Can You Help Me Better Understand My Credit Score?

Credit scores affect whether you can get credit and what you pay for credit cards, auto loans, mortgages, and other kinds of credit. For most kinds of credit scores, higher scores mean you are more likely to be approved and pay a lower interest rate on new credit.

When lenders talk about “your score,” they usually mean the FICO score developed by the Fair Isaac Corporation. It is today’s most commonly used system. FICO scores range from 350-850, and most people score in the 600s and 700s (higher FICO scores are better). Lenders and landlords obtain FICO scores from the three national credit reporting agencies Equifax, Experian and TransUnion.

In the eyes of most lenders, FICO credit scores above 700 are a very good sign of good financial health. FICO scores below 600 indicate high risk to lenders and could lead lenders to charge much higher rates and landlords to turn down the rental application.

As a rule, credit scores analyze the credit-related information on your credit report. How they do this varies. Since FICO scores are frequently used, here is how these scores assess what is on your credit report.

1. Your payment history—about 35% of a FICO score. Have you paid your credit accounts on time? Late payments, bankruptcies, and other negative items can hurt your credit score. But a solid record of on-time payments helps your score.
2. How much you owe—about 30% of a FICO score. FICO scores look at the amounts you owe on all your accounts, the number of accounts with balances, and how much of your available credit you are using. The more you owe compared to your credit limit, the lower your score will be.
3. Length of your credit history—about 15% of a FICO score. A longer credit history will increase your score. However, you can get a high score with a short credit history if the rest of your credit report shows responsible credit management.
4. New credit—about 10% of a FICO score. If you have recently applied for or opened new credit accounts, your credit score will weigh this fact against the rest of your credit history. FICO scores distinguish between a search for a single loan and a search for many new credit lines, in part by the length of time over which inquiries occur. If you need a loan, do your rate shopping within a focused period of time, such as 30 days, to avoid lowering your FICO score.
5. Other factors—about 10% of a FICO score. Several minor factors also can influence your score. For example, having a mix of credit types on your credit report—credit cards, installment loans such as mortgage or auto loan, and personal lines of credit—is normal for people with longer credit histories and can add slightly to their scores.

By law, credit scores may not consider your race, color, religion, national origin, sex and marital status, and whether you receive public assistance or exercise any consumer right under the Federal Equal Credit Opportunity Act or Fair Credit Reporting Act.

In addition to FICO, there are other types of credit scores. They are developed by independent companies, credit reporting agencies, and even some lenders. As a rule, the higher the score the better.

Each credit reporting agency calculates your score and each score may be different because the credit history each agency has about you may be different. Lenders may make a credit card or auto loan decision based on a single agency’s score, although others such as mortgage lenders often will look at all three scores.

Your credit score changes when your information changes at that credit reporting agency. This means a poor credit score can improve over time by a person improving how they handle their finances.

Here are some general ways to improve your credit scores:

• Pay your bills on time. Delinquent payments and collections can really hurt your score.
• Keep balances low on credit cards. High debt levels can hurt your score.
• Pay off debt rather than moving it between credit cards. The most effective way to improve your score in this area is to pay down your revolving credit.
• Apply for and open new credit accounts only when you need them.
• Check your credit report regularly for accuracy and contact the creditor and credit reporting agency to correct any errors.
• If you have missed payments, get current and stay current. The longer you pay your bills on time, the better your score.