Credit Scores

Learn what credit and FICO scores are, how they are calculated, and how to improve them.

Everyone has a number of credit scores: numerical calculations that are supposed to indicate the risk that you will default on credit payments. The higher your score, the less likely you are to default, and therefore the better the credit risk. The most commonly known credit score is the FICO score.

Credit scoring companies (like Fair Isaac, which produces the FICO score) calculate credit scores based on information in your credit report.  Credit scores are used by credit card companies, home equity lenders, auto loan lenders, and finance companies when you apply for credit or a loan. A low score can affect your ability to get a credit card or loan or convince lenders to charge you higher interest.

How Your Credit Score is Calculated

There are a variety of companies that sell credit scores. The largest and most ubiquitous is Fair Isaac Corporation ("FICO"). Although FICO won't reveal exactly how it determines a credit score, it considers the following factors (the approximate weight it assigns to each factor is in parentheses):

Payment history (35%). Your score is negatively affected if you have paid bills late, had an account sent to collection, or declared bankruptcy. The more recent the problem, the lower your score.

Outstanding debt (30%). If the amount you owe is close to your credit limit, that is likely to have a negative effect on your score. Also, if you carry a balance on a number of accounts, that might lower your score because it looks like you're overextended.

Length of your credit history (15%). The longer your accounts have been open, the better.

New credit (10%). If you have recently applied for many new accounts, that may negatively affect your score. (Promotional inquiries don't count.)

Types of credit in use (10%). FICO says it's looking for a "healthy mix" of different types of credit, both revolving and installment accounts. This factor is important only if there isn't a lot of other information to use in determining your score.

Although this is a good guide as to what credit scoring companies deem important, keep in mind that some companies may consider different factors.

What the Numbers Mean

FICO scores range from 300 to 850. According to Equifax, the majority of credit scores fall within the 600s to 700s. According to the model, as your score increases, your risk of default decreases.

If your score is far below average, you may have a hard time convincing a creditor to make you an affordable loan (or any loan at all). But just as your credit history can vary from credit bureau to credit bureau, so can your credit scores. It is possible to have a fairly high score with one credit reporting agency (Equifax, Experian, or TransUnion) and a somewhat lower score with another, just as you might have a clean credit history with one bureau and a muddied record with another. For more on the credit reporting agencies and your credit report, see Credit Report Basics.

To learn how to get your credit score, see the articles in Credit Reports & Credit Scores.

How to Improve Your Credit Score

If you want to improve your credit score, Fair Isaac offers these tips:

  • Pay your bills on time.
  • Make up missed payments and keep all your payments current.
  • Maintain low balances on credit cards and other "revolving debt."
  • Pay off debt rather than transferring it to a new account.
  • Don't close unused credit card accounts just to raise your credit score.
  • Don't get new credit cards that you don't need just to increase the credit available to you.

Finally, don't give up hope just because you have a low score. If you think there are mistakes on your credit report, you can get a copy of the report, fix the problem, and explain the situation to the lender. For more information, see  How to Clean Up Your Credit Report. Some lenders may override credit scores if they think you are a good risk despite problems with your score. And you can always take steps to rebuild your credit.

For more information on repairing your credit record and improving your credit score, get Credit Repair, by Robin Leonard (Nolo).

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