Credit Scoring

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

Everyone has a credit score: a number intended to rate the quality of  credit (the higher your score, the better your credit). Credit scores are used by credit card companies, home equity lenders, auto loan lenders, and finance companies when you apply for credit or a loan. A low score can affect your ability to get a credit card or loan or convince lenders to charge you higher interest.

Factors Affecting Your Credit Score

Credit scores are produced with a computer model, usually created by Fair Isaac ("FICO"). Although FICO won't reveal exactly how it determines a credit score, it 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.

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. Also, if you carry a balance on a number of accounts, that might lower your score because it looks like you're overextended.

Length of your credit history (15%). The longer your accounts have been open, the better.

New credit (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%). FICO says it's looking for a "healthy mix" of different types of credit, both revolving and installment accounts. This factor is important only if there isn't a lot of other information to use in determining your 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. According to FICO, the average score is 692. According to the model, as your score increases, your risk of default decreases.

If your score is far below average, you may have a hard time convincing a creditor to make you an affordable loan (or any loan at all). 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 fairly high score with one credit bureau (Equifax, Experian, or TransUnion) and a somewhat lower score with another, just as you might have a clean credit history with one bureau and a muddied record with another. For more on the credit bureaus, see Nolo's article How to Clean Up Your Credit Report.

How to Get Your Credit Score

You may obtain your credit score from credit bureaus that develop or distribute credit scores for a fee (the Federal Trade Commission sets the fee). Fair Isaac, in partnership with Equifax (one of the "big three" credit bureaus), makes credit scores available online to consumers for a fee of $15.95. To get your credit score, visit www.myfico.com or www.equifax.com.

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.

Your credit score may also be available free from certain lenders. For example, Washington Mutual provides free monthly credit scores online to its credit card customers.

How to Improve 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.

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. For more information, see Nolo's article How to Clean Up Your Credit Report. Some lenders may override credit scores if they think you are a good risk despite problems with your score.

For more information on repairing your credit record and improving your credit score, get Credit Repair, by Robin Leonard and John Lamb (Nolo).