fair Isaac CorporationP.O. Box 11746

San Rafael, CA 94912-1746www.myfico.com

www.fairisaac.com

1557EB 11/03 10,000

Managing your credit health means knowing how your credit score works. This booklet answers your questions on credit scoring, including:

Get the Facts About Credit Scores

How can I fix errors on my credit report? . . . . 4

Which scores are the real FICO scores? . . . . . . 7

What are the five most important things my credit score considers? . . . . . . . . . . . . . . . 8

Will checking my credit score make it drop? . . 14

How much do inquiries affect my score? . . . . 14

Will closing old accounts raise my score? . . . 14

What’s a good score to get? . . . . . . . . . . . . . 16

How can I check my own credit score—and why should I? . . . . . . . . . . . . . . . . . . . . . 16

A Divis ion of Fair Isaac

Compliments of