Understanding credit scoring can help you better manage your credit. While there are many types of credit scores, the scores most commonly used are developed by Fair, Isaac. Collectively these are called FICO® scores but they are also known as BEACON® at Equifax, EMPIRICA® at Trans Union and the Experian/Fair, Isaac Risk Model at Experian.

FICO scores are based solely on information in consumer credit reports maintained at one of the credit reporting agencies. They evaluate the same information in your credit report that a lender looks at.

What is a FICO score?

A FICO score is a number that tells a lender how likely you are to repay a loan or make credit payments on time. Click on the areas below that interest you.

What a FICO® Score Considers

Listed in the hypertext links below are the five main categories of information that FICO 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.

  1. PAYMENT HISTORY  What is your track record?
Factor number 1
Payment History


What is your track record?

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, foreclosures, suits, wage attachments, liens and judgments. These are considered quite serious, although older items and items with small amounts will count less than more recent items or those with larger amounts.
  • Details on late or missed payments ("delinquencies") 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 60-day late payment is not as risky as a 90-day late payment, in and of itself. But recency and frequency count too. A 60-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 or satisfying a judgment or collection item does not make the late payment or item 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?

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Amounts Owed


How much is too much?


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 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 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?


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Length of Credit History


How established is yours?


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

Your score takes into account:

4.  NEW CREDIT  Are you taking on more debt?


Factor number 4

New Credit


Are you taking on more debt?


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 certain "inquiries" to the credit reporting agencies, resulting from your requests for new credit. An inquiry is a request by a lender to get a copy of your credit report.


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

Your score takes into account:



5.  TYPES OF CREDIT USE  Is it a "healthy" mix?

Factor number 5
Types of Credit in Use

Is it a "healthy" mix?


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.

Please note that:



Tips for Raising Your Score #1
It's important to note that raising your score is a bit like losing weight: It takes time and there is no quick fix. In fact, quick-fix efforts can backfire. The best advice is to manage credit responsibly over time.


Tips for Raising Your Score #2 Tips for Raising Your Score #3 Tips for Raising Your Score #4 Tips for Raising Your Score #5 Facts & Fallacies

Fallacy:  My score determines whether or not I get credit.

Fact:  Lenders use a number of facts to make credit decisions, including your FICO score. Lenders look at information such as the amount of debt you can reasonably handle given your income, your employment history, and your credit history. Based on their perception of this information, as well as their specific underwriting policies, lenders may extend credit to you although your score is low, or decline your request for credit although your score is high.

Fallacy:  A poor score will haunt me forever.

Fact:  Just the opposite is true. A score is a "snapshot" of your risk at a particular point in time. It changes as new information is added to your bank and credit bureau files. Scores change gradually as you change the way you handle credit. For example, past credit problems impact your score less as time passes. Lenders request a current score when you submit a credit application, so they have the most recent information available.

Fallacy:  Credit scoring is unfair to minorities.

Fact:  Scoring considers only credit-related information. Factors like gender, race, nationality and marital status are not included. In fact, the Equal Credit Opportunity Act (ECOA) prohibits lenders from considering this type of information when issuing credit. Independent research has been done to make sure that credit scoring is not unfair to minorities or people with little credit history. Scoring has proven to be an accurate and consistent measure of repayment for all people who have some credit history. In other words, at a given score, non-minority and minority applicants are equally likely to pay as agreed.

Fallacy:  Credit scoring infringes on my privacy.

Fact:  Credit scoring evaluates the same information lenders already look at — the credit bureau report, credit application and/or your bank file. A score is simply a numeric summary of that information. Lenders using scoring sometimes ask for less information — fewer questions on the application form, for example.

Fallacy:  My score will drop if I apply for new credit.

Fact:  If it does, it probably won't drop much. If you apply for several credit cards within a short period of time, multiple requests for your credit report information (called "inquiries") will appear on your report. Looking for new credit can equate with higher risk, but most credit scores are not affected by multiple inquiries from auto or mortgage lenders within a short period of time. Typically, these are treated as a single inquiry and will have little impact on the credit score.

Date: September 1, 2000
Credit Score: 670
Source of score: Equifax (BEACON®)
Reason codes: 10 14 5 8

Your BEACON score: 670

The information in your Equifax credit report has been summarized in a BEACON® score of 670. Most U.S. consumers score between 300 and 850. Generally, the higher your score, the more favorably a lender will view your application for credit. Compared to the national population, you are in the 30th percentile of consumers by credit risk. A score of 670 is below average. Studies show that for consumers with scores similar to yours, the odds of becoming seriously delinquent on one or more credit accounts are 3.45 times higher than for people with an average score.

Understanding your percentile. Compared to the national population, your FICO® score is in the 30th percentile. This means that roughly 30% of consumers have scores lower than or equal to your own score, and 70% have scores which are higher.
How lenders view your FICO score

Many lenders use FICO scores. Frequently, there is more to consider in a credit decision than just a person's credit history. Because the FICO score is based solely on the information in your credit report, many lenders bring other factors into their decisions as well, such as your income or employment history. So the FICO score itself, while important, is not always the only criterion on which your credit application is evaluated.

It is also important to understand that every lender sets their own policies and tolerance for risk when making decisions. Though many lenders incorporate FICO scores into their decisions, there is certainly no single cutoff score used by all lenders. In fact, since they often factor in additional information or special circumstances, some lenders may extend you credit even if your score is low, or decline your request although your score is high. Nonetheless, the FICO score is the most widely used and recognized credit rating, so it's important that you know and understand your own score.

Lenders may view consumers with a score of 670 as a slightly higher risk. Usually, lenders will evaluate other factors besides the score in their review of your application for credit. The factors will likely differ from one lender to the next, as each creditor has its own decision strategies, credit policies, and customer focus. While there are many lenders who approve loan applicants with a score of 670, they may do so with higher rates or more restrictive terms.

Distribution. This chart shows the percentage of people who score in specific FICO score ranges. For example, about 5% of U.S. consumers have a FICO score between 500 and 549. Your score of 670 places you in the 650-699 range, along with 16% of the total population. (Note that the score ranges shown above are provided for your information, but they do not necessarily correspond to any particular lender's policies for extending credit.)

Credit repayment. The second chart demonstrates the delinquency rate (or credit risk) associated with selected ranges of the FICO score. In this illustration, the delinquency rate is the percentage of borrowers who reach 90 days past due or worse on any credit account over a two-year period. For example, the delinquency rate of consumers in the 500-549 range is 71%. This means that for every 100 borrowers in this range, approximately 71 will default on a loan, file for bankruptcy, or fall 90 days past due on at least one credit account in the next two years. As a group, the consumers in your score range, 650-699, have a delinquency rate of 15%.

Factors affecting your score

In addition to the score, you received four reason codes. These represent the top four reasons your score was not higher. The order in which these codes were returned to you is significant: the first code represents the factor with the strongest negative impact on your score, the second code had the next strongest impact, and so on. The best way to understand how you scored and what you can do to improve your score over time is to consider these top reasons.

First Reason Code: 10 Your first reason code is 10, "Proportion of balances to credit limits on bank/national revolving or other revolving accounts is too high". This is the single most important factor affecting your score. Analysis of consumer credit behavior repeatedly finds that owing a substantial balance on revolving accounts relative to the amount of revolving credit available to you represents increased risk. In fact, evaluation of your level of revolving debt is one of the most important factors in the FICO score. The score evaluates your total balances in relation to your total available credit on revolving accounts, as well as on individual revolving accounts. For a given amount of revolving credit available, a greater amount owed indicates a greater risk, and lowers the score. (For credit cards, the total outstanding balance on your last statement is generally the amount that will show in your credit report. Note that even if you pay off your credit cards in full each and every month, your credit report may show the last billing statement balance on those accounts.)

Paying down your revolving account balances is a good sign that you are able and willing to manage and repay your debt, and this will increase your score. On the other hand, shifting balances among revolving accounts, opening up new revolving accounts, and closing down other revolving accounts will not necessarily improve your score, and could possibly decrease your score.

Second Reason Code: 14 Your second reason code is 14, "Length of time accounts have been established". This is the second most important factor affecting your score. This reason is based on a measurement of the age of the accounts on your credit report (i.e., the age of the oldest account, the average age of accounts, or both.) Research shows that consumers with longer credit histories have better repayment risk than those with shorter credit histories. Also, consumers who frequently open new accounts have greater repayment risk than those who do not. Therefore, only apply for needed credit and wait before you apply for more. All other factors being equal, your score is likely to improve as your credit history ages.

Third Reason Code: 5 Your third reason code is 5, "Too many accounts with balances". Analysis repeatedly finds that carrying balances on too many credit accounts at once is a predictor of future repayment risk. (For credit cards, note that even if you pay off your balance 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.) In order to improve your credit score, pay down the balances on your credit obligations. For revolving accounts, once they are paid down keep your balances low. Note that consolidating your debt by transferring balances from many accounts onto fewer accounts will not necessarily raise your score, because the same total amount is still owed.

Fourth Reason Code: 8 Your fourth reason code is 8, "Too many inquiries last 12 months". Research shows that consumers who are seeking several new credit accounts are riskier compared to consumers not seeking credit. This reason appears when your credit report contains too many inquiries posted as a result of your applying for credit. Inquiries are the only information lenders have that indicates a consumer is actively seeking credit. There are different types of inquiries that reside on your credit report. The score only considers those inquiries that were posted as a result of you applying for credit. Other types of inquiries, such as promotional inquiries (where a lender has pre-approved you for a credit offer) or consumer disclosure inquiries (where you have requested a copy of your own report) are not considered by the score.

The scores can identify "rate shopping" in the mortgage- and auto-lending environment, so that you are not penalized with multiple inquiries related to one credit transaction.

Typically, the presence of inquiries on your credit file has only a small impact on FICO scores, carrying much less importance than delinquencies, current levels of indebtedness, and the length of time you have used credit. This reason rarely appears as a primary or secondary reason except in high scoring files. As time passes the age of your most recent inquiry will increase, and your score will rise as a result, provided you do not apply for additional credit in the meantime. Typically inquiries are purged from the credit bureau files after two years.

A common misperception is that every single inquiry will drop your score a certain number of points. This is not true. The impact of inquiries on your score will vary - depending on your overall credit profile. Inquiries will usually have a larger impact on the score for consumers with limited credit history and on consumers with previous late payment behavior. The most prudent action to raise your score over time is by applying for credit only when you need it.


Lenders may view consumers with a score of 670 as a slightly higher risk. Different lenders will evaluate other factors besides the score in their review of a loan application. While there are many lenders who might approve loan applicants with a score of 670, they may do so with higher rates or more restrictive terms.

Review your credit report from each credit reporting agency at least once a year and especially before making a large purchase, like a house or a car. You should make sure the information in your credit report is correct. You don't need to be concerned if the balance doesn't exactly match your credit card statement. But you do need to worry if the credit report includes late payments that you believe are in error. And you should verify that the accounts listed on your credit report are accounts that you own. Your credit score is based on your credit report, and lenders also review this information when making credit decisions.

If you feel that the information contained in your credit report is not accurate, you should contact the credit reporting agencies directly:
Equifax: (800) 685-1111 www.equifax.com
Experian: (888) 397-3742 www.experian.com
Trans Union: (800) 916-8800 www.transunion.com