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What is A Credit Score and How Is It Used?

Has your credit application been denied because your credit score is too low? Learn about scores and how to improve yours.

Creditors use credit scores, or risk scores, to indicate a borrower's creditworthiness. Your financial attributes are used in a formula that calculates the likelihood you'll repay your debts. Creditors look at how people with similar information repay their debts, and assess the possibility that any given borrower will default on a loan. The higher the score, the lower the risk for the creditor.

Where Does Your Credit Score Come From?

Credit scores are based on statistical models developed by Fair, Isaac and Co., a financial services company founded in 1956. Also known as a FICO score, this evaluation of your credit uses five types of information:

  • The amount of debt you are carrying. If you owe a lot of money, it lowers your credit score. Being close to the limits on your credit cards lowers your credit score as well as having a large balance remaining on an installment loan.

  • The length of time you have been using credit. If your use of credit is recently established, your credit score is lower.

  • Recent opening of new credit accounts. Having several new credit accounts can lower your credit score. If there are numerous credit inquiries on your credit report, it may give you a lower credit score, as it shows you've been shopping for credit.

  • Your payment history. Charge-offs, foreclosures, judgments, or bankruptcies on your credit record lower your credit score. Late payments bring down your credit score. On the other hand, do not think that paying off and closing credit accounts will improve your credit score. It is best to pay off an account and leave it open with a zero balance, because it adds positive information to your credit history.

  • Types of credit. Using secured credit cards or borrowing from finance companies can lower your credit score. Having too many revolving accounts can lower your credit score. In some cases, using the services of a credit counseling or debt management agency can lower your credit score. Although it has been several years since Fair, Isaacs revised its formulas to ignore the use of credit counselors, your score could still be lowered if your creditors are reporting your payments as late because of a reduced amount agreed to with the credit counseling or debt management agency.

FICO scores range from 300 to 850. If you have a high FICO score that is greater than 700, you will qualify for lower interest rates on loans and charge accounts.


It may sound like credit scores are used to keep you from getting the credit you desire. In reality, there are benefits to the credit scoring system, including:

  • Credit scores are based on the same criteria for everyone.

  • More credit is available to more people at lower rates.

  • Having a low credit score doesn't necessarily mean you'll be turned down, but the offers you receive may include higher interest rates.

  • Higher loan amounts are being given out because creditors feel confident that credit scoring can accurately predict default risk.

  • Credit scores can allow for faster credit decision.

Multiple Inquires Can Mean Trouble

When you're looking for a new home or car, it's not uncommon to shop around for the best interest rates on a mortgage or auto loan. Doing this can result in many credit inquires on your credit report.

Don't worry; having multiple credit inquiries as a result of shopping for a mortgage or auto loan is taken into account when calculating your credit score because:

  • Multiple inquiries in a 14-day period count as one inquiry toward your credit score.

  • Any inquiries in the last 30 days don't figure into the calculation of your credit score.

These two points apply only to mortgages and auto loans, not to credit cards. It's easy to create a lot of credit inquiries when shopping online for credit. If you provide your social security number to a creditor, chances are your credit report will be pulled, and an inquiry will be placed on it. An increased number of inquiries may result in a lower credit score. For more information about credit scoring, see the Privacy Rights Clearinghouse article Your Credit Score: How It All Adds Up.

Is it Legal?

Credit scoring is legal; however, creditors must follow specific guidelines. The Equal Credit Opportunity Act standardizes the credit application process, and requires that creditors base credit decisions on credit data and not on such things as race, age, or gender.

Can You Find Out Your Score?

If you know your credit score, you'll understand how creditors evaluate you when deciding to grant you credit. So how do you find out what it is? Under the Fair Credit Reporting Act, you have the right to know your credit score. See the U.S. Federal Trade Commission article A Summary of Your Rights Under the Fair Credit Reporting Act.

Your credit score is weighted according to each of the five categories outlined above. Specifically:

  • Payment timeliness – 35%

  • Amount of debt (ratio of balances owed to total available credit) – 30%

  • Length of time using credit – 15%

  • New credit accounts or recent credit inquiries – 10%

  • Types of credit (credit cards, installment loans) – 10%

Obtaining your credit score is not usually free, unlike getting a copy of your credit report, which you are entitled to have free once a year. To order a copy of your FICO score, visit the Fair, Isaac Corporation website MyFICO.com or you can visit the websites of the major credit reporting agencies (Equifax, Experian, or TransUnion) to order combined packages of credit reports and credit scores. Otherwise, you can make a free approximation of your credit score by using the Bankrate.com FICO Score Estimator.

The major credit reporting agencies use their own variations of the FICO score: Equifax calls it the Beacon FICO score; TransUnion names it the Empirica credit score; and Experian has the Experian/Fair, Isaac Risk Model. Regardless of the name, they are all FICO scores, but the credit bureaus might list different FICO scores for you. This could be due to differences in how each agency compiles its credit report, or there might be errors in one agency's credit report that do not appear in the others.


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