What is a credit score?
A credit score is a number that reflects your credit risk level, typically with
a higher number indicating lower risk. It is generated through statistical
models using elements from your credit report; however, your score is not
physically stored as part of your credit history on the credit file. Rather, it
is typically generated at the time a lender requests your credit report, and is
then included as part of the report. Your credit score is a fluid number, and it
changes as the elements in your credit report change. For example, payment
updates or a new account could cause your score to fluctuate. There are many
different credit scores used in the financial service industry. Your score may
be different from lender to lender (or from car loan to mortgage loan),
depending on the type of credit scoring model that was used.
Why are credit scores used?
Before credit scores, lenders physically looked over each applicant's credit
report to determine whether to grant credit. A lender might deny credit based on
a subjective judgment that a consumer already held too much debt, or had too
many recent late payments. Not only was this time consuming, but human judgment
was prone to mistakes and bias. Lenders used personal opinion to make a decision
about an applicant that may have had little bearing on the applicant's ability
to repay debt. Credit scores help lenders assess risk more fairly because they
are consistent and objective. Consumers also benefit from this method. No matter
who you are as a person, your credit score only reflects your likelihood to
repay debt responsibly, based on your past credit history and current credit
Who uses credit scores and how are they used?
Banks, credit card companies, auto dealers, retail stores, and most other
lenders use scores to quickly summarize a consumer's credit history, saving the
need to manually review an applicant's credit report and provide a better,
faster risk decision. Although many additional factors are used in determining
risk, such as an applicant's income vs. the size of the loan, a credit score is
a leading indicator of one's basic creditworthiness.
What information impacts my credit score?
The information that impacts a credit score varies depending on the score being
used. Generally, credit scores are affected by elements in your credit report,
Credit bureau-based scores, like those generated by Experian, cannot use
demographics prohibited under the Equal Credit Opportunity Act, such as race,
color, religion, national origin, gender, age, marital status, receipt of public
assistance or exercise of rights under Consumer Credit Protection Act. Scores
used by individual lenders may use such elements as income, occupation, and type
of residence in determining their own custom credit score.
- Number and severity of late payments
- Type, number and age of accounts
- Total debt
- Recent inquiries
Credit scoring 101
History of credit scores
Credit scores became widely used in the 1980's. Long before credit scores, human
judgment was the sole factor in deciding who received credit. Lenders used their
past experience at observing consumer credit behavior as the basis for judging
new consumers. Not only was this a slow process, but it was also unreliable
because of human error. Lenders eventually began to standardize how they made
credit decisions by using a point system that scored the different variables on
a consumer's credit report. This point system helped to eliminate much of the
bias that previously existed; however, it was still tied to intuitive measures
of credit worthiness and was not based on actual consumer behavior. Credit
granting took a huge leap forward when statistical models were built that
considered numerous variables and combinations of variables. These models were
built using payment information from thousands of actual consumers, which made
scores highly effective in predicting consumer credit behavior. When combined
with computer applications, scoring models have made the credit granting process
extremely fast, efficient and objective, facilitating commerce and helping
consumers quickly get the credit they need.
The credit modeling process
Designers of credit scoring models review a set of consumers - often over a
million - who opened loans at the same time, and determine who paid their loan
and who did not. The credit profiles of the consumers who defaulted on the loans
are examined to identify common variables they exhibited at the time they
applied for the loan. The designers then build statistical models that assign
weights to each variable, and these variables are combined to create a credit
score. Models for specific types of loans, such as auto or home, more closely
consider consumer payment statistics related to these loans. Model builders
strive to identify the best set of variables from a consumer's past
credit history that most effectively predict future credit behavior.
In determining credit scores, lenders place you in a risk category that compares
you to a large number of consumers with similar credit histories. This allows
lenders to compare "apples to apples," ensuring that your credit
behavior is judged in a context that is relevant and fair. For example,
consumers with brief credit histories and only a few accounts are not compared
to consumers with long-established credit histories. Rather, these consumers
will be compared to other consumers who also have brief credit histories. Keep
in mind that the attributes of your risk category (i.e. number of accounts,
total debt, etc.) may not have the same impact to a credit score for consumers
in another risk category.
What are score factors?
Score factors are the elements from your credit report that drive your credit
score. For example, such elements as your total debt, types of accounts, number
of late payments and age of accounts are what determine the outcome of your
credit score. Score factors can have a positive or negative affect on your
credit score. Lenders must provide consumers with the most significant score
factors when they are declined credit. With a subscription to CreditExpert
Credit ManagerSM, our online credit management service, you can
view the negative and positive score factors that drive your PLUS score. In
addition, CreditExpert Credit ManagerSM provides score factor advice
on how to improve or maintain your credit.
Your credit score
How can I see my credit score?
Lenders, especially mortgage lenders, often make credit scores available to
consumers during the loan process, although they are under no obligation to do
so. However, there is a good possibility that consumers will soon have the
benefit of new disclosure laws concerning credit scores. For example, the state
of California recently passed a law that will obligate mortgage lenders to
reveal credit scores to loan applicants beginning in July 2001. Industry
analysts expect other states to follow suit. To get unlimited access to your
PLUS score, credit report and analysis tools right now, sign up for CreditExpert
Credit Manager, our online credit management service.
Why don't I have a credit score? Credit scoring models cannot
generate a score without sufficient credit information. If you have little or no
credit history, you will probably not have a credit score available. If you have
never had a credit account, try applying for a retail, gas or secured credit
card to begin your credit history. Keep your outstanding debt low and pay your
bills on time. Before long you will be receiving additional offers for credit.
However, be cautious to only apply for credit that you really need.
How do I improve my credit score?
Paying your bills on time is the single most important contributor to a good
credit score. Even if the debt you owe is a small amount, it is crucial that you
make payments on time. In addition, you should minimize outstanding debt, avoid
overextending yourself and applying for credit needlessly. Applications for
credit show up as inquiries on your credit report, indicating to lenders that
you may be taking on new debt. Use the credit you already have to prove your
ongoing ability to manage credit responsibly. If you do have negative
information on your credit report, such as late
payments, a bankruptcy,
record item or too many inquiries,
your best strategy is to pay your bills and wait. Time is often your best ally
in improving credit.
Managing score factors
If you are declined credit, a lender must notify you of the top reasons why. Pay
careful attention to these factors and manage your credit accordingly. For
example, if you have been declined credit because of high outstanding balances,
chances are other lenders will feel the same way.
How often does my credit score change?
Your credit score is a fluid number that changes as your credit report changes.
Therefore, any change to your credit report could impact your score.
How do my spouse or other family members affect my credit?
If you hold a joint credit account, have co-signed a loan or have authorized use
of another person's credit, these items could affect your score if they appear
on your credit report. It's important that joint account holders or authorized
users understand that their credit behavior does affect the other joint account
holder or main account holder. A credit account held solely in the name of your
spouse, child or any other family member cannot impact your credit score.
However, in community property states, all debt acquired during a marriage is
considered a joint debt, regardless if the account is joint or in the name of an