A credit score is a rating used by lenders to: determine your credit worthiness (the likelihood that you’ll fail to pay as agreed during the next 2 to 3 years), how much credit to lend and at what rate to lend it. Typically, credit scores range from 300 to 850.  The higher the score, the less risk you represent.

History of credit scores

Credit scoring systems became prevalent in the 1960s and involved solely using human judgment to determine the granting of credit.  Due to the slowness of this process and the subjective nature of manually reviewing every credit report, lenders began to standardize the methods used in determining how they made credit decisions.

During the 1980s, Fair, Isaac, and Company developed a statistical model (the FICO® score) allowing a more accurate prediction of the risk a lender faces in granting credit.  This model evaluates the information from your credit report and then compares that information to patterns found in hundreds of thousands of other consumers.  Being more objective and more efficient, this method is now widely used.

Types of Credit Scores

While the most commonly used credit score method is the FICO® method (used by over 70% of creditors), there are many different methods used; therefore, your credit score may vary from lender to lender.

How are credit scoring models developed?

Lenders create their models using several criteria:

• Selecting a large sampling of customers
• Analyzing the data in their credit reports to determine which factors relate to creditworthiness
• Assigning a degree of importance to each factor, based on how accurate a predictor it is in determining who will repay their debt on time

Your credit score is only one factor that a lender will use in making these decisions.  Lenders may try to get a “bigger picture” by looking at your credit report, the information that you provided on your credit application, and even possibly their current relationship with you.  Each lender will have its own guidelines on granting credit, so it never hurts to ask about their policies!

Because credit scores fluctuate as the items in your credit report change, they are generated only when a lender requests your credit report and are not stored as part of your credit history.  (For example, payments or new accounts could cause your score to change.) Your score from two months ago will not be the same score that you would receive today, in most cases.

You may not have a credit score if any of the following conditions exists:

• Your credit report does not contain at least one account
• A remark on your account references a person who is deceased
• Your social security number matches a number in the Social Security Administration’s “Death Claim Index”

How scores are calculated

Lenders create models by reviewing a set of consumers, examining their credit profiles and identifying common variables.  Using this information, they build statistical models that assign weights to each variable.  Lenders then combine these weights to create a credit score.

Thousands of credit-scoring models are in use in the credit industry.  Different models will consider different variables for different types of credit.  For example, an auto loan would more closely consider payment statistics related to auto loans.

Generally, positive credit characteristics will make your score higher and help you to qualify for loans and better interest rates.  Negative characteristics will make your score lower and interfere with your ability to get the best loans/rates.

What Affects a Credit Score?

Although many different scoring models exist, most use the following factors, though their importance in each model may vary:

• Payment History: late payments on past and current accounts will lower your score, while payments made on time will boost your score
• Public Records: collection items, bankruptcies, and judgments will lower your score
• Amounts Owed: balances over 50% of your credit limits will lower your score, aim for balances that are less than 30% of your credit limit
• Length of Credit History: the longer the history, the better
• New Accounts: opening multiple new accounts in a short period of time may lower your score
• Inquiries: a large number of hard inquiries (where you have applied for credit) may lower your score
• Accounts In Use: too many open accounts can lower your score, whether the accounts are in use or not
• Types of credit: the types of credit you have (car loans, credit cards, department store cards, etc), a good balance will look best

What is NOT Considered in Your Credit Score?

The following factors are not considered when determining your credit score:

• Your race, color, religion, national origin, sex, and marital status: US 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 Protection Act
• Your age: may be considered in some scoring models, but not FICO®
• Your salary, occupation, title, employer, date employed, or employment history: lenders may consider this information separately, but it is not a factor in your credit score
• Where you live
• Any interest rate being charged on a particular credit card or other account
• Any items reported as child/family support obligation or rental agreements
• Certain types of inquiries (requests for your credit report or score): requests made by you, an employer, and any request from lenders without your knowledge are not included
• Any information not found in your credit report
• Any information that is not proven to be predictive of future credit performance
• In Canada, mortgage information is not used to calculate your score

How often does a credit score change?

Your credit score will fluctuate as the items in your credit report change.  For this reason, scores are only generated when a lender requests your report and are not stored as part of your credit history.

Will inaccurate information in my credit report affect my credit score?

If the inaccurate information is used as part of a credit score calculation, then your score will be affected.  You should always make sure that the following items reflect accurate information on your report:

• Payment History
• Public Records
• Amounts Owed
• Inquiries

Your credit score is one of the most important factors used by lenders to determine whether to grant you credit, how much credit to grant you, and at what interest rate to grant it.  For this reason, it is important to know that your score truly represents your credit standing.  Generally, the higher your score, the better off you are.

Lenders do take into consideration other factors: your job history, your income, your savings, mortgage information and your actual credit report.  They may even take into consideration any special reasons for past credit problems.  In the end, the final decision on whether or not to grant you credit lies with them.

If you are planning a major purchase, you should check both your credit report and your credit score several months before.  Make sure the information in your credit report is accurate, as this will affect your score.  Credit scores above 650 will usually qualify you for credit.  Below this, you may have trouble receiving credit.

Since your credit score is a reflection of your past credit history, there is no magical way to improve it immediately; however there ARE steps you can take to raise your score.

• Pay your bills on time!
  Late payments, collections, and bankruptcies will have the greatest negative effect on your credit score.  Even if your debt is small, being punctual is very important!  If you DO miss a payment, make sure that you bring it current the following month.  This will keep the item from showing past due on your credit report.  If you fall behind due to illness, unemployment, or family issues: first, contact your creditor and explain the circumstances to them and work out a payment schedule that you can meet; second, you can add a short consumer statement to your credit report.
• Check your credit report!
  Make sure the information reported is accurate.  Requesting your own credit report will not show up as a hard inquiry and, therefore, will not negatively affect your score.  If you have bad credit, immediately begin taking steps to repair your credit.
• Don’t open new accounts that you don’t need!
  Not only will opening multiple new accounts in a short period of time possibly lower your score, but too many accounts may also lower your score.  Remember, you don’t want to overextend yourself!
• Keep your total account balances as low as possible.
  Remember, balances over 50% of your credit limits will lower your score, aim for balances that are less than 30% of your credit limit.  Also, pay OFF debt rather than just moving it around.
• Minimize the number of inquiries on your credit report.
  A large number of hard inquiries (where you have applied for credit) may lower your score, so don’t apply for multiple credit cards over a short period of time.
• Be patient.
  Just as there is no quick fix to repairing your credit, there is no fast way to improve your credit score.  Build a long history of good credit by paying your bills on time and being responsible.  Consider keeping the oldest account on your credit report open.  This will lengthen your credit history.

Remember: One action on your Credit Report may have multiple effects on your Credit Score (your score fluctuates as your report changes).

For example: You decide to close several unused department store credit card accounts.  By lowering the number of department store accounts, you will generally raise your score; however, it also lowers your total number of accounts, which could *lower* your score.

When you receive your Credit Score, pay attention to the factors that went into calculating it.  Identify which elements you might be able to improve.

US Residents may obtain credit scores through the major credit bureaus:

Equifax

By law, you are entitled to obtain your credit score. There is a fee of $6.95 to obtain your credit score from Equifax Information Services.

To request your credit score, please contact:

Equifax Information Services LLC
P.O. Box 105167
Atlanta, GA 30348
or call
1-877-SCORE-11

If you are in the process of obtaining a mortgage, you may be entitled to free credit score information. Contact the person making or arranging your loan for further information.

Experian

Order online for only $5.00 or purchase by phone by calling 1-888-322-5583

TransUnion

The TransUnion Personal Credit Score can only be received with your TransUnion Personal Credit Report. The cost of the credit report varies from free to $9.50. The TransUnion Personal Credit Score costs $5.95 in addition to the cost of the credit report.

Canadian Residents may obtain credit scores through the major credit bureaus:

Equifax, CA

Score Power is the only product that offers you access to your FICO credit score. Score Power provides your FICO score, the Equifax Credit Report the score is based on and a full explanation of your score with tips on how to improve it over time.  Your FICO Score plus your Equifax Credit Report for $21.95 CDN.

TransUnion, CA

You can order, in addition to your credit report, online for $7.95.

Boosting your post-bankruptcy credit score
Posted: Oct. 10, 2006

The Bankruptcy Adviser by Justin Harelik • Bankrate.com

Dear Bankruptcy Adviser,
Why should I care about a bankruptcy on my credit report? Six years after being discharged, my credit score is 736. Does it still make a difference?
-- Sharon

Dear Sharon,
This is a great question. You may have “ghost credit,” and I’ll get more into that in a minute, but first things first: Congratulations! I have no doubt your improved credit score is the result of hard work. There is more you can do to improve your credit and I hope this article will give you, and everyone else in similar situations, a few ideas.

You should always care about every mark on your credit report. When a lender is deciding whether to give you access to their money, they rarely make a mistake by saying, “No.” “No” is their default answer and anything that leads them down the path to saying “no” is worthy of concern.

However, once you’ve done everything you can do, let it go. Because bankruptcy information stays on your credit report for 10 years, you have four years to go before the bankruptcy mark can be removed.

During those 10 years, there are negative consequences to having this mark on your report.

Consequences of bankruptcy:

• Some banks may refuse your credit card application or demand a higher rate.
• Some credit underwriters may discriminate against you if you apply for a home mortgage or car loan.
• Many unsecured credit card companies may not increase your credit limit as rapidly as you might like.
• Prospective employers may discriminate against your employment application.

Now, let’s talk about “ghost credit.” You may have it and there’s not much you can do about it, but you should at least know what it is. Four years from now, Sharon, your credit report will be squeaky clean, but it won’t go back before your bankruptcy. In other words, your credit history will only be 10 years old. Negative but accurate information comes off credit reports, but positive accurate information stays on forever, so people who have not declared bankruptcy have credit reports that look different than yours.

Underwriters looking at your loan application may take into account your “ghost credit.” That is, the underwriters will ask themselves, “what happened to Sharon before these 10 years?” Of course, it’s none of their business, and in the scheme of things, it’s not nearly as important as what has happened recently (which is reflected in your credit score). However, underwriters are careful people and they would prefer a positive credit history of long standing over a positive credit history of comparatively short standings and ghost credit. This is not something to worry about, because you cannot go back in time, but it is worth understanding.

Here are some ideas for how you can accelerate the restoration of your credit and squeeze some extra advantages out of the system:

If you haven’t already done so, make sure you have accounts with major banks. Many times after bankruptcy, people must get credit cards and loans from less well know financial institutions. Once you’ve held some of these cards for a while, if possible, switch over to accounts with big banks. The reason is when they say “yes,” their affirmations carry more weight. 

If you have a car loan, consider refinancing it. If you bought a car with a four- to six-year payment plan and your credit score has improved at all, you could qualify for interest rate and payment decreases.

If you haven’t asked for an increase of your credit limit in a while, do so. The formula for determining your credit score depends on how much credit you have available. For example, you may be eligible to have your credit limit extended from $3,000 to $8,000. That extra $5,000 increases your credit availability, and that could help your credit score.

If you know how, take a look at your report at least once a year or work with someone who can. Improving and maintaining your credit is a lifelong endeavor and every detail counts.

Justin Harelik is a practicing attorney in Los Angeles. To ask a question of the Bankruptcy Adviser, go to the “Ask the Experts” page and select “bankruptcy” as the topic.