Credit Information
Scores are part of the lending decision
What do lenders look at when deciding whether to approve a loan? Typically, lenders making almost any kind of credit decision will look at a variety of types of information, including one or more credit scores. While there are many kinds of credit scores, the most frequently used are credit bureau risk scores developed by Fair, Isaac. These are commonly known as FICO@scores, although they have different names at each of the national credit reporting agencies.
A score is a number that tells a lender how likely an individual is to repay a loan, or make credit payments on time. When a lender requests a credit report and score from a credit reporting agency, the score is calculated by a "scorecard" or scoring model- a mathematical equation that evaluates many types of information from your credit report at that agency. By comparing this information to the patterns in thousands of past credit reports, scoring identifies your level of credit risk.
Types of information FICO scores consider
Listed below are the five main categories of information on a credit report that Fair, Isaac scores evaluate, along with their general level of importance. Within these categories is a complete list of the information that goes into a FICO score.
Please note that:
- A score takes into consideration all these categories of information, not just one or two. No one piece of information or factor will determine your score.
- The importance of any factor depends on the overall information in your credit report. For some people, a given factor may be more important than for someone else with a different credit history. In addition, as the information in your credit report changes, so does the importance given anyone factor in determining your score.
Thus, it's impossible to say exactly how important any single factor is in determining your score - even the levels of importance shown are for the general population, and will be slightly different for different credit profiles. What's important is the mix of information, which varies from person to person, and for anyone person over time.
- Your score only looks at information in your credit report. Lenders look at many things when making a credit decision, including your income and the kind of credit you are applying for. However, your FICO score does not reflect these facts, as it only evaluates your credit report at the credit reporting agency.
- Your score considers both positive and negative information in your credit report. Late payments will lower your score, but having a good record of making payments on time will raise your score.
- Your score does not consider your ethnic group, religion, gender, marital status and nationality. These are, in fact, prohibited from use in scoring by US law.
1. Payment History: What is your track record? (APPROXIMATELY 35% OF YOUR SCORE IS BASED ON THIS CATEGORY)
The first thing any lender would want to know is whether 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 one or two instances of, say, late credit card payments. By the same token, having no late payments in your credit report doesn't mean you will get a "perfect score". Some 60-65% of credit reports show no late payments at all- your payment history is just one piece of information 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), retail accounts (credit from stores where you do business, such as department store credit cards), installment loans (loans where you make regular payments, such as car loans), finance company accounts and mortgage loans.
- Public record and collection items - reports of events such as bankruptcies, judgments, suits, liens, wage attachments and collection items. These are considered quite serious, although older items will count less than more recent ones.
- Details on late or missed payments and public record and collection items - specifically, how late they were, how much was owed, how recently they occurred and how many there are. A 30-day late payment is not as risky as a 90-day late payment, in and of itself. But recency and frequency count too. A 30-day late payment made just a month ago will count more than a 90-day late payment from five years ago. Note that closing an account on which you had previously missed a payment does not make the late payment disappear from your credit report.
- How many accounts show no late payments. A good track record on most of your credit accounts will increase your credit score.
2. Amounts Owed How 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 low score. However, owing a great deal of money on many accounts can indicate that a person is overextended, and is more likely to make some payments late or not at all. Part of the science of scoring is determining how much is too much for a given credit profile.
Your score takes into account:
- The amount owed on all accounts. Note that even if you payoff 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 different types of accounts. In addition to the overall amount you owe, the score considers the amount you owe on specific types of accounts, such as credit cards and installment loans.
- Whether you are showing a balance on certain types of accounts. In some cases, having a very small balance without missing a payment shows that you have managed credit responsibly, and may be slightly better than no balance at all. On the other hand, closing unused credit accounts that show zero balances and that are in good standing will not generally raise your score.
- How many accounts have balances. A large number can indicate higher risk of over-extension.
- How much of the total credit line is being used on credit cards and other "revolving credit" accounts. Someone closer to "maxing out" on many credit cards may 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 paid back $2,000, you owe (with interest) more than 80% of the original loan. Paying down installment loans is a good sign that you are able and willing to manage and repay debt.
3. Length Of Credit History. How established is yours? (APPROXIMATELY 15% OF YOUR SCORE IS BASED ON THIS CATEGORY)
In general, a longer credit history will increase your score. However, even people with short credit histories may get high scores, depending on how the rest of the credit report looks.
Your score takes into account:
- How long your credit accounts have been established, in general. The score considers both the age of your oldest account and an average age of all your accounts.
- How long specific credit accounts have been established.
- How long it has been since you used certain accounts.
4. New Credit Are 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 for credit - via the Internet and other channels more frequently than ever. Fair, Isaac scores reflect this fact. However, research shows that opening several credit accounts in a short period of time does represent greater risk - especially for people who do not have a long-established credit history. This also extends to requests for credit, as indicated by "inquiries" to the credit reporting agencies - an inquiry is a request by a lender to get a copy of your credit report.
The Fair, Isaac scores distinguish between searching for many new credit accounts and rate shopping, which is generally not associated with higher risk. In part, this is handled by treating a grouping of inquiries - which probably represents a search for the best rate on a single loan - as though it was a single inquiry. Your score takes into account:
- How many new accounts you have. The score looks at how many new accounts there are by type of account (for example, how many newly opened credit cards you have). It also may look at how many of your accounts are new accounts.
- How long it has been since you opened a new account. 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 reporting agencies. Note that if you order your credit report from a credit reporting agency - such as to check it for accuracy, which is a good idea - the score does not count this. This is considered a "consumer-initiated inquiry," not an indication that you are seeking new credit. Also, the score does not count it when a lender requests your credit report or score in order to make you a "pre-approved" credit offer, or to review your account with them, even though these inquiries may show up on your credit report.
- Length of time since credit report inquiries were made by lenders. Whether you have a good recent credit history, following past payment problems. Re-establishing credit and making payments on time after a period of late payment behavior will help to raise a score over time.
5. Types of Credit in Use Is it a "healthy" mix? (APPROXIMATELY 10% OF YOUR SCORE IS BASED ON THIS CATEGORY)
The score will consider your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans. It is not necessary to have one of each, and it is not a good idea to open credit accounts you don't intend to use. The credit mix usually won't be a key factor in determining your score - but it will be more important if your credit report does not have a lot of other information on which to base a score.
Your score takes into account:
- What kinds of credit accounts you have, and how many of each. The score also looks at the total number of accounts you have. For different credit profiles, how many is too many will vary.
Using Score Reason Codes to Understand Your Score
When a lender receives 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 not higher. They say things like "Number of accounts with delinquency." If the lender rejects your request for credit, these reason codes can help the lender tell you why your score wasn't higher.
These reason codes are more helpful than the score itself in helping you determine whether your credit report might contain errors, and how you might improve your score over time. However, if you already have a high score (for example, in the mid-700s) some of the reason codes may not be very helpful, as they may be marginal factors related to the last three categories above.
A Note About Fair, Isaac Scores Fair, Isaac credit bureau risk scores are available to lenders through the major credit reporting agencies (Experian, Equifax and Trans Union). The score from each credit reporting agency considers only the data in your credit report at that agency. This is why you may have a different score from each of the credit reporting agencies.
Fair, Isaac credit bureau risk scores provide the best risk guide available based solely on credit report data. The higher the score, the lower the risk. There are also other types of scores available to lenders. But no score says whether a specific individual will be a "good" or "bad" customer. And while many lenders use FICO scores to help them make lending decisions, each lender has its own strategy, including the level of risk it finds acceptable for a given credit product. There is no single "cutoff score" used by all lenders.
FICO credit bureau risk scores are calculated by the credit reporting agency, using Fair, Isaac's scoring models, when the score is requested by a lender. Only the credit reporting agencies have the data needed to calculate a FICO score. Fair, Isaac can't access or correct data at the credit reporting agencies, or calculate a score. To get a copy of your credit report or to correct information in the report, contact the credit-reporting agency directly.
Consumer Reporting Agencies CRA's Companies that gather and sell this information are called Consumer Reporting Agencies (CRAs). The most common type of CRA is the credit bureau. The information CRAs sell about you to creditors, employers, insurers, and other businesses is called a consumer report.
The Fair Credit Reporting Act (FCRA), enforced by the Federal Trade Commission, is designed to promote accuracy and ensure the privacy of the information used in consumer reports. Recent amendments to the Act expand your rights and place additional requirements on CRAs. Businesses that supply information about you to CRAs and those that use consumer reports also have new responsibilities under the law.
Here are some questions consumers commonly ask about consumer reports and CRAs - and the answers. Note that you may have additional rights under state laws. Contact your state Attorney General or local consumer protection agency more information.
Q. How do I find the CRA that has my report?
A. Contact the CRAs listed in the Yellow Pages under "credit" or "credit rating and reporting". Because more than one CRA may have a file on you, call each until you locate all the agencies maintaining your file. The three major national credit bureaus are:
- Equifax,
P.O. Box 740241,
Atlanta, GA 30374-0241; (800) 685-1111.
- Experian (formerly TRW),
P.O. Box 949,
Allen, TX 75013; (800) 682-7654.
- Trans Union,
760 West Sproul Road,
P.O. Box 390,
Springfield, PA 19064-0390; (800) 916-8800.
In addition, anyone who takes action against you in response to a report supplied by a CRA - such as denying your application for credit, insurance, or employment - must give you the name, address, and telephone number of the CRA that provided the report.
Q. Is there a charge for my report?
A. Sometimes. There's no charge if a company takes adverse action against you, such as denying your application for credit, insurance or employment, and you request your report within 60 days of receiving the notice of the action. The notice will give you the name, address, and phone number of the CRA. In addition, you're entitled to one free report a year if you can prove that
- you're unemployed and plan to look for a job within 60 days,
- you're on welfare, or
- your report is inaccurate because of fraud. Otherwise, a CRA may charge you up to $8 for a copy of your report.
Q. What can I do about inaccurate or incomplete information?
A. Under the new law, both the CRA and the information provider have responsibilities for correcting inaccurate or incomplete information in your report. To protect all your rights under this law, contact both the CRA and the information provider.
First, tell the CRA in writing what information you believe is inaccurate. CRAs must reinvestigate the items in question - usually within 30 days - unless they consider your dispute frivolous. They also must forward all relevant data you provide about the dispute to the information provider. After the information provider receives notice of a dispute from the CRA, it must investigate, review all relevant information provided by the CRA, and report the results to the CRA. If the information provider finds the disputed information to be inaccurate, it must notify all nationwide CRAs so that they can correct this information in your file.
When the reinvestigation is complete, the CRA must give you the written results and a free copy of your report if the dispute results in a change. If an item is changed or removed, the CRA cannot put the disputed information back in your file unless the information provider verifies its accuracy and completeness, and the CRA gives you a written notice that includes the name, address, and phone number of the provider.
Second, tell the creditor or other information provider in writing that you dispute an item. Many providers specify an address for disputes. If the provider then reports the item to any CRA, it must include a notice of your dispute. In addition, if you are correct - that is, if the information is inaccurate - the information provider may not use it again.
Q. What can I do if the CRA or information provider won't correct the information I dispute?
A. A reinvestigation may not resolve your dispute with the CRA. If that's the case, ask the CRA to include your statement of the dispute in your file and in future reports. If you request, the CRA also will provide your statement to anyone who received a copy of the old report in the recent past. There usually is a fee for this service. If you tell the information provider that you dispute an item, a notice of your dispute must be included anytime the information provider reports the item to a CRA.
Q. Can my employer get my report?
A. Only if you say it's okay. A CRA may not supply information about you to your employer, or to a prospective employer, without your written consent.
Q. Can creditors, employers, or insurers get a report that contains medical information about me?
A. Not without your approval.
Q. What should I know about "investigative consumer reports"?
A. "Investigative consumer reports" are detailed reports that involve interviews with your neighbors or acquaintances about your lifestyle, character, and reputation. They may be used in connection with insurance and employment applications. You'll be notified in writing when a company orders such a report. The notice will explain your right to request certain information about the report from the company you applied to. If your application is rejected, you may get additional information from the CRA. However, the CRA does not have to reveal the sources of the information.
Q. How long can a CRA report negative information?
A. Seven years. There are certain exceptions:
- Bankruptcy information may be reported for 10 years.
- Information reported in response to an application for a job with a salary of more than $75,000 has no time limit.
- Information reported because of an application for more than $150,000 worth of credit or life insurance has no time limit.
- Information about a lawsuit or an unpaid judgment against you can be reported for seven years or until the statute of limitations runs out, whichever is longer.
Q. Can anyone get a copy of my report?
A. No. Only people with a legitimate business need, as recognized by the FCRA. For example, a company is allowed to get your report if you apply for credit, insurance, employment; or to rent an apartment.
Q. How can I stop a CRA from including me on lists for unsolicited credit and insurance offers?
A. Creditors and insurers may use CRA file information as a basis for sending you unsolicited offers. These offers must include a toll-free number for you to call if you want to remove your name and address from lists for two years; completing a form that the CRA provides for this purpose will keep your name off the lists permanently.
Q. Do I have the right to sue for damages?
A. You may sue a CRA, a user or - in some cases - a provider of CRA data, in state or federal court for most violations of the FCRA. If you win, the defendant will have to pay damages and reimburse you for attorney fees to the extent ordered by the court.
Q. Are there other laws I should know about?
A. Yes. If your credit application was denied, the Equal Credit Opportunity Act requires creditors to specify why - if you ask. For example, the creditor must tell you whether you were denied because you have "no credit file" with a CRA or because the CRA says you have "delinquent obligations." The ECOA also requires creditors to consider additional information you might supply about your credit history. You may want to find out why the creditor denied your application before you contact the CRA.
Q. Where should I report violations of the law?
A. Although the FI'C can't act as your lawyer in private disputes, information about your experiences and concerns is vital to the enforcement of the Fair Credit Reporting Act. Send your questions or complaints to:
Consumer Response Center -FCRA,
Federal Trade Commission, Washington, D.C. 20580
For a free copy of Best Sellers, a complete list of FI'C publications, contact:
Consumer Response Center
Federal Trade Commission
Washington, D.C. 20580
(202) 326-2222; TDD: (202) 326-2502
You also can visit us at www.ftc.gov on the Internet.
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