A credit score is a number lenders use to help them decide: "If I give this person a loan or credit card, how likely is it I will get paid back on time?"
Credit scores are also called risk scores because they help lenders predict the risk that you will not be able to repay the debt as agreed.
Scores are generated by statistical models using elements from your credit report, and sometimes from other sources, such as your credit application. However, scores are not stored as part of your credit history. Rather, scores are generated at the time a lender requests your credit report and then included with the report.
Credit scores are fluid numbers that change as the elements in your credit report change. For example, payment updates or a new account could cause scores to fluctuate. Scores 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.
What's in a credit score?
The information that impacts a credit score varies depending on the score being used. Credit scores are only affected by elements in your credit report, such as:
- Number and severity of late payments
- Type, number and age of accounts
- Total debt
- Recent inquiries
Credit scores do not consider your:
- national origin
- marital status
U.S. law prohibits credit scoring from considering these facts, as well as any receipt of public assistance, or the exercise of any consumer right under the Consumer Credit Protection Act.
Why lenders use Credit Scores
Credit scores came into wide use in the 1980s. 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.
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 status.
Credit Score Factors
Score factors are the elements from your credit report that drive credit scores and indicate what elements of your credit history most affected the credit score at the time it was calculated. For example, your total debt, types of accounts, number of late payments and age of accounts affect credit scores.
Score factors are the key to improving risk scores. They tell you what you must address in your credit history to become more creditworthy over time.
Lenders must provide consumers with the most significant score factors when they are declined credit.
Check your Credit
Whenever you apply for a new credit card, loan or extension of credit, the potential lender will most likely review your credit report before making a decision. You should too! Check it several weeks or even months prior to making a large credit purchase.
- Get an easy-to-read summary of your credit accounts and total debt - both existing balances and available limits.
- Budget and plan for the future.
- Assure the accuracy of the information reported about your credit. This is especially important when you're getting ready to buy an expensive item such as a car or new home
How to correct errors on your report
Federal law allows consumers to challenge inaccuracies and correct their credit files, and you are encouraged to dispute incorrect data. There is no fee. If you believe there is an error on your report, dispute it online for fast resolution. We will verify your dispute with the source of the data and receive a response within 30 days.
Free Credit Report
Request a free credit report to review your credit accounts and identify any inaccuracies. The federal Fair and Accurate Credit Transactions Act (FACT Act) requires each of the three consumer reporting companies to provide a free copy of your credit report, at your request, once every 12 months.
To Order Your Free Report:
Visit www.AnnualCreditReport.com or call 877-322-8228
Tips for Using Credit
When you are extended a line of credit, use it, but use it carefully. Be certain your account is reported to a credit reporting agency. Most importantly, make your payments on time.
Set up a budget and stick to it. You need to be aware of how much debt you already have and how much you are adding to that debt by buying with credit.
Once you have signed a credit agreement, you are responsible for it unless the creditor agrees to release you from the agreement. That not only includes credit cards or installment loans, but also health club agreements and cellular telephone contracts, even if you stop using the service. Remember also that a divorce decree does not release you from responsibility for joint accounts.
Protect yourself from credit fraud. Treat your credit cards like cash. Sign them as soon as you get them. Don't leave them lying around. Shred receipts that have your account number on them and do the same with credit offers you receive in the mail but choose not to accept.
Look over your credit report once a year. Reviewing your report will ensure that your accounts are being reported correctly.
Supercharge your Credit
Scores reflect credit payment patterns over time with more emphasis on recent information. In general, a score may improve, if you:
- Pay your bills on time.
Delinquent payments and collections can have a major negative impact on a score.
- Keep balances low on credit cards and other "revolving credit."
High outstanding debt can affect a score.
- Apply for and open new credit accounts only as needed.
Don't open accounts just to have a better credit mix - it probably won't raise your score.
- Pay off debt rather than moving it around.
Also, don't close unused cards as a short-term strategy to raise your score. Owing the same amount but having fewer open accounts may lower your score. Review your credit report regularly so you know what is being reported. It won't affect your score to request and check your own credit report.
- Items that make scores better
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 refrain from 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. It may be to your advantage to 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 public record item (e.g., bankruptcy), or too many inquiries, you may want to pay your bills and wait. Time is your ally in improving credit. There is no quick fix for bad credit.
Any change to your credit report could affect your score. Simply closing two accounts not only lowers the number of open installment accounts (which generally will improve your score) but it also lowers the total number of all open accounts (which generally lowers your score). Furthermore, such an action will affect the average age of all accounts that could either raise or lower your score. As you can see, one seemingly simple change actually affects a large number of items on the credit report. Therefore, it is impossible to provide a completely accurate assessment of how one specific action will affect a person's credit score. This is why the score factors are important. They identify what elements from your credit history are having the greatest impact so that you can take appropriate action.
Actually, you don't rebuild scores. You rebuild your credit history, which is then reflected by credit scores. The length of time to rebuild your credit history after a negative change depends on the reason behind the change. Most negative changes in scores are due to the addition of a negative element to your credit report such as a delinquency or collection account. These new elements will continue to affect your scores until they reach a certain age. Delinquencies remain on your credit report for seven years. Most public record items remain on your credit report for seven years, although some bankruptcies may remain for 10 years and unpaid tax liens remain for 15 years. Inquiries remain on your report for two years.