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Credit Score FAQ
Frequently asked questions about credit scores
Ever wonder how a creditor decides whether to grant you credit? Here is some information that might help you understand how the credit process works.
- So what is credit scoring?
- What is a credit score?
- Why is credit scoring used?
- What's in a score?
- How is a credit scoring model developed?
- How reliable is the credit scoring system
- What if I do not receive a credit score?
- What is the credit score range?
- What's a good score?
- How does my credit score affect me?
- How often does my credit score change?
- Do late payments affect my credit score?
- Do inquiries affect my credit score?
- Does co-signing a loan affect my credit score?
- What can I do to improve my score?
- What happens if I am denied credit or don’t get the terms I want?
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Simply put, credit scoring is a method of assessing the credit risk of a loan applicant. It uses mathematical models to evaluate a person's credit worthiness based on their credit history and current credit accounts. Creditors use it to help determine whether to give you credit. It also may be used to help decide the terms you are offered or the rate you will pay for the loan.
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A credit score, calculated from variables in your credit report and other factors determined by the lending institution, is a rating tool used by lenders to gauge an individual's creditworthiness.
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Credit scoring is based on real data and statistics, so it usually is more reliable than subjective or judgmental methods. It treats all applicants objectively. Judgmental methods typically rely on criteria that are not systematically tested and can vary when applied by different individuals
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Credit scores are reported as a number, usually in the 300 to 900 range. The higher the number, the better the score. Creditors see the number as an indicator that an individual will repay a loan. Typically, scores are determined by reviewing the following data:
Personal details such as race, gender and religion are definitely not considered when determining your score. It's also worth noting that each major credit bureau has its own method for calculating credit scores. However, the scoring models have been fairly well standardized so that a "600" score at one bureau is roughly the equivalent to the same score at another.
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How is a credit scoring model developed?
To develop a model, a creditor selects a random sample of its customers, or a sample of similar customers if their sample is not large enough, and analyzes it statistically to identify characteristics that relate to creditworthiness. Then, each of these factors is assigned a weight based on how strong a predictor it is of who would be a good credit risk. Each creditor may use its own credit scoring model, different scoring models for different types of credit, or a generic model developed by a credit scoring company.
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How reliable is the credit scoring system
Credit scoring systems enable creditors to evaluate millions of applicants consistently and impartially on many different characteristics. But to be statistically valid, credit scoring systems must be based on a big enough sample. Remember that these systems generally vary from creditor to creditor.
Although you may think such a system is arbitrary or impersonal, it can help make decisions faster, more accurately, and more impartially than individuals when it is properly designed. And many creditors design their systems so that in marginal cases, applicants whose scores are not high enough to pass easily or are low enough to fail absolutely are referred to a credit manager who decides whether the company or lender will extend credit. This may allow for discussion and negotiation between the credit manager and the consumer. -
What if I do not receive a credit score?
A credit score can't be generated if there's no information in a credit report, so individuals with little or no credit history will generally not have a score.
To remedy this situation, consider applying for a retail, gas or secured credit card to establish credit. Then keep your debt low and pay your bills on time to establish your credit history on a positive note. -
What is the credit score range?
Credit scores range from 350 to 850 — a higher number represents a stronger financial position.
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Overall, a score of 650 or above is a sign of good credit. People with scores of 650 or higher will, all things considered, have a good chance of obtaining quality loans at the best interest rates.
Scores of 620 to 650 indicate good credit, but also may point to potential trouble areas that creditors will want to look at and review. A lender may require additional documentation before a loan will be approved.
With scores of below 620, consumers may find that they can still obtain a loan. However, the process will be lengthier and more involved, as creditors consider scores below this threshold to be an indicator of greater credit risk.
Plus, get personalized tips and analysis that can help you improve your credit rating. -
How does my credit score affect me?
Credit scores, calculated from such information in your credit file as total debt, types of accounts, number of late payments, age of accounts, and number of inquiries, give lenders a subjective rating of your creditworthiness. Lenders then consider this rating when deciding whether or not to extend you credit. It's in your best interest, therefore, to keep your credit as robust as possible so you can secure favorable rates and terms. If your credit score is weak, you can often strengthen it by minimizing outstanding debt, avoiding overextension, and limiting new credit applications.
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How often does my credit score change?
Your credit score fluctuates as often as information in your credit file changes.
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Do late payments affect my credit score?
Yes, late payments negatively affect your score — paying your bills on time is the single most important contributor to a good credit score
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Do inquiries affect my credit score?
It depends on the type of inquiry. Inquiries for marketing purposes do not affect your score. These include consumer requests for a credit report, lenders using credit information to review an account, or a potential employer looking over someone's credit. Inquiries initiated by the consumer, such as mortgage, auto loan and credit card applications, however, do affect your score because studies have shown that too many are a red flag for credit risk. Inquiries do not weigh as heavily, however, as past payment history or number of delinquent accounts.
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Does co-signing a loan affect my credit score?
Yes. Any loan or credit card account affects your score.
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What can I do to improve my score?
Credit scoring models are complex and often vary among creditors and for different types of credit. If one factor changes, your score may change — but improvement generally depends on how that factor relates to other factors considered by the model. Only the creditor can explain what might improve your score under the particular model used to evaluate your credit application.
Nevertheless, scoring models usually consider the following types of information in your credit report to help compute your credit score:
Have you paid your bills on time? You can count on payment history to be a significant factor. If your credit report indicates that you have paid bills late, had an account referred to collections, or declared bankruptcy, it is likely to affect your score negatively.
Are you maxed out? Many scoring systems evaluate the amount of debt you have compared to your credit limits. If the amount you owe is close to your credit limit, it’s likely to have a negative effect on your score.
How long have you had credit? Generally, scoring systems consider the length of your credit track record. An insufficient credit history may affect your score negatively, but factors like timely payments and low balances can offset that.
Have you applied for new credit lately? Many scoring systems consider whether you have applied for credit recently by looking at “inquiries” on your credit report. If you have applied for too many new accounts recently, it could have a negative effect on your score. Every inquiry isn’t counted: for example, inquiries by creditors who are monitoring your account or looking at credit reports to make “prescreened” credit offers are not considered liabilities.
How many credit accounts do you have and what kinds of accounts are they? Although it is generally considered a plus to have established credit accounts, too many credit card accounts may have a negative effect on your score. In addition, many scoring systems consider the type of credit accounts you have. For example, under some scoring models, loans from finance companies may have a negative effect on your credit score.
Scoring models may be based on more than the information in your credit report. When you are applying for a mortgage loan, for example, the system may consider the amount of your down payment, your total debt, and your income, among other things.
Improving your score significantly is likely to take some time, but it can be done. To improve your credit score under most systems, focus on paying your bills in a timely way, paying down any outstanding balances, and staying away from new debt.
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What happens if I am denied credit or don’t get the terms I want?
If you are denied credit, the ECOA requires that the creditor give you a notice with the specific reasons your application was rejected or the news that you have the right to learn the reasons if you ask within 60 days. Ask the creditor to be specific: Indefinite and vague reasons for denial are illegal. Acceptable reasons might be “your income was low” or “you haven’t been employed long enough.” Unacceptable reasons include “you didn’t meet our minimum standards” or “you didn’t receive enough points on our credit scoring system.” Learn more about your credit denial.
