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Understanding Your Credit Score

Corporate Headquarters:

Fair, Isaac and Company, Inc.P.O. Box 11746San Rafael, CA 94912-1746

www.myfico.comwww.fairisaac.com

0997EB 08/01 10,000

Compliments of:

An Introduction to Credit Scores . . . . . . 1

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

Your Credit Report—

The Basis of Your Credit 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

Interpreting Your Score . . . . . . . . . . . . 14

Q&A on Credit Scores . . . . . . . . . . . . . 15

Checking Your Credit Report . . . . . . . . 16

Fair, Isaac, FICO and myFICO aretrademarks or registered trademarks ofFair, Isaac and Company, Inc., in theUnited States and/or in other countries.BEACON, Equifax Credit Profile and ScorePower are trademarks or registeredtrademarks of Equifax Inc. EMPIRICA is aregistered trademark of Trans Union LLC.Other product and company names hereinmay be trademarks of their respectiveowners.

Copyright © 2001 Fair, Isaac and Company,Inc. All rights reserved. This informationmay be freely copied and distributed,without modification.

Contents

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 F A I R , I S A A C

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An Introduction to Credit ScoresWhat do lenders look at when decidingwhether to approve a loan? Typically, lendersmaking almost any kind of credit decision will look at avariety of types of information, including one or morecredit scores.

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

There are many types of credit scores, but the mostcommonly used are credit bureau scores. Credit bureauscores are based solely on information in consumercredit reports maintained at one of the credit reportingagencies. Other types of scores may also includeinformation from credit applications or bank files.

The most widely used credit bureau scores aredeveloped by Fair, Isaac. These are commonly knownas FICO® scores. While this booklet discusses FICOscores, some of the information applies to other types of scores as well.

Understanding credit scoring can help you manage yourcredit. A FICO score looks at the same information inyour credit report that a lender looks at. By knowinghow your credit risk is evaluated, you can take actionsthat will lower your credit risk—and thus raise yourscore—over time.

Complete information on credit scoringcan be found online at www.myfico.com.

E x p l o r i n g C r e d i t S c o r i n gThis booklet will give you anunderstanding of credit scoresand what you can do to improveyour credit score over time.

For information on:

■ How your score was usedin making a particularcredit decision—contactthe lender.

■ How to correct informa-tion in your credit report—contact the creditreporting agencies directly.See page 16 for contactinformation.

■ How to get your FICO score—visitwww.myfico.com for yourcurrent FICO score, theEquifax Credit ProfileTM onwhich it was calculated and a personalized FICOscore explanation.

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. Even a mortgage application can beapproved in hours instead of weeks for borrowers whoscore above a lender’s “score cutoff.” Scoring alsoallows retail stores, Internet sites and other lenders tomake “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.

■ Credit “mistakes” count for less. If you have hadpoor 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. Unlike so-called“knockout rules” that turn down borrowers based solelyon a past problem in their file, credit scoring weighs all of the credit-related information, both good and bad,in your credit report.

S c o r i n g F a c t s a n d F a l l a c i e sMany of the things that havebeen reported about creditscoring just aren’t true.Throughout this booklet, you can read some of the mostcommon fallacies about scores,and learn the real facts.

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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.

FALLACY: A poor scorewill haunt me forever.

FACT: Just the oppositeis true. A score is a “snapshot”of your risk at a particular pointin time. It changes as new infor-mation is added to your bankand credit bureau files. Scoreschange gradually as you changethe way you handle credit. For example, past credit prob-lems impact your score less as time passes. Lenders requesta current score when you applyfor credit, so they have the mostrecent information available.


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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.

CREATING YOUR CREDIT REPORT

Your credit report does not really exist until you or alender asks for it. It is then compiled by the creditreporting agency based on the information stored in thatagency’s files. This information is supplied by lenders,by you and by court records.

Tens of thousands of credit grantors—retailers, creditcard issuers, banks, finance companies, credit unions,etc.—send updates to each of the credit reportingagencies, usually once a month. These updates includeinformation about how their customers use and paytheir accounts.

Your credit report reveals many aspects of yourborrowing activities. All pieces of information shouldbe considered in relationship to other pieces of infor-mation. The ability to quickly, fairly and consistentlyconsider all this information is what makes creditscoring so useful.

H o w M i s t a k e s A r e M a d eWhen a credit report containserrors, it is often because the report is incomplete, orcontains information aboutsomeone else. This typicallyhappens because:

■ The person applied forcredit under differentnames (Robert Jones, Bob Jones, etc.).

■ Someone made a clericalerror in reading or enter-ing name or addressinformation from a hand-written application.

■ The person gave aninaccurate SocialSecurity number, or thenumber was misread bythe lender.

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

For information on how to check your credit report,see page 16.


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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.

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.

7-93 COLLECTION $500

9-91 JUDGMENT $1000 Satisfied 3-92

9-93 COLLECTION $750

INQUIRIES THAT YOU INITIATE

7-01-99

6-15-99

DATE

Bank

Retail

INDUSTRY

6-01-99

11-01-90

DATE

Auto finance

Retail

INDUSTRY

10-25-98

DATE

Bank

INDUSTRY

TRADE LINE INFORMATION

Bankcard

Auto loan

Retail

Retail

Pers finance

INDUSTRY

6–99

6–99

3–99

5–99

5–99

DATE REPORTED

3–88

7–95

6–91

11–98

6–96

DATE OPENED

$ 5,000

8,000

1,000

750

2,000

HIGHCREDIT

$ 0

1,500

0

300

1,400

BALANCE

Current

Current

30 days

Current

Current

CURRENTRATING

120+, 6 yrs ago

HISTORICALDELINQUENCY

IDENTIFYING INFORMATIONI. Wishfor Credit

805 Main St.

Anytown, America 77777

12 Lost Lane

Somewhere, USA 66666

Date of Birth: 1-25-50

SS# 888-88-8888

Sam’s Gas & Oil

Attendant

1980

CREDIT BUREAU REPORT

PUBLIC RECORD / COLLECTION ITEMS

OTHER INQUIRIES

6-15-99

DATE

Oil company

INDUSTRY

2-07-99

DATE

Bank

INDUSTRY

3-23-98

DATE

Bank

INDUSTRY

O t h e r N a m e s f o rF I C O S c o r e sFICO scores have different namesat each of the three creditreporting agencies. All of thesescores, however, are developedusing the same methods by Fair,Isaac, and have been rigorouslytested to ensure they providethe most accurate picture ofcredit risk possible using creditreport data.

Credit Reporting FICO®

Agency Score

Equifax & Equifax BEACON®

Canada

Experian Experian/Fair, Isaac

Risk Model

Trans Union & Trans Union EMPIRICA®

Canada


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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 Fair,Isaac and Company (FICO). FICO scores are providedto lenders by the three major credit reporting agencies:Equifax, Experian and Trans Union.

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.

OBTAIN YOUR FICO SCORE

Fair, Isaac, in partnership with Equifax, also offersFICO credit scores to consumers over the Internet. Log on to www.myfico.com to purchase Score Power,TM

a service that provides you with your current FICO score,the Equifax Credit ProfileTM on which it was calculated,and a clear, concise and personalized explanation of your score.


MORE THAN ONE SCORE

In general, when people talk about “your score,” they’retalking about your current FICO score. However, there is no one score used by lenders to make decisionsabout you.

■ Credit bureau scores are not the only scores used.Many lenders use their own scores, which often willinclude the FICO score as well as other informationabout you. Some businesses will sell you credit scoresthat are not FICO scores and may not be used by anylenders at all. Such scores often include advice that maynot apply to FICO scores and could actually hurt yourcredit standing with lenders.

■ FICO scores are not the only credit bureau scores.There are other credit bureau scores, although FICOscores are by far the most commonly used. Other creditbureau scores may evaluate your credit report differentlythan FICO scores, and in some cases a higher scoremay mean more risk, not less risk as with FICO scores.

■ Your score may be different at each of the three maincredit reporting agencies. The FICO score from eachcredit reporting agency considers only the data in yourcredit report at that agency. If your current scores fromthe credit reporting agencies are different, it’s probablybecause the information those agencies have on youdiffers. Today Equifax is the only credit reportingagency to make FICO scores available to consumers atwww.equifax.com and at www.myfico.com.

■ Your FICO score changes over time. As your datachanges at the credit reporting agency, so will any newscore based on your credit report. So your FICO scorefrom a month ago is probably not the same score alender would get from the credit reporting agency today.

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Above 780745–780690–745620–690Below 620

Based on thegeneral population’s

FICO scores.

20% 20% 20%20% 20%

How Do People Score?

FALLACY: Credit scoringis unfair to minorities.

FACT: Scoring does not consider your gender, race,nationality or marital status. In fact, the Equal CreditOpportunity Act prohibitslenders from considering thistype of information whenissuing credit. Independentresearch has shown that creditscoring is not unfair tominorities or people with littlecredit history. Scoring hasproven to be an accurate andconsistent 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.

Payment History

New Credit

35%

30%

15%

10%10%

Types of Credit in Use

Length ofCredit History

Amounts Owed


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G e t t i n g a B 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.

One general tip is to make surethe information in your creditreport is correct. Check yourcredit report for accuracy atleast 90 days before you planany major purchases, such asapplying for a mortgage. If youfind errors, have them correctedby the lender and creditreporting agency. See page 16for information on how to checkyour credit report.

For a more specific adviceabout your own FICO score, goto www.myfico.com.

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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. What’s important is the mix of information,which varies from person to person, and for any oneperson over time.

■ Your FICO score only looks at information in yourcredit report. Lenders look at many things when makinga credit decision, however, including your income, howlong you have worked at your present job and the kindof 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 accountwill not remove it fromyour credit report. It willstay on your report forseven years.

■ 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.

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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.

However, late payments are not an automatic “score-killer.” An overall good credit picture can outweigh oneor two instances of, say, late credit card payments. Bythe same token, having no late payments in your creditreport doesn’t mean you will get a “perfect score.”Some 60%–65% of credit reports show no late paymentsat all—your payment history is just one piece of infor-mation used in calculating 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.

■ Details on late or missed payments (“delinquencies”)and public record and collection items—specifically,how late they were, how much was owed, howrecently 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 count more than a 90-day late payment fromfive years ago. Note that closing an account on whichyou had previously missed a payment or satisfying ajudgment or collection item does not make the latepayment or item disappear from your credit report.

■ 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?


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.


■ 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 no balance at all. On the other hand, closingunused credit accounts that show zero balances and thatare in good standing will not generally 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?


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.


■ 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 CreditProtection 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, as may other types of scores.

■ 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). The score doesnot count “consumer disclosure” inquiries—requests you have made for your creditreport, in order to check it. It also does not count “promotional inquiries”—requests made by lenders in order to make you a “pre-approved” credit offer—or“administrative inquiries”—requests made by lenders to review your account withthem. Requests that are marked as coming from employers are not counted either.

■ Any information not found in your credit report.

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

4. New CreditAre you taking on more debt?


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. This also extends to requestsfor credit, as indicated by certain “inquiries” to thecredit reporting agencies, resulting from your requestsfor new credit. An inquiry is a request by a lender to geta copy of your credit report.

FICO scores do a good job of distinguishing between asearch for many new credit accounts and rate shopping,which is generally not associated with higher risk.


■ 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. Note that if you order yourcredit report from a credit reporting agency orwww.myfico.com, the score does not count this, as it is not an indication that you are seeking new credit.Also, the score does not count requests a lender has madefor your credit report or score in order to make you a“pre-approved” credit offer, or to review your accountwith them, even though you may see these inquiries on your credit report.

■ 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 loan within afocused period of time.FICO scores distinguishbetween a search for asingle loan and a search formany new credit lines, inpart by the length of timeover which inquiries 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 credit reports to consumers. You can be sure that yourFICO score will not beaffected by an inquiry when it is requested through www.myfico.comor www.equifax.com.

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


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.


■ 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 paying timelypayments) will raise yourscore. Someone with nocredit cards, for example,tends to be higher risk thansomeone who has managedcredit cards 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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Interpreting Your ScoreWhen you or a lender receive your Fair,Isaac credit bureau risk score, up to four“score reason codes” are also delivered.These explain 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 score over time. However, if you already have ahigh score (for example, in the mid-700s or higher)some of the reasons may not be very helpful, as theymay be marginal factors related to the last threecategories described previously (length of credit history,new credit 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.

COMMON SCORE REASONS

Here are the top 10 most frequently given score reasons.Note that the specific wording given by your lender maybe different from this.

■ Serious delinquency

■ Serious delinquency, and public record or collection filed

■ Derogatory public record or collection filed

■ Time since delinquency is too recent or unknown

■ Level of delinquency on accounts

■ Number of accounts with delinquency

■ Amount owed on accounts

■ Proportion of balances to credit limits on revolving accounts is too high

■ Length of time accounts have been established

■ Too many accounts with balances


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FALLACY: Credit scoringinfringes on my privacy.

FACT: FICO scoresevaluate your credit reportalone, which lenders alreadyuse to make credit decisions. A score is simply a numericsummary of that information. In fact, lenders using scoringcan often ask for less informa-tion about you. They may have fewer questions on theapplication form, for example.

Q&A on Credit ScoresWHAT IS A GOOD FICO SCORE TO GET?

Since there’s no one “score cutoff” used by all lenders,it’s hard to say what a good score is outside the contextof a particular lending decision. For example, a FICOscore of 750 may qualify you for a platinum credit card,whereas a score of 675 may indicate you’re a better matchfor a standard card. Your lender may be able to give youguidance on the criteria for a given credit product.

HOW CAN I FIND OUT MY FICO SCORE?

You can now purchase your own FICO score at twodifferent sites on the Internet. Go to www.myfico.com orwww.equifax.com to access Score Power, a servicebrought to you by Fair, Isaac and Equifax. You’llreceive your current FICO score, your Equifax creditreport, a full explanation of your score, and advice forimproving your score over time.

Some lenders also may tell you your score, if they areusing it to make a lending decision. In California, statelaw requires lenders to tell you your score if they use itin connection with your mortgage application. In all 50states, if you are turned down for credit based primarilyon your score, the lender does need to give you thereasons why your score wasn’t higher. This can help youunderstand your credit picture and how to improve it.

Note that FICO scores are also called BEACON (at Equifax), the Experian/Fair, Isaac Risk Model (atExperian) and EMPIRICA (at Trans Union). Any otherscore is not your FICO score.

WHAT IF I’M TURNED DOWN FOR CREDIT?

If you have been turned down for credit, the EqualCredit Opportunity Act (ECOA) gives you the right toobtain the reasons why within 30 days. You are alsoentitled to a free copy of your credit bureau reportwithin 60 days, which you can request from the creditreporting agencies.

If the score was a primary part of the lender’s decision,the lender will use the score reason codes (see page 14)to explain why you didn’t qualify for the credit. (Theyoften may not tell you your score, because the reasonsbehind it are more useful—but you can ask.)

If your credit application was turned down, or youdidn’t qualify for the interest rate you wanted, ask yourlender how you can improve your credit picture.


15

FALLACY: My score willdrop if I apply for new credit.

FACT: Probably notmuch. If you apply for severalcredit cards within a shortperiod of time, multiplerequests for your credit reportinformation (called “inquiries”)will appear on your report.Looking for new credit canequate with higher risk, butmost credit scores are notaffected by multiple inquiriesfrom auto or mortgage lenderswithin a short period of time.The FICO score treats these as a single inquiry, which willhave less impact on your credit score.


16

Checking Your Credit ReportYou should make sure the information in your creditreport is correct. Not only is your credit score based onthis information, but lenders also review this informationin making credit decisions.

Review your credit report from each credit reportingagency at least once a year and especially beforemaking a large purchase, like a house or car. To requesta copy, contact the credit reporting agencies directly:

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

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

■ Trans Union: (800) 916-8800, 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 yourreport. Your lender will need to reorder your creditreport and score once any changes have been made toyour information at the credit reporting agency. Smallerrors may have little or no effect on your score. If there are significant errors, however, the lender maydisregard the score.

Note that only the credit reporting agencies have thedata from which FICO scores are calculated. Fair, Isaaccan’t correct data at the credit reporting agencies.

FALLACY: My scoredetermines whether or not I get credit.

FACT: Lenders use anumber of facts to make creditdecisions, including your FICOscore. Lenders look at informa-tion such as the amount of debt you can reasonably handlegiven your income, youremployment history, and yourcredit history. Based on theirperception of this information,as well as their specificunderwriting policies, lendersmay extend credit to youalthough your score is low, ordecline your request for creditalthough your score is high.

An Introduction to Credit Scores . . . . . . 1

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

Your Credit Report—

The Basis of Your Credit 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

Interpreting Your Score . . . . . . . . . . . . 14

Q&A on Credit Scores . . . . . . . . . . . . . 15

Checking Your Credit Report . . . . . . . . 16

Fair, Isaac, FICO and myFICO aretrademarks or registered trademarks ofFair, Isaac and Company, Inc., in theUnited States and/or in other countries.BEACON, Equifax Credit Profile and ScorePower are trademarks or registeredtrademarks of Equifax Inc. EMPIRICA is aregistered trademark of Trans Union LLC.Other product and company names hereinmay be trademarks of their respectiveowners.

Copyright © 2001 Fair, Isaac and Company,Inc. All rights reserved. This informationmay be freely copied and distributed,without modification.

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Understanding Your Credit Score

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