Frequently Asked Questions about FICO Scores · FICO® Scores, and in some cases a higher score may...

FICO® Score Open Access Consumer Credit Education – US Version

© 2012 Fair Isaac Corporation. All rights reserved. 1 January 01, 2012

Frequently Asked Questions about FICO® Scores


© 2013-2017 Fair Isaac Corporation. All rights reserved. i

Table of Contents About FICO® Scores ................................................................................ 1

What is a credit score? ......................................................................................... 1

What are FICO® Scores? ....................................................................................... 1

What is a good FICO® Score? ................................................................................ 1

What is the lowest and highest possible FICO® Score? ......................................... 2

Are FICO® Scores the only risk scores? ................................................................. 2

Why are my scores at each of the three consumer reporting agencies different? ............................................................................................................................. 2

Why is this FICO® Score different than other scores I’ve seen?......................... .3

Why do FICO® Scores fluctuate/change?............................................................3

What are the minimum requirements to produce a FICO® Score? ....................... 3

What are key score factors? ................................................................................ 3

Who or what is FICO? .......................................................................................... 4

Access to Credit ..................................................................................... 5

Does a FICO® Score alone determine whether I get credit?.................................. 5

How is a credit history established? .................................................................... 5

How can I better understand my financial health? .............................................. 5

How long will negative information remain on my credit files? .......................... 7

Do FICO® Scores change that much over time? .................................................... 7

What if I’m turned down for credit? .................................................................... 8

How do I get my free credit report? .................................................................... 8

Can I transfer my credit file from another country to the US consumer reporting agencies? ............................................................................................................. 8

Why did my lender lower my credit limit?........................................................... 8

Credit Card Impacts to Scores ................................................................ 9

Should I take advantage of promotional credit card offers?................................ 9

Will closing my credit card account impact my FICO® Scores? ............................. 9

What’s the best way to manage my growing credit card debt?......................... 10

Mortgage Impacts to Scores ................................................................ 11

Are the alternatives to foreclosure any better as far as FICO® Scores are concerned? ........................................................................................................ 11


© 2013-2017 Fair Isaac Corporation. All rights reserved. ii

How does a mortgage modification affect the borrower’s FICO® Scores? .......... 11

Will contacting a mortgage servicer affect a FICO® Score? ................................. 11

How does refinancing affect a FICO® Score?....................................................... 11

How do loan modifications affect a FICO® Score? .............................................. 12

How long will a foreclosure affect a FICO® Score? .............................................. 12

Student Loan Impacts to Scores ........................................................... 13

How do FICO® Scores consider student loan shopping? ..................................... 13

How can the impact of student loan shopping be minimized? .......................... 13

Bankruptcy and Public Record Impacts to Score .................................. 14

What are the different categories of late payments and do they affect FICO®

Scores? ............................................................................................................... 14

How will FICO® Scores consider a bankruptcy, and how can I minimize any negative effects? ................................................................................................ 14

What are the different types of bankruptcy and how is each considered by FICO® Scores? ..................................................................................................... 15

How do public records and judgments affect FICO® Scores? .............................. 15

Credit missteps – how their effects on FICO® Scores vary .................................. 15

General Impacts to Score .................................................................... 18

What are inquiries and how do they affect FICO® Scores? ................................. 18

Does applying for many new credit accounts hurt a FICO® Score more than applying for just a single new account? ............................................................. 19

Is there a best way to go about applying for new credit to minimize the effect to a FICO® Score? .................................................................................................... 19

Are FICO® Scores unfair to minorities? ............................................................... 20

How are FICO® Scores calculated for married couples? ...................................... 20

Will spending less and saving more impact a FICO® Score? ................................ 20

If lenders have different lending requirements, how can I know if I qualify for affordable financing? ......................................................................................... 21

Can accounts that aren’t in my credit files affect a FICO® Score? ....................... 22


© 2013-2017 Fair Isaac Corporation. All rights reserved. 1

About FICO® Scores

What is a credit score?

A credit score is a number that summarizes your credit risk. The score is based on a snapshot of your credit file(s) at one of the three major consumer reporting agencies (CRAs)—Equifax, Experian and TransUnion—at a particular point in time, and helps lenders evaluate your credit risk. Your credit score influences the credit that’s available to you and the terms, such as interest rate, that lenders offer you.

What are FICO® Scores?

The credit scores most widely used in lending decisions are FICO® Scores, the credit scores created by Fair Isaac Corporation (FICO). Lenders can request FICO® Scores from all three major consumer reporting agencies (CRAs). Lenders use FICO® Scores to help them make billions of credit decisions every year. FICO develops FICO® Scores based solely on information in consumer credit files maintained at the CRAs. Understanding your FICO® Scores can help you better understand your credit risk. A good FICO® Score means better financial options for you.

What is a good FICO®

Score?

The score above which a lender would accept a new application for credit, but below which the credit application would be denied, is known as the “score cutoff”. Since the score cutoff varies by lender, it’s hard to say what a good FICO® Score is outside the context of a particular lending decision. For example, one auto lender may offer lower interest rates to people with FICO® Scores above, say, 680; another lender may use 720, and so on. Your lender may be able to give you guidance on their criteria for a given credit product.

The chart below provides a breakdown of ranges for FICO® Scores found across the U.S. consumer population. It provides general guidance on what a particular FICO® Score represents. Again, each lender has its own credit risk standards.

Ranges of FICO® Scores

Rating What FICO® Scores in this range mean

800 or Higher Exceptional • These FICO® Scores are in the top 20% of U.S. consumers • Demonstrate to lenders that the consumer is an

exceptional borrower 740 to 799 Very Good • These FICO® Scores are in the top 40% of U.S. consumers

• Demonstrate to lenders that the consumer is a very dependable borrower

670 to 739 Good • These FICO® Scores are near the average for U.S. consumers

• Considered by most lenders to be good scores 580 to 669 Fair • These FICO® Scores are in the lowest 40% of U.S.

consumers • Some lenders will approve credit applications within this

score range Lower than 580 Poor • These FICO® Scores are in the lowest 20% of U.S.

consumers • Demonstrate to lenders that the consumer is a very risky

borrower



What is the lowest and highest possible FICO®

Score?

The FICO® Scores which are in use today by the vast majority of lenders fall within the 300-850 score range. This score range was introduced to establish an easy-to-understand, common frame of reference for lenders and consumers. Industry-specific FICO® Scores, such as those for auto lending or credit card lending, were developed to accommodate the unique characteristics of their respective industry and range from 250-900. Some lenders also use FICO® Scores NG, which range from 150-950.

Are FICO®

Scores the only risk scores?

No. While FICO® Scores are the most commonly used credit risk scores by lenders in the US, lenders may use other scores to evaluate your credit risk. These include:

• FICO Application risk scores. Many lenders use scoring systems that include a FICO® Score but also consider information from your credit application.

• FICO Customer risk scores. A lender may use these scores to make credit decisions on its current customers. Also called “behavior scores,” these scores generally consider a FICO® Score along with information on how you have paid that lender in the past.

• Other credit scores. These scores may evaluate your credit file(s) differently than FICO® Scores, and in some cases a higher score may mean more risk, not less risk as with FICO® Scores. FICO® Scores are the scores most lenders use when making credit decisions.

Why are my scores at each of the three CRAs different?

In general, when people talk about “your credit score,” they’re talking about your FICO® Scores. But in fact, your FICO® Scores are calculated separately by each of the three consumer reporting agencies (CRAs)—using a formula that FICO has developed. It’s normal for your FICO® Scores from each CRA to be different for any of the following reasons:

• Your FICO® Scores are based on the credit information in your credit file at a particular CRA at the time your score is calculated. The information in your credit files is supplied by lenders, collection agencies and court records. Some of these sources may provide your information to just one or two of the CRAs, not all three. Differences in the underlying credit data will often result in differences in your FICO® Scores.

You may have applied for credit under different names (for example, Robert Jones versus Bob Jones) or a maiden name, which may cause fragmented or incomplete files at the CRAs. In rare situations, this can result in your credit files not having certain account information, or including information that should be on someone else’s credit files. This is one reason why it is important for you to review your credit files at least annually.

• Lenders may report your credit information to one credit reporting agency today, and to another credit reporting agency tomorrow. This can result in one agency having more up-to-date information which in turn can cause differences in your FICO® Scores from both agencies.

• The CRAs may record the same information in slightly different ways which can affect your FICO® Scores.



Why is this FICO® Score different than other scores I’ve seen?

There are different credit scores available to consumers and lenders. FICO® Scores are the credit scores used by most lenders, but different lenders (such as auto lenders and credit card lenders) may use different versions of FICO® Scores. In addition, your FICO® Score is based on credit file data from a particular consumer reporting agency at a particular point in time, so differences in your credit files between the consumer reporting agencies or by date may create differences in your FICO® Scores. When reviewing a score, take note of the date, bureau credit file source, score type, and range for that particular score.

Why do FICO® Scores fluctuate/ change?

There are many reasons why your score may change. FICO® Scores are calculated each time they are requested, taking into consideration the information that is in your credit file from a particular consumer reporting agency at that time. So, as the information in your credit file at that bureau changes, your FICO® Scores can also change. Review your key score factors, which explain what factors from your credit report most affected a score. Comparing key score factors from the two different time periods can help identify causes for changes in FICO® Scores. Keep in mind that certain events such as late payments or bankruptcy can lower your FICO® Scores quickly.

What are the minimum require-ments to produce a FICO®

Score?

There’s really not much to it; in order for a FICO® Score to be calculated, a credit file must contain these minimum requirements:

• At least one account that has been open for six months or more • At least one account that has been reported to the credit reporting agency within the

past six months • No indication of deceased on the credit file (Please note: if you share an account with

another person and the other account holder is reported deceased, it is important to check your credit file to make sure you are not impacted).

Note: These minimum requirements vary slightly for FICO® Scores NG.

What are key score factors?

When a lender receives your FICO® Score, "key score factors" are also delivered, which are the top factors that affected the score.

My lender recently changed the version of FICO® Score they use. Why do lenders change?

To keep up with consumer trends and the evolving needs of lenders, FICO periodically updates its scoring models. As a result, there are multiple FICO® Score versions—base FICO® Scores (and their updates) and industry-specific FICO® Scores (and their updates). Just as you may update your computer or mobile phone applications, lenders update the software they use, including their version of FICO® Scores, to keep current.



Who or what is FICO?

Founded in 1956, Fair Isaac Corporation (FICO) uses advanced math and analytics to help businesses make smarter decisions. One of FICO’s inventions is FICO® Scores, which are the most widely used credit scores in lending decisions. It is important to note that while FICO works with the consumer reporting agencies (CRAs) to provide your FICO® Scores, it does not have access to or store any of your personal data or determine the accuracy of the information in your credit file.



Access to Credit

Does a FICO® Score alone determine whether I get credit?

No. Most lenders use a number of factors to make credit decisions, including a FICO® Score. Lenders may 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 review of this information, as well as their specific underwriting policies, lenders may extend credit to you even with a low FICO® Score, or decline your request for credit even with a high FICO® Score.

How is a credit history established?

There are a few ways to establish a credit history, including the following.

• By applying for and opening a new credit card, a person with no or little credit history may not get very good terms on this credit card—such as a high annual percentage rate (APR). However, by charging small amounts and paying off the balance each month, you won’t be paying interest each month so the high APR won’t hurt your financial position.

• Those unable to get approved for a traditional credit card may be able to open a secured credit card to build credit history, provided the card issuer reports secured cards to the consumer reporting agency. This type of card requires a deposit of money with the credit card company. Charges can then be made on the secured card, typically up to the amount deposited.

With both traditional and secured credit cards, keeping balances low, paying off balances each month, and not missing payments are important for responsible financial health management.

How can I better understand my financial health?

Your FICO® Scores reflect credit payment patterns over time with more of an emphasis on recently reported information than older information. Below is some general information about shaping your financial future:

• The key score factors provided with your FICO® Score represent the main areas of credit practices that impact your financial health.

• Consumers with a moderate number of credit accounts on their credit report generally represent lower risk than consumers with either a large number or a very limited number of credit accounts. Opening accounts solely for a better credit picture probably won’t impact a FICO® Score and, in some instances, may even lower the score.

• People who continually pay their bills on time tend to appear less risky to lenders. Collections and delinquent payments, even if only a few days late, can have a major negative impact on your FICO® Scores.

• People who stay caught up on amounts due and continue to pay their bills on time are generally viewed as less risky to lenders. Especially after missing payments, getting back on track with paying bills on time will have an impact on your financial health. Older credit problems have less impact on your FICO® Score than recent ones, so poor credit performance won’t haunt you forever. The impact of past credit problems on your FICO® Scores fades as time passes and as recent good payment patterns show up on a credit file. And your FICO® Scores weigh any credit



problems against any positive information that indicates that you’re responsibly managing your financial health.

• Creditors and legitimate credit counselors may be able to provide direction to people who are having trouble responsibly managing their financial health. Seeking assistance from a credit counseling service will not hurt FICO® Scores.

• High outstanding credit card debt can negatively impact your FICO® Scores. • Paying down total revolving (credit card) debt, rather than moving it from one

credit card to another, is a responsible financial health management practice. • Most public records and collections stay on a person’s credit report for no more

than seven years—though bankruptcies may remain for up to 10 years. However, as these items age, their impact on a FICO® Score gradually decreases, and people can re-establish a good credit history with ongoing responsible financial health management.

• People who show moderate and conscientious use of revolving accounts, such as having low balances and paying them on time, generally demonstrate responsible financial behavior. Having credit cards and installment loans (and making timely payments) will positively impact financial health. People with no credit cards, for example, tend to be higher risk than people who have managed credit cards responsibly.

• Typically, the presence of “inquiries”the number of requests from a lender for your credit reports when you apply for loanson a credit report has only a small impact, carrying much less importance than late payments, the amount owed, and length of time a person has used credit. FICO® Scores consider recent inquiries less as time passes, provided no new inquiries are added. Too many “inquiries can negatively affect a FICO® Score. However, FICO® Scores treat multiple inquiries from auto, mortgage, or student loan lenders within a short period of time as a single inquiry because when purchasing a house or a car it is customary to shop for the best rate, resulting in more inquiries.

• Closing unused credit cards as a short-term strategy to increase a FICO® Score can actually have the opposite effect and lower a FICO® Score.

• For people who have been using credit for only a short time, opening a lot of new accounts too quickly can lower a FICO® Score.



How long will negative information remain on my credit files?

It depends on the type of negative information. Here’s the basic breakdown of how long different types of negative information will remain on your credit files:

• Late payments: 7 years • Bankruptcies: 7 years for a completed Chapter 13, and 10 years for Chapters 7

and 11 • Foreclosures: 7 years • Collections: Generally, about 7 years, depending on the age of the debt being

collected • Public Record: Generally 7 years, although unpaid tax liens can remain indefinitely

Keep in Mind: For all of these negative items, the older they are the less impact they will have on your FICO® Scores. For example, a collection that is 5 years old will hurt much less than a collection that is 5 months old.

Do FICO®

Scores change that much over time?

It’s important to note that your FICO® Scores are calculated each time they’re requested; either by you or a lender. And each time a FICO® Score is calculated, it’s taking into consideration the information that is in your credit file at a particular consumer reporting agency at that time. So, as the information in your credit file changes, your FICO® Scores can also change.

How much your FICO® Scores change from time to time is driven by a variety of factors such as:

• Your current credit profile—how you have managed your financial health to date will affect how a particular action may impact your scores. For example, new information in your credit file, such as opening a new credit account, is more likely to have a larger impact for someone with a limited credit history as compared to someone with a very full credit history.

• The change being reported—the “degree” of change being reported will have an impact. For example, if someone who usually pays bills on-time continues to do so (a positive action) then there will likely be only a small impact on his or her FICO® Scores one month later. On the other hand, if this same person files for bankruptcy or misses a payment, then there will most likely be a substantial impact on their score one month later.

• How quickly information is updated—there is sometimes a lag between when you perform an action (like paying off your credit card balance in full) and when it is reported by the creditor to the consumer reporting agencies. It’s only when the consumer reporting agency has the updated information that your action will have an effect on your FICO® Scores.

Keep in Mind: Small changes in financial health management can be important to obtain a certain FICO® Score level or to reach a certain lender’s FICO® Score “cutoff” (the point above which a lender would accept a new application for credit, but below which, the credit application would be denied).



What if I’m turned down for credit?

If you have been turned down for credit, the Equal Credit Opportunity Act (ECOA) gives you the right to obtain the reasons why within 30 days. You are also entitled to a free copy of your credit reports within 60 days, which you can request from each of the consumer reporting agencies. If a FICO® Score was a primary part of the lender’s decision, the lender may use the key score factors or reason codes to explain why you didn’t qualify for the credit.

How do I get my free credit report?

You can get one credit report from each of the three major consumer reporting agencies once every 12 months.

Can I transfer my credit files from another country to the US consumer reporting agencies?

Credit files and credit histories do not transfer from country to country. There are legal, technical and contractual barriers that prevent a person from transferring their credit files or history to a different country. Unfortunately, this often means that a new immigrant to the US will need to establish a new credit history.

Why did my lender lower my credit limit?

Some banks are lowering credit lines and closing credit card or revolving accounts that have had little or no recent activity. These actions can hurt your score if they result in higher credit utilization (proportion of balance to credit limit); therefore, preserving credit lines by keeping credit card accounts open and using them frequently—while, at the same time, maintaining low balances—can help a score from being negatively affected.

Do I need to keep my utilization ratio below 30% to have no impact on my score?

There is no single utilization percentage that equates to optimal points. Generally speaking, lower utilization means less credit risk and positive impact to FICO® Scores.



Credit Card Impacts to FICO® Scores

Should I take advantage of promotional credit card offers?

Generally, opening new accounts can indicate increased risk and can hurt your FICO® Scores. Every individual’s situation is unique, but in general consumers with a moderate number of revolving accounts on their credit reports generally represent lower risk than consumers with either a relatively large number or a very limited number of revolving accounts. However, please keep in mind that opening a new account, and to a lesser extent the resulting credit inquiry, may demonstrate higher risk in the short term.

Will closing a credit card account impact a FICO®

Score?

Yes, but not in the way you might expect. And, while closing an account may be a good strategy for responsible financial health management in some cases, it also may have a negative impact on your FICO® Scores.

FICO® Scores take into consideration something called a “credit utilization ratio”. This ratio or proportion basically looks at your total used credit in relation to your total available credit; the higher this ratio is, the more it can negatively affect your FICO® Scores. This is because, in general, people with higher credit utilization ratios are more likely to default on loans. So, by closing an old or unused card, you are essentially wiping away some of your available credit and thereby increasing your credit utilization ratio.

It’s a bit tricky, so here’s an example:

Say you have three credit cards.

• Credit card 1 has a $500 balance and a $2,000 credit limit. • Credit card 2 is an unused card with a zero balance and a $3,000 limit. • Credit card 3 has a $1,500 balance and a $1,500 limit.

In this scenario your credit utilization ratio looks like this:

Total balances = $2,000 ($500 + $0 + $1,500) Total available credit = $6,500 ($2,000 + $3,000 + $1,500) Credit utilization ratio = 30% (2,000 divided by 6,500)

Now, if you decide to close credit card 2 because it’s an old card that you never use, your credit utilization ratio looks like this:

Total balances = $2,000 ($500 + $1,500) Total available credit = $3,500 ($2,000 + $1,500) Credit utilization ratio = 57% (2,000 divided by 3,500)

You can see that your utilization ratio rose from 30% to 57% by closing the unused credit card.



What’s the best way to manage my growing credit card debt?

There are a number of different things to consider when managing credit card debt. We’ll touch on a few of the key things of which to be aware.

The advantage of having more than one credit card

People who only have one credit card available and are coming close to maxing out that card, might consider applying for another card in terms of how it affects their FICO® Scores. It has to do with what’s called credit utilization.

Utilization measures how much of your credit you are using in relation to your total available credit. If you have one credit card with $500 charged to it and a credit limit of $1,000, then your utilization is 50%. There’s no ideal utilization to shoot for, because as with most things, it depends on everything else on your file. But in terms of the risk of hurting FICO® Scores, people who keep their utilization on any one card below 50% will see less negative impact to their FICO® Scores. Research has shown that people who max out a single credit card are more likely to miss future payments, and therefore FICO® Scores consider people using more of their available credit as more risky than people who are using very little of their available credit.

Disadvantages of having a large number of credit cards

Consumers with a moderate number of revolving accounts on their credit report generally represent lower risk than consumers with either a relatively large number or a very limited number of revolving accounts.



Mortgage Impacts to FICO® Scores

Are the alternatives to fore-closure any better as far as FICO®

Scores are concerned?

The common alternatives to foreclosure, such as short sales, and deeds-in-lieu of foreclosure, are all “not paid as agreed” accounts, and considered the same by FICO® Scores. This is not to say that these may not be better options in some situations; it’s just that they will be considered no better or worse than a foreclosure by FICO® Scores.

Bankruptcies as an alternative to foreclosure may have a greater impact on a FICO® Score. While a foreclosure is a single account that you default on, declaring bankruptcy has the opportunity to affect multiple accounts and therefore has potential to have a greater negative impact on your FICO® Scores.

How does a mortgage modification affect the borrower’s FICO® Score?

FICO® Scores are calculated from the information in consumer credit files. Whether a loan modification affects the borrower’s FICO® Scores depends on whether and how the lender reports the event to the consumer reporting agencies, as well as on the person’s overall credit profile. If a lender indicates to a consumer reporting agency that the consumer has not made payments on a mortgage as originally agreed, that information in the consumer’s credit reports could cause the consumer’s FICO® Scores to decrease or it could have little to no impact on his or her FICO® Scores.

Will contacting my mortgage servicer affect a FICO® Score?

Simply contacting your servicer with questions has no effect on your FICO® Scores. If your servicer needs to check your credit, they must get your permission first. A credit check could result in an inquiry in your credit file, which can have a small impact on your scores.

Any action after that may also impact your FICO® Scores—for example, if you pursue refinancing or loan modifications.

How does refinancing affect a FICO®

Score?

Refinancing and loan modifications can affect your FICO® Scores in a few areas. How much these affect the score depends on whether it’s reported to the consumer reporting agencies as the same loan with changes or as an entirely new loan.

If a refinanced loan or modified loan is reported as the same loan with changes, three pieces of information associated with the loan modification may affect your score: the credit inquiry, changes to the loan balance, and changes to the terms of that loan. Overall, the impact of these changes on your FICO® Scores should be minimal.

If a refinanced loan or modified loan is reported as a “new” loan, your score could still be affected by the inquiry, balance, and terms of the loan—along with the additional impact of a new “open date.” A new or recent open date typically indicates that it is a new credit obligation and, as a result, can impact the score more than if the terms of the existing loan are simply changed.



How do loan modifications affect a FICO® Score?

Your servicer will likely use a FICO® Score, along with other factors, to help determine the new terms of your loan, such as your mortgage rate. In general, your FICO® Scores play a key role any time you apply for new credit or change the terms of a loan. That’s why staying credit savvy and maintaining a good credit rating remains so important.

How long will a foreclosure affect a FICO® Score?

A foreclosure remains in your credit files for seven years, but its impact to your FICO® Scores will lessen over time. While a foreclosure is considered a very negative event by FICO® Scores, it’s a common misconception that it will ruin your scores for a very long time. In fact, if all other credit obligations remain in good standing, your FICO® Scores can begin to rebound in as little as two years. The important thing to keep in mind is that a foreclosure is a single negative item, and if you keep this item isolated, it will be much less damaging to your FICO® Scores than if you had a foreclosure in addition to defaulting on other credit obligations.



Student Loan Impacts to FICO® Scores

How do FICO®

Scores consider student loan shopping?

The growth of the student loan industry has increased public interest in how lenders assess the credit risk of young college-bound adults. Both large and small lenders often use FICO® Scores to help them underwrite student loans. How FICO credit scoring formulas treat credit inquiries depends on the way in which those inquiries are reported by lenders to each of the three consumer reporting agencies. If the inquiries are reported by the lender in a manner that indicates rate shopping for a single loan (such as a mortgage, auto, or student loan), FICO scoring formulas typically reflect that in its calculation of a score. In general, student loan shopping inquiries made during a focused time period will have little to no impact on a score. In the rare instance in which a credit inquiry related to a student loan is not coded so that it receives our special rate-shopping inquiry logic, that inquiry typically would decrease a FICO® Score by only a few points.

What’s the best advice for people shopping for student loans to minimize the impact to their FICO®

Scores?

As you’re shopping for the best student loan rate, the lenders you approach may request your credit reports or your FICO® Score (from one or more of the three consumer reporting agencies) to check your credit standing. Inquiries generally won’t affect a score if rate shopping is finished in a reasonable amount of time, which is made easier by researching rates ahead of time and deciding from which companies to get quotes. It’s advantageous for consumers to finish rate shopping and finalize a loan within 45 days. Not only will loan rates be easier to compare when the quotes come only a few days apart, but any impacts to a FICO® Score will be minimized.



Bankruptcy and Public Record Impacts to FICO® Scores

What are the different categories of late payments and do they affect FICO®

Scores?

FICO® Scores consider late payments in these general areas; how recent the late payments are, how severe the late payments are, and how frequently the late payments occur. So this means that a recent late payment could be more damaging to a FICO® Score than a number of late payments that happened a long time ago.

You may have noticed on your credit reports that late payments are listed by how late the payments are. Typically, creditors report late payments in one of these categories: 30-days late, 60-days late, 90-days late, 120-days late, 150-days late, or charge off (written off as a loss because of severe delinquency). Of course a 90-day late is worse than a 30-day late, but the important thing to understand is that people who continually pay their bills on time tend to appear less risky to lenders. However, for people who continue not to pay debt, and their creditor either charges it off or sends it to a collection agency, it is considered a significant event with regard to a score and will likely have a severe negative impact.

A history of payments is the largest factor in FICO® Scores. Sometimes circumstances cause people to be unable to keep current with their bills—maybe an unexpected medical emergency or losing a job. Creditors and legitimate credit counselors may be able to provide direction to people when they are having trouble responsibly managing their financial health. Late payments hurt scores and credit standing, but paying off late debt and getting current before the debt becomes a judgment or goes to a collections agency will have a positive effect on a score. However, you can never again get an account to a “current” status once it becomes a judgment or is turned over to a collection agency.

How do FICO®

Scores consider a bankruptcy, and how can I minimize any negative effects?

A bankruptcy is considered a very negative event by FICO® Scores. How much of an impact it will have on your score will depend on your entire credit profile. For example, someone that had spotless credit and a very high FICO® Score could expect a huge drop in their score. On the other hand, someone with many negative items already listed in their credit files might only see a modest drop in their score; that’s because their lower score is already reflective of their higher risk level. Another thing to note is that the more accounts included in the bankruptcy filing, the more of an impact on a FICO® Score.

While it may take up to ten years for a bankruptcy to fall off of your file, the impact of the bankruptcy will lessen over time.

If you file for bankruptcy, here are some things you should do to make sure your creditors are accurately reporting the bankruptcy filing:

• Check your credit files to ensure that accounts that were not part of the bankruptcy filing are not being reported with a bankruptcy status.

• Make sure your bankruptcy is removed as soon as it is eligible to be “purged” from your credit file.

While there are many things to consider when filing for bankruptcy, understand that the bankruptcy will impact your FICO® Scores for as long as it is listed on your credit files.



What are the different types of bankruptcy and how is each considered by a FICO®

Score?

A bankruptcy is considered a very negative event by FICO® Scores regardless of the type. As long as the bankruptcy is listed on your credit file, it will be factored into your scores. However, as the bankruptcy item ages, its impact on a FICO® Score gradually decreases. Typically, here is how long you can expect bankruptcies to remain on your credit files (from the date filed):

• Chapter 11 and 7 bankruptcies up to 10 years. • Completed Chapter 13 bankruptcies up to 7 years.

These dates and time periods refer to the public record item associated with filing for bankruptcy. All of the individual accounts included in the bankruptcy should be removed from your credit files after 7 years.

How do public records and judgments affect a FICO®

Score?

Public records and FICO® Scores

Public records are legal documents created and maintained by Federal and local governments, which are usually accessible to the public. Some public records, such as divorces, are not considered by FICO® Scores, but adverse public records, which include bankruptcies, judgments and tax liens, are considered by FICO® Scores. FICO® Scores can be affected by the mere presence of an adverse public record, whether paid or not.

Adverse public records will have less effect on a FICO® Score as time passes, but they can remain in your credit files for up to ten years based on what type of public record it is. Judgments specifically remain in your credit files for seven years from the date filed.

A judgment in your credit file

Judgments will almost always have a negative effect. Creditors, collections agencies, and legitimate credit counselors may be able to provide direction, or negotiate a payment plan, to people when they are having trouble responsibly managing their financial health, and before a debt turns into a judgment.

Credit missteps – how their effects on FICO® Scores vary

People can run into financial difficulties that impact their FICO® Scores. Some difficulties may change your score by a small amount, while others can drop your score significantly. What your score was before the difficulty appeared in your credit files also can make a difference.

Here is a comparison of the impact that credit problems can have on FICO® Scores of two different people: Alex and Benecia. Note that their initial FICO® Scores are 100 points apart.

First, let’s give you a general snapshot of Alex’s and Benecia’s credit profiles:



Alex has a FICO® Score of 680 and: Benecia has a FICO® Score of 780 and:

Has six credit accounts, including several active credit cards, an active auto loan, a mortgage, and a student loan

Has ten credit accounts, including several active credit cards, an active auto loan, a mortgage and a student loan

An eight-year credit history A fifteen-year credit history

Moderate utilization on his credit card accounts (his balances are 40-50% of his limits)

Low utilization on her credit card accounts (her balances are 15-25% of her limits)

Two reported delinquencies: a 90-day delinquency two years ago on a credit card account, and an isolated 30-day delinquency on his auto loan a year ago

Never has missed a payment on any credit obligation

Has no accounts in collections and no adverse public records on file

Has no accounts in collections and no adverse public records on file

Now let’s take a look at how different credit missteps impact their FICO® Scores:

Alex Benecia

Current FICO® Score 680 780

Score after one of these credit missteps is added to each credit file:

Maxing out (charging up to the limit) a credit card 650-670 735-755

A 30-day delinquency 600-620 670-690

Settling a credit card debt for less than owed 615-635 655-675

Foreclosure 575-595 620-640

Bankruptcy 530-550 540-560

As you can see, maxing out (charging up to the limit) a credit card has the smallest impact of these credit missteps. Declaring bankruptcy has the biggest impact to their scores. For someone like Benecia with a high FICO® Score of 780, declaring bankruptcy could lower her score by as much as 240 points. That’s because FICO® Scores generally give the most weight to payment history. Bankruptcy is included in one’s payment history. Also, a bankruptcy often involves more than one credit account, compared with a foreclosure which often involves just a single account.

High scores can fall farther. Notice that Benecia would lose more points for each misstep than would Alex, even though her FICO® Score starts out 100 points higher. That’s because Alex’s lower score of 680 already reflects his riskier past behavior. So the addition of one more indicator of increased risk on his credit file is not quite as significant to his score as it is for Benecia.



Settling a credit card debt is the third credit problem listed. It means that the lender agrees to accept less than the amount owed on the account. A settled account indicates a higher level of risk and typically happens only when an account is overdue. So in Benecia’s case, to help make the debt settlement plausible we also added a 30-day delinquency to her credit file. Her new FICO® Score reflects both changes. Alex’s credit file already included a recent delinquency.

Are you more like Alex or Benecia? Many different combinations of information in a credit file can produce a FICO® Score of 680 or 780. Depending on what’s on your own credit files, your experience may vary from that of Alex or Benecia, or be similar. In any case, if a person knows what’s in their credit reports at each of the three major consumer reporting agencies, he or she may be able to better understand the severity of impact of a financial misstep to their score.



General Impacts to FICO® Scores

What are inquiries and how do they affect FICO®

Scores?

Credit inquiries are requests by a “legitimate business” to check your credit.

Inquiries may or may not affect FICO® Scores. Credit inquiries are classified as either “hard inquiries” or “soft inquiries”—only hard inquiries have an effect on FICO® Scores.

Soft inquiries are all credit inquiries where your credit is NOT being reviewed by a prospective lender. FICO® Scores do not take into account any involuntary (soft) inquiries made by businesses with which you did not apply for credit, inquiries from employers, or your own requests to see your credit file. Soft inquiries also include inquiries from businesses checking your credit to offer you goods or services (such as promotional offers by credit card companies) and credit checks from businesses with which you already have a credit account. If you are receiving FICO® Scores for free from a business with which you already have a credit account, there is no additional inquiry made on your credit report.

FICO® Scores take into account only voluntary (hard) inquiries that result from your application for credit. Hard inquiries include credit checks when you’ve applied for an auto loan, mortgage, credit card or other types of loans. Each of these types of credit checks count as a single inquiry. One exception occurs when you are “rate shopping”. Your FICO® Scores consider all inquiries within a reasonable shopping period for an auto, student loan or mortgage as a single inquiry.

The relative information with a hard inquiry that can be factored into FICO® Scores include:

• Number of recently opened accounts, and proportion of accounts that are recently opened, by type of account.

• Number of recent credit inquiries. • Time since recent account opening(s), by type of account. • Time since credit inquiry(ies).

For many people, one additional hard credit inquiry (voluntary and initiated by an application for credit) may not affect their FICO® Scores at all. For others, one additional inquiry would take less than 5 points off a FICO® Score.

Inquiries can have a greater impact, however, if you have few accounts or a short credit history. Large numbers of inquiries also mean greater risk: people with six inquiries or more in their credit files are eight times more likely to declare bankruptcy than people with no inquiries in their files.



Does applying for many new credit accounts hurt FICO® Scores more than applying for just a single new account?

The short answer is yes—applying for many new accounts often hurts your FICO® Scores more than applying for a single new account. There is no magic number of applications to which you should limit yourself. However, FICO® Scores consider recent inquiries less as time passes, provided no new inquiries are added.

Applying for a single new credit card may have a small impact to a FICO® Score, but if you apply for several credit cards, that can have a much greater effect on your FICO® Scores. Generally, rate shopping for home or auto loans will have less of an impact on your FICO® Scores than comparison shopping for credit cards or other types of credit accounts. A better practice when determining the best credit card is to read about the features of each card and then only apply for the one that has the features you want from your new card.

Is there a best way to go about applying for new credit to minimize the effect to a FICO® Score?

Applying for new credit only accounts for about 10% of a FICO® Score, so the impact is relatively modest. Exactly how much applying for new credit affects your score depends on your overall credit profile and what else is already in your credit reports. For example, applying for new credit can have a greater impact on your FICO® Scores if you only have a few accounts or a short credit history.

That said, there are definitely a few things to be aware of depending on the type of credit you are applying for. When you apply for credit, a credit check or “inquiry” can be requested to check your credit standing. Let’s take a look at the common inquiries you might find in your credit reports.

Credit Cards

If you only need a small amount, credit card companies will sometimes provide an increased credit limit (for accounts already opened). While a request for an increased limit may count as an inquiry just like opening a new card would, it won’t reduce the average age of your credit accounts, which is also important to your FICO® Scores.

If getting the limit raised on an existing card isn’t an option, then applying for the fewest number of credit cards will have the least negative impact to your FICO® Scores. For example, if a person needed an extra $5,000, getting one card with a $5,000 limit rather than two cards each with a $2,500 limit results in less impact to your scores. That’s because when applying for new credit cards, each application is counted separately as an individual inquiry in your credit file, and the more inquiries you have, the more that could hurt your FICO® Scores. Historically, people with six inquiries or more in their credit files are eight times more likely to declare bankruptcy than people with no inquiries in their files. So having more inquiries makes you look more risky to potential lenders.

Home, Auto, and Student Loans

FICO® Scores do not penalize people for rate shopping for a home, car or student loan. During rate shopping, multiple lenders may request your credit reports to check your credit. But FICO® Scores de-duplicate these and consider inquiries within a reasonable shopping period for an auto, student loan or mortgage each as a single inquiry. Doing the entire rate shopping and getting the loan within 45 days, will have no immediate impact



to your FICO® Score.

Given rate shopping for home, auto and student loans has no immediate impact, why do you even see an inquiry in your credit files? While these types of inquiries may appear in your files, FICO® Scores count all those inquiries that fall in a typical shopping period as just one inquiry. So, again, doing rate shopping within a matter of weeks as opposed to a matter of months limits the longer-term impact to your scores as well.

Do employers use FICO® Scores in hiring decisions?

No. While Federal law allows review of credit reports for the purpose of employment screening, FICO® Scores are not included with the reports.

Are FICO® Scores used in insurance underwriting?

FICO® Scores were designed to help lenders by rank-ordering consumers according to the likelihood they will become at least 90 days late repaying a creditor within the next 24 months. FICO also offers FICO® Insurance Scores, credit-based insurance scores specifically designed for the insurance industry to help predict future auto and home insurance losses.

Are FICO®

Scores unfair to minorities?

No. FICO® Scores do not consider your gender, race, nationality or marital status. In fact, the Equal Credit Opportunity Act prohibits lenders from considering this type of information when issuing credit. Independent research has shown that FICO® Scores are not unfair to minorities or people with little credit history. FICO® Scores have proven to be an accurate and consistent measure of repayment for all people who have some credit history. In other words, at a given FICO® Score, non-minority and minority applicants are equally likely to pay as agreed.

How are FICO® Scores calculated for married couples?

Married couples don’t have joint FICO® Scores, they each have individual scores. The difference is that when you are single you usually only need to worry about your credit habits and credit profile. However, when you become married your spouse’s credit habits and credit profile may have an impact on yours. For example, if you have a credit card in both of your names and it doesn’t get paid on time, that can affect both of your FICO® Scores—and not in a good way.

Will spending less and saving more impact a FICO® Score?

While putting more money towards savings is usually a good idea, it’s not necessarily going to impact your FICO® Scores. FICO® Scores do not consider the amount of disposable cash (savings accounts, certificates of deposit or cash in your cookie jar) you have at any given time. Therefore, the amount of money you keep in savings doesn’t impact your FICO® Scores.

As far as spending less, that could have an effect on your FICO® Scores. For example, if you typically use your credit cards for purchases and you don’t always pay off the balance on those credit cards, then you may notice an impact in your FICO® Scores. FICO® Scores factor in the balance on revolving credit accounts (for example, credit cards).



If lenders have different lending requirements, how can I know if I qualify for affordable financing?

The surest way to get the most up-to-date and accurate information is to contact your lender for their FICO® Score requirements before shopping for credit. You can also check your current FICO® Scores so you’ll know where you stand in the eyes of these potential lenders.



Can accounts that aren’t in my credit reports affect a FICO®

Score?

Though your FICO® Scores capture a pretty accurate picture of your credit history, not every account is recorded. Your good history of rental and utilities payments may not be listed in your credit reports. Even though your landlord, the cable and cell phone providers are pleased with your timely payments, this positive information may not be reported to the consumer reporting agencies. That being said, not paying these bills on time can have a negative effect on your financial health and your FICO® Scores:

• Reported delinquencies: Even though your good payment history isn’t reported, if you go late on these bills, your landlord or utility department has the right to report your bills as delinquent to the consumer reporting agencies. If the bill continues to go unpaid, a judgment could be obtained against you in small claims court, and/or your account could be turned over to a collection agency. Any of these blemishes can then show up in your credit reports and can be as harmful to your FICO® Scores as the more commonly reported items such as late payments on loans or credit cards.

• Future referrals: The next time you need to move, your potential landlord is likely going to require a copy of your credit report and a FICO® Score. In addition, he/she may want to contact your current landlord to check if you paid your rent on time. Even if you have a high FICO® Score, a potential landlord could choose another candidate if your current landlord reports that the rent is paid late or incomplete. As always, people who consistently pay their bills on time appear to be less risky to lenders and other types of creditors.

Understanding Your FICO® Score

© 2013 Fair Isaac Corporation. All rights reserved. 1 August 2013

Understanding FICO® Scores


© 2013-2017 Fair Isaac Corporation. All rights reserved. i

Table of Contents Introduction to Credit Scoring 1

What’s in Your Credit Reports 1

Checking Your Credit Reports for Errors 2

The Basics of FICO® Scores 4

Overview of FICO® Scores 4

What are FICO® Scores? 4

Applying for Credit 5

How FICO® Scores Help You 5

How FICO® Scores Work 7

What’s in FICO® Scores: The 5 Key Ingredients 7

What FICO® Scores Ignore 10

Financial Health Management 11

Payment Due Dates 11

Managing Accounts… 11

When Seeking New Credit… 12

Monitoring the Score is Important 12

Credit Inquiries and Their Effect on FICO® Scores 13

What is an “Inquiry”? 13

How do They Affect FICO® Scores? 13

Minimizing the Impact of Inquiries on a Score 14

Myths Concerning FICO® Scores 15

Myth: A FICO® Score Determines Whether or Not I Get Credit. 15

Myth: A Poor FICO® Score will Haunt Me Forever. 15

Myth: My FICO® Scores Will Drop if I Apply for New Credit. 15

Myth: Credit Scoring Is Unfair to Minorities. 16

Myth: Credit Scoring Infringes on My Privacy. 16

Glossary of Credit Terms 17



Introduction to Credit Scoring

When you apply for credit—such as a credit card, auto loan or mortgage—the company from which you are seeking credit checks your credit report from one or more of the three major consumer reporting agencies. In addition to your credit report(s), they will most likely use a credit score, such as a FICO® Score, in their evaluation of risk before lending their money to you. FICO® Scores are used in 90% of lending decisions. Each lender has its own process and policies for making decisions when reviewing a credit application. Most lenders consider a FICO® Score along with additional information, either from one or more of your credit reports or from supplemental information you provide with your application, such as your income. Some lenders are conservative, meaning they only want to lend to the least risky consumers. Other lenders are happy to work with consumers who have less-than-ideal credit histories. When evaluating your credit risk, the items that lenders generally pay the most attention to are: • Your FICO® Score • Your payment history – to see if you have paid your bills on time • Your current debt – to see if you are able to reasonably take on more debt • Whether you have had any collection accounts

• Any public records, such as bankruptcies, judgments and liens • The types of financing you have successfully managed

• The length of your credit history • Recent activity, including new accounts and credit inquiries by other lenders

• Your income – to determine your ability to make required payments Based on this information, a lender will decide whether to approve or decline your credit application. If they approve it, they will set your credit terms, such as interest rate, credit limit and down payment requirement.

What’s in Your Credit Reports

Lenders regularly provide information to consumer reporting agencies about the type of credit account you have and how you pay your bills. This information forms the basis for your credit report, which details your credit history as it has been reported to the consumer reporting agency by lenders who have extended credit to you in the past. Every U.S. consumer typically has three reports—one at each of the three major U.S. consumer reporting agencies (Equifax, TransUnion, and Experian). Often, lenders report details of your credit history to more than one consumer reporting agency. Your credit report lists what types of credit you use, the length of time your accounts have been open, and whether you’ve paid your bills on time. It also tells lenders how much



credit you’ve used and whether you’re seeking new credit. Your credit report contains many pieces of information – see below for details. Your FICO® Scores summarize your credit report information into a single number that lenders can use to assess your credit risk quickly, fairly and consistently. That is a big part of the reason that FICO® Scores are so useful to lenders and borrowers alike. All credit reports contain basically the same types of information: • Personal Information

Your name, address, Social Security number, date of birth and employment information. This information is not used in calculating FICO® Scores; it is only used to identify you. Updates to this information come from information you supply to your lenders.

• Your Credit Accounts Most lenders report information about each account you have established with them. They report the type of account (bank credit card, auto loan, mortgage, etc.), the date you opened the account, your credit limit or loan amount, the account balance, and your payment history.

• Requests for Credit

When you apply for a loan, you authorize your lender to ask for a copy of your credit report(s). This is how inquiries appear on your reports. Your credit reports list the inquiries that lenders have made for your credit report(s) within the last two years.

• Public Record and Collection Items

Consumer reporting agencies also collect information on overdue debt from collection agencies and public record information such as bankruptcies, foreclosures, tax liens, garnishment, legal suits and judgments from state and county courthouses. In general, these items remain on your credit report for 7 to 10 years.

Checking Your Credit Reports for Errors

Because FICO® Scores are based on the information in your credit reports, it is very important to make sure that the credit report information is accurate. You should review your credit report from each consumer reporting agency (CRA) at least once a year and before making any large purchases, such as a home or car. You have the right to obtain one free credit report each year from each of the consumer reporting agencies through www.AnnualCreditReport.com. Please note that your free credit report will not include your FICO® Score.

If you find an error

If you find an error on one or more of your credit reports, contact the consumer reporting agency and the organization that provided the information to the agency. Both parties are responsible for correcting inaccurate or incomplete information in your report as required by the Fair Credit Reporting Act.



Fixing credit report errors

The follow steps will help facilitate that mistakes get corrected as quickly as possible. 1. Tell the CRA in writing what information you believe is inaccurate and request that

they fix it. This is called initiating a credit report “dispute.” The CRA must investigate the item(s) in question—usually within 30 days—unless they consider your dispute frivolous. Include copies (NOT originals) of documents that support your position.

In addition to providing your complete name and address, your letter should:

• Clearly identify each item in your report that you dispute. • State the facts and explain why you dispute the information. • Request deletion or correction.

You may want to enclose a copy of your report with the items in question circled. Send your letter by certified mail, return receipt requested, so you can document that the CRA received your correspondence. Keep copies of your dispute letter and enclosures. Each of the three major consumer reporting agencies offers you the ability to initiate a dispute online in order to correct errors in your credit report.

2. Write the appropriate creditor or other information provider, explaining that you are disputing the information provided to the bureau. Again, include copies of documents that support your position. Many providers specify an address for disputes. If the provider again reports the same information to a CRA, it must include a notice of your dispute. Request that the provider copy you on correspondence they send to the CRA. Expect this process to take between 30 and 90 days.

In many states, you will be eligible to receive a free credit report directly from the CRA, once a dispute has been registered, in order to verify the updated information. Contact the appropriate CRA to see if you qualify for this service.



The Basics of FICO® Scores

Overview of FICO® Scores

FICO® Scores are one of many factors nearly all lenders in the U.S. consider when they make key credit decisions. In fact, a US News and World Report article stated that “The FICO Score is the No. 1 piece of data to determine how much you’ll pay on a loan and whether you’ll get credit.” Such decisions include whether to approve your credit application, what credit terms to offer you and whether to increase your credit limit once your credit account is established. FICO® Scores are used by thousands of creditors including the largest lenders, making it the most widely used credit score. Experts estimate that FICO® Scores are used in 90% of lending decisions. While FICO® Scores are used in 90% of lending decisions, lenders may consider other factors when making credit decisions. Other factors lenders might use include: information you provided on your credit application, how much you earn, your regular expenses, and how you manage your credit, checking and savings accounts. FICO® Scores can be used in other decisions, too. Your FICO® Scores may be used when you apply for a cell phone account, cable TV and utility services, for example.

What are FICO® Scores?

When you accept new credit and manage it diligently by consistently paying as agreed, you demonstrate to lenders that you represent a good credit risk. Lenders use your credit history as a way of evaluating how well you’ve managed your credit to date. A FICO® Score is a three-digit number calculated from the credit information on your credit report at a consumer reporting agency (CRA) at a particular point in time. It summarizes information in your credit report into a single number that lenders can use to assess your credit risk quickly, consistently, objectively and fairly. Lenders use your FICO® Scores to estimate your credit risk—how likely you are to pay your credit obligations as agreed. And it helps you obtain credit based on your actual borrowing and repayment history, without consideration of prohibited types of information such as race or religion. Your FICO® Scores from each agency may be different because FICO® Scores are based solely on the specific credit information in that agency’s credit file, and not all lenders report to all three CRAs. Even in instances where the lender reports to all three CRAs, the timing of when information from credit grantors is updated to your credit file may create differences in your score across the three CRAs. In addition to the three-digit number, a FICO® Score includes “score factors” which are the top factors that affected the score. These factors reflect information from your credit report which adversely impacted your score. Having a good FICO® Score can put you in a better position to qualify for credit or better terms in the future.



Applying for Credit

When you apply for credit, your FICO® Scores can influence the credit limit, interest rate, loan amount, rewards programs, balance transfer rates, and other terms that lenders will offer you. FICO® Scores are used by lenders in connection with a wide variety of credit products including:

• Credit Cards • Auto Loans • Mortgages • Home Equity Lines & Loans

• Personal Loans & Lines of Credit • Student Loans

How FICO® Scores Help You

A FICO® Score gives lenders a fast, objective and consistent estimate of your credit risk. Before the use of scoring, the credit granting process could be slow, inconsistent and unfairly biased. Here are some ways FICO® Scores benefit you.

Get credit faster FICO® Scores can be delivered almost instantaneously, helping lenders speed up credit card and loan approvals. This means when you apply for credit, you’ll get an answer more quickly, even within seconds. Even a mortgage application can be approved much faster for borrowers who score above the lender’s minimum score requirement. FICO® Scores also allow retail stores, internet sites and other lenders to make “instant credit” decisions. Keep in mind that FICO® Scores are only one of many factors lenders consider when making a credit decision.

Credit decisions are unbiased Using FICO® Scores, lenders can focus on the facts related to credit risk, rather than their personal opinions or biases. Factors such as your gender, race, religion, nationality and marital status are not considered by FICO® Scores. So when a lender uses your FICO®

Score, it is getting an evaluation of your credit history that is fair and objective.

Older credit problems count for less If you have had problems paying bills in the past, it won’t haunt you forever (unless you continue to pay bills late). The impact of past credit problems on your FICO® Scores fades as time passes and as recent good payment patterns show up on your credit report.

A higher FICO® Score may save you money

When you apply for credit – whether it’s a credit card, a car loan, a personal loan or mortgage – lenders need to understand how risky you are as a borrower in order to make a good decision. Your FICO® Scores may affect not only a lender’s decision to grant you credit, but also how much credit and on what terms (interest rate, for example). Keep in mind that FICO® Scores are only one of many factors lenders consider when making a



credit decision. A higher FICO® Score can help you qualify for better rates from lenders—generally, the higher your score, the lower your interest rate and payments. The difference between a FICO® Score of 620 and 760, for example, can be tens of thousands of dollars over the life of a loan. Consider these two examples: Two different people are borrowing $230,000 on a 30-year mortgage. A borrower with a FICO® Score of 760 could pay $211 less each month in interest as compared to a borrower with a FICO® Score of 630. That’s a savings of $75,960 over the life of the loan. On a $20,000, 48-month auto loan, the borrower with a FICO® Score of 720 could pay $131 less each month in interest as compared to a borrower with a FICO® Score of 580. That’s a savings of $6,288 over the life of the loan.

Even if a FICO® Score is poor, it can put more credit within your reach Because FICO® Scores allow lenders to more accurately associate risk levels with individual borrowers, they allow lenders to offer different prices to different borrowers. Rather than making strictly “yes-no” credit decisions and offering “one-size-fits-all” credit products, lenders use FICO® Scores to approve consumers who might have been declined credit in the past. Lenders are even able to provide higher-risk borrowers with credit that they are more likely to be able to manage. Remember, FICO® Scores provide a time-proven and tested numerical representation of information in your credit report. So it’s important to check your report for accuracy at all three major U.S. consumer reporting agencies. All U.S. consumers may request their free credit report each year from each CRA at www.AnnualCreditReport.com.



How FICO® Scores Work

A FICO® Score is calculated by a mathematical equation that evaluates many types of information in any of your credit reports at the time the request is made. By comparing this information to the patterns in millions of past credit reports, a FICO® Score provides lenders a consistent and reliable indication of your future credit risk. FICO® Scores most often fall within a 300-850 score range, while the alternative versions for FICO® Scores—the FICO® Industry Scores—range between 250 and 900. Some lenders use the FICO® Score NG, which will fall within a 150-950 range. Higher FICO® Scores are considered lower risk, and lower FICO® Scores indicate higher risk. When a lender receives a FICO® Score, key “score factors” are delivered with the score. These key score factors are the top factors that affected the score Each lender has its own standards for approving credit applications, including the level of risk it finds acceptable for a given credit product. There is no single “minimum FICO®

Score” used by all lenders. If you focus on keeping your FICO® Scores in the mid-700s or higher, you likely will qualify for favorable credit products and terms. FICO’s research shows that people with a high FICO® Score tend to:

• Make all payments on time each month • Keep credit card balances low • Apply for new credit only when needed • Establish a long credit history

What’s in FICO®

Scores: The 5 Key Ingredients

FICO® Scores take into consideration five main categories of information in a credit report. The chart below shows the relative importance of each category to FICO® Scores.



Below is a detailed breakdown of each category. As you review this information, keep in mind that:

• FICO® Scores take into consideration all of these categories, not just one or two. • The importance of any factor (piece of information) depends on the information

in your entire credit report. • FICO® Scores look only at the credit-related information on a credit report. • FICO® Scores consider both positive and negative information on a credit report.

1. Payment History Approximately 35% of a FICO® Score is based on this information, which includes:

• Payment information on many types of accounts: o Credit cards – such as Visa, MasterCard, American Express and Discover. o Retail accounts – credit from stores where you do business, such as

department store credit cards. o Installment loans – loans where you make regular payment amounts, such as

car loans and mortgage loans. o Finance company accounts.

• Public record and collection items – reports of events such as bankruptcies,

foreclosures, lawsuits, wage attachments, liens and judgments.

• Details on late or missed payments (“delinquencies”) and public record and collection items.

• The number of accounts that show no late payments or are currently paid as

agreed.

2. The Amounts You Owe Approximately 30% of a FICO® Score is based on information which evaluates indebtedness. In this category, FICO® Scores take into account:

• The amount owed on all accounts.

• The amount owed on different types of accounts. • The balances owed on certain types of accounts. • The number of accounts which carry a balance. • How much of the total credit line is being used on credit cards and other revolving

credit accounts. • How much is still owed on installment loan accounts, compared with the original

loan amounts.

Credit utilization, one of the most important factors evaluated in this category, considers the amount you owe compared to how much credit you have available. For example, if you



have a $2,000 balance on one card and a $3,000 balance on another, and each card has a $5,000 limit, your credit utilization rate would be 50%. While lenders determine how much credit they are willing to provide, you control how much you use. FICO’s research shows that people using a high percentage of their available credit limits are more likely to have trouble making some payments now or in the near future, compared to people using a lower level of credit. Having credit accounts with an outstanding balance does not necessarily mean you are a high-risk borrower with a low FICO® Score. A long history of demonstrating consistent payments on credit accounts is a good way to show lenders you can responsibly manage additional credit.

3. Length of Credit History Approximately 15% of a FICO® Score is based on this information. In general, a longer credit history will increase a FICO® Score, all else being equal. However, even people who have not been using credit long can get a good FICO® Score, depending on what their credit report says about their payment history and amounts owed. Regarding length of history, a FICO® Score takes into account:

• How long credit accounts have been established. A FICO® Score can consider the age of the oldest account, the age of the newest account and the average age of all accounts.

• How long specific credit accounts have been established.

• How long it has been since you used certain accounts.

4. New Credit Approximately 10% of a FICO® Score is based on this information. FICO’s research shows that opening several credit accounts in a short period of time represents greater risk—especially for people who do not have a long credit history. In this category a FICO® Score takes into account:

• How many new accounts have been opened. • How long it has been since a new account was opened. • How many recent requests for credit have been made, as indicated by inquiries to

the consumer reporting agencies. • Length of time since inquiries from credit applications were made by lenders. • Whether there is a good recent credit history, following any past payment

problems.

Looking for an auto, mortgage or student loan may cause multiple lenders to request your credit report, even though you are only looking for one loan. In general, FICO® Scores compensate for this shopping behavior in the following ways:

• FICO® Scores ignore auto, mortgage, and student loan inquiries made in the 30



days prior to scoring. So, consumers who apply for a loan within 30 days, the inquiries won’t affect the score while rate shopping.

• After 30 days, FICO® Scores typically count inquiries of the same type (i.e., auto, mortgage or student loan) that fall within a typical shopping period as just one inquiry when determining your score.

5. Types of Credit in Use Approximately 10% of a FICO® Score is based on this information. FICO® Scores consider the 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 a credit account you don’t intend to use. In this category a FICO®

Score takes into account:

• What kinds of credit accounts are on the credit report? Whether there is experience with both revolving (credit cards) and installment (fixed loan amount and payment) accounts, or has the credit experience been limited to only one type?

• How many accounts of each type exist? A FICO® Score also looks at the total number of accounts established. For different credit profiles, how many is too many will vary depending on the overall credit picture.

What FICO® Scores Ignore

FICO® Scores consider a wide range of information on a credit report. However, they do NOT consider:

• Race, color, religion, national origin, sex and marital status. U.S. law prohibits credit scoring from considering these facts, or considering any receipt of public assistance, or the exercise of any consumer right under the Consumer Credit Protection Act.

• Age. Other types of scores may consider age, but FICO® Scores do not. • Salary, occupation, title, employer, date employed or employment history.

Lenders may, however, consider this information separately. • Where the consumer lives. • Any interest rate being charged on a particular credit card or other account. • Any items reported as child/family support obligations. • Certain types of inquiries (requests for your credit report or score). FICO® Scores

do not count any inquiries initiated from checking one’s own credit report, any inquiries from employers or insurance companies, or any inquiries lenders make without the consumer’s knowledge. o Checking your own credit report and scores will never affect your FICO®

Scores. • Any information not found in the credit report.

• Any information that is not proven to be predictive of future credit performance.



Financial Health Management

How you manage your financial health over time is important. Read through the following information about financial health management.

Payment Due Dates

Timely bill payments are important In general, people who continually pay their bills on time and demonstrate a good payment history tend to appear less risky to lenders. On the other hand, late payments and collections can have a major impact on FICO® Scores. Also, note that closing an account on which you previously missed a payment, will not remove it from your credit report. The missed payment will stay on a report for seven years.

The quantity of late payments, and duration of being current on payments FICO® Scores are affected by the number of times payments are late, as well as the length of time that bills are paid on time (by their due dates). In addition, higher balances on past due accounts on a person’s credit reports generally represent greater the risk to lenders.

If you are having trouble paying your bills—sources for assistance In some cases creditors will work with their borrowers to modify payment structures to help borrowers make timely payments. In addition, non-profit credit counseling agencies can sometimes work with creditors to lower monthly payments.

Managing Accounts…

Keeping balances low High balances on your credit cards and other revolving credit can lower FICO® Scores. Likewise, a person with an installment loan balance that is high in relation to the original loan amount tends to be viewed as risky to lenders.

Credit card management In general, having credit cards doesn’t hurt FICO® Scores if payments are made on time. People without credit cards, for example, tend to be slightly higher risk than people who have shown they can manage credit cards responsibly.

Opening new cards While the available credit amount might increase, opening a new credit card could lower a FICO® Score. New accounts can lower the average time credit accounts have been established, which can lower a FICO® Score. Even if credit has been used for a long time, opening a new account can still lower a FICO® Score.

Closing credit cards Owing the same amount but having fewer open accounts may actually lower a FICO®

Score. Closing unused cards is fine, but keeping balances low on open accounts will avoid



negatively impacting a FICO® Score.

It’s OK to request and check your own credit report Every 12 months every consumer is entitled by law to one free credit report from each consumer reporting agency through www.AnnualCreditReport.com. Checking your own credit report will not harm your FICO® Scores.

When Seeking New Credit…

Rate shopping within a short period of time When looking for a mortgage, student loan or an auto loan, people often check with several lenders to find the best rate. This can cause multiple lenders to request their credit report(s), even though they’re only looking for one loan. These requests are referred to as inquiries, and in general, frequent inquiries indicate higher risk (and therefore could negatively impact a FICO® Score). However, FICO® Scores typically account for this rate shopping behavior by treating multiple inquiries from auto, mortgage, or student loan lenders within a short period of time as a single inquiry. Because of that, rate shopping within a reasonable shopping period will have less of an impact on a FICO® Score.

Monitoring the Score is Important

FICO® Scores are based on the information in the credit reports at one point in time and can change whenever credit report changes. But a FICO® Score probably won’t change much from one month to the next. However, certain events such as bankruptcy or late payments can lower a FICO® Score fast. That’s why it’s a good idea for consumers to check and monitor their FICO® Scores six to twelve months before applying for a big loan, so they can know their FICO® Scores and better understand how FICO® Scores work. For consumers who are actively working to improve their understanding of FICO® Scores, checking their scores quarterly or even monthly is appropriate.



Credit Inquiries and Their Effect on FICO® Scores

In some cases, but certainly not all, a search for new credit can mean a person poses a greater credit risk. This is why FICO® Scores count inquiries—requests a lender makes for your credit report or scores when you apply for credit. FICO® Scores consider inquiries very carefully, as not all inquiries are related to credit risk.

What is an “Inquiry”?

When you apply for credit, you authorize those lenders to ask or “inquire” for a copy of your credit report from a CRA. When you later check your credit report, you may notice that their credit inquiries are listed. You may also see listed there inquiries by businesses that you don’t know, such as lenders who have mailed you a credit card solicitation. The only inquiries considered by FICO® Scores are the ones that result from your applications for new credit.

How do They Affect FICO®

Scores?

FICO® Scores consider inquiries very carefully, as not all inquiries are related to credit risk. Typically, the presence of inquiries on a credit report has only a small impact on FICO® Scores, carrying much less importance than late payments, the amount owed, and the length of time a person has used credit. There are four important facts to know about inquiries:

• Inquiries usually have a small impact. For most people, one additional credit inquiry will take less than five points off their FICO® Score. Much more important for your score are factors like: how timely you pay your bills and your overall debt burden as indicated on your credit report.

• Many types of inquiries are ignored completely. FICO® Scores do not count

inquiries when you order your credit report or credit score. Also, FICO® Scores do not count inquiries a lender has made for your credit report or score in order to make you a “pre-approved” credit offer, or to review your account with them, even though you may see these inquiries on your credit report. Inquiries that are marked as coming from employers or insurers are not counted either. FICO®

Scores only consider inquiries that are a result of you applying for new credit.

• FICO® scoring models largely use specialized logic that accounts for rate shopping for student, auto and mortgage loans. In general, student loan, auto and mortgage-related inquiries that occur 30 days prior to scoring have little or no effect at all on FICO® Scores. If you were to shop for a car loan and home loan during the same shopping period, the auto loan inquiries would generally be counted as one inquiry, and the mortgage loan inquiries would be counted separately as another inquiry. This is because they represent two separate searches for credit.



In terms of the impact on FICO® Scores, it’s best to perform rate shopping in a reasonably short period.

• FICO® Scores consider inquiries less heavily as time passes, provided no new inquiries are added.

Minimizing the Impact of Inquiries on a Score

Shorter-period rate shopping. Generally, 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.

Opening new accounts. Opening new accounts can lower a FICO® Score in the short term.

Note that it’s OK to request and check your own credit reports and your FICO® Scores. This won’t affect your FICO® Scores, as long as you order your credit report directly from the consumer reporting agency or through an organization authorized to provide credit reports to consumers.



Myths Concerning FICO® Scores

Myth: All credit scores are the same

Truth: Not all credit scores are FICO® Scores. Because FICO® Scores are the most widely used credit scores—used in over 90% of lending decisions—they give you a more accurate look at how lenders will evaluate your credit risk when you apply for credit or a loan.

Myth: A FICO® Score Determines Whether or Not I Get Credit.

Truth: Lenders use a number of pieces of information about you and about the loan for which you are applying to make credit decisions, including your FICO® Scores. 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 analysis of this information, as well as their specific underwriting policies, lenders may extend credit to you even with a low FICO® Score, or decline your request for credit even with a high FICO®

Score.

Myth: A Poor FICO®

Score will Haunt Me Forever.

Truth: Just the opposite is true. FICO® Scores are indicators of a consumer’s risk at a particular point in time. Your FICO® Scores change as new information is added to your credit report and as historical information ages; your FICO® Scores change gradually as you change the way you handle credit. For example, past credit problems impact your FICO®

Scores less as time passes. Lenders request a current FICO® Score when you submit a credit application, so they have the most recent information available.

Myth: My FICO® Scores Will Drop if I Apply for New Credit.

Truth: If it does, they 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 indicate higher risk to a lender, but your FICO® Scores are not affected by multiple inquiries from auto, mortgage or student loan lenders within a short period of time. Typically, these are treated as a single inquiry and tend to have little impact on your FICO® Scores.



Myth: Credit Scoring Is Unfair to Minorities.

Truth: FICO® Scores consider 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 FICO® Scores are not unfair to minorities or people with little credit history. FICO® Scores have proven to be an accurate and consistent measure of repayment risk for all people who have some credit history.

Myth: Credit Scoring Infringes on My Privacy.

Truth: FICO® Scores evaluate the same information at which lenders already look—the credit report. A FICO® Score is a number that summarizes your credit risk based on a snapshot of your credit report information. Lenders using FICO® Scores may in fact ask for less information, for instance having fewer questions on the application form.



Glossary of Credit Terms

Adverse action notice A notice sent by a lender after denying a person’s request for credit based on information in the person’s credit report.

Balance The amount owed on a credit obligation.

Bankruptcy A proceeding in U.S. Bankruptcy Court that may legally release a person from repaying debts owed, or reduce the amount owed over a few years. Credit reports normally include bankruptcies for up to 10 years.

Charge-off A declaration by a lender, generally for tax purposes, that an amount of debt is unlikely to be collected, which can happen when a person becomes severely delinquent in repaying a debt. The lender reports to the consumer reporting agencies that it has taken a loss, but the borrower is still responsible for paying back the debt. Also known as a “write-off.”

Collection Attempted recovery of a past-due credit obligation by a lender’s collection department or a separate collection agency.

Consumer Reporting Agency (CRA) See credit bureau.

Credit account A specific lending arrangement between a creditor and borrower that provides the borrower with a loan or a revolving instrument such as a credit card, with an obligation to repay the creditor. Sometimes referred to as a credit obligation.

Credit bureau An agency that collects and stores individual credit information and sells it for a fee to creditors so they can make decisions on granting loans and other credit activities. Typical clients include banks, mortgage lenders and credit card issuers. Also commonly referred to as consumer reporting agency (CRA), credit reporting agency or credit repository. The three largest credit bureaus in the U.S. are Equifax, Experian and TransUnion.

Credit bureau risk score A credit score calculated by a credit bureau, based only on the credit history from the person’s credit report. FICO® Scores are the leading brand of credit bureau risk scores.

http://www.investopedia.com/terms/c/creditbureau.asp



Credit file The credit records at a credit bureau regarding a given individual. The file may include: the person’s name, address, Social Security Number, credit history, inquiries, collection records, and public records such as bankruptcy filings and tax liens.

Credit history A record of a person’s credit accounts and activities, including how the person has repaid credit obligations in the past.

Credit limit The amount of credit that a financial institution extends to a borrower. Credit limit also refers to the maximum amount a credit card company will allow someone to borrow on a single card. Credit limits are usually determined based on the applicant’s FICO® Score and information contained in their credit application.

Credit obligation See credit account.

Credit report A detailed report of an individual’s credit history as stored in an individual’s credit file, prepared by a credit bureau and used by a lender when making credit decisions. Most credit reports include: the person’s name, address, credit history, inquiries, collection records, and any public records such as bankruptcy filings and tax liens.

Credit risk The likelihood that individuals will not pay their credit obligations as agreed. Borrowers who are more likely to pay as agreed pose less risk to creditors and lenders.

Credit score A statistically-derived number that provides a snapshot of a person’s credit risk. FICO® Scores are credit scores and rank-ordering tools—higher scores will correspond to better credit risk than lower scores. Credit risk is the likelihood that the person, compared to other people, will default on a credit obligation. A credit score is usually based only on a person’s past and current credit information. Lenders use the scores when making credit decisions at different points in a person’s credit lifecycle.

Default When a debtor (or borrower) is unable or unwilling to meet the legal obligation of debt repayment. Usually an account is considered to be “in default” after being delinquent for several consecutive 30-day billing cycles.

Delinquent A failure to deliver even the minimum payment on a loan or debt payment on or before the time agreed. Because most lenders have monthly payment cycles, they usually refer to such accounts as 30, 60, 90 or 120 days delinquent.



Equal Credit Opportunity Act (ECOA) Federal legislation that prohibits discrimination in credit. The ECOA originally was enacted in 1974 as Title VII of the Consumer Credit Protection Act.

Fair Credit Reporting Act (FCRA) Federal legislation that promotes the accuracy, confidentiality and proper use of information in the files of every “consumer reporting agency”. The FCRA was enacted in 1970.

FICO FICO, formerly known as Fair Isaac Corporation, is the company that invented FICO® Scores. Starting in the 1950s, FICO sparked a revolution in credit risk assessment by pioneering credit risk scoring for credit grantors. This new approach to measuring risk enabled banks, retailers and other businesses to improve their performance and to expand consumers’ access to credit. Today, FICO® Scores are widely recognized as the industry standard for measuring credit risk.

FICO® Industry Score

A type of FICO® Score offered by all three U.S. consumer reporting agencies—Equifax, Experian and TransUnion—that ranges from 250 to 900 and is used by some lenders to address specific types of lending products, such as auto loans or credit cards.

FICO® Scores

Credit bureau risk scores produced using scoring models developed by FICO. FICO® Scores are used by lenders and others to assess the credit risk of prospective borrowers or existing customers, in order to help make credit and marketing decisions. FICO® Scores only use credit report information that has proven to be predictive of credit risk. FICO® Scores are available through all three major U.S. consumer reporting agencies (credit bureaus).

FICO® Score NG

A type of FICO® Score offered by all three U.S. consumer reporting agencies—Equifax, Experian and TransUnion—that ranges from 150 to 950 and is used by some lenders.

Inquiry An item on a person’s credit report indicating that someone with a “permissible purpose” (under FCRA rules) has previously requested a copy of the person’s credit report or credit score. FICO® Scores only consider inquiries by lenders resulting from a person’s application for credit; all other inquiries are ignored.

Installment debt Debt to be paid back at regular intervals over a specified period. Examples of installment debt include most mortgages and auto loans. Sometimes referred to as an “installment account” or an “installment loan.”

Late payment A failure to deliver a loan or debt payment on or before the due date. Also see Delinquent.

http://www.fico.com/



Permissible purpose The Fair Credit Reporting Act (FCRA) prohibits a consumer reporting agency (credit bureau) from furnishing an individual’s consumer report unless there is a permissible purpose. Permissible purposes include the use of the consumer report in connection with a credit or insurance transaction, for employment purposes, and for account review. The consumer reporting agency may also furnish a consumer report if a consumer gives his or her consent.

Revolving credit/debt A line of credit that the borrower can repeatedly use and pay back without having to reapply every time credit is used. Bank credit cards are the most common type of revolving credit account. Other types include department store cards and travel charge cards.

Risk-based pricing The practice of setting credit terms, such as interest rate or credit limit, based on a person’s credit risk is referred to as risk-based pricing. Creditors that engage in risk-based pricing generally offer more favorable terms to borrowers with good FICO® Scores and less favorable terms to borrowers with poor FICO®

Scores.

Score The numeric output from a predictive scoring model. The most common type of score used by lenders is a credit risk score such as a FICO® Score. Also see Credit score.

Score factors Delivered with a consumer’s FICO® Score, these are the top areas that affected that consumer’s FICO®

Scores. The order in which the score factors are listed is important. The first factor indicates the area that most influenced the score and the second factor is the next most significant influence. Addressing some or all of these score factors can benefit the score.

Scoring model A mathematical formula or statistical algorithm used to predict certain behaviors of prospective borrowers or existing customers relative to other people. A scoring model calculates scores based on data such as information on a consumer’s credit report that has proven to be predictive of specific consumer behaviors.

Utilization The proportion of the balance owed on revolving accounts divided by the available credit limit(s). Utilization is an input used in determining a person’s credit score. Typically it is the amount of outstanding balances on all credit cards divided by the sum of their credit limits, and it’s expressed as a percentage. For example, if you have a $2,000 balance on one card and a $3,000 balance on another, and each card has a $5,000 limit, your credit utilization rate would be 50%. This ratio may also be calculated for each credit card individually.

Write-off See Charge-off.

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