What is a credit score?

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. There are many different credit scores used in the financial service industry. 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.

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How scores are calculated?

Designers of credit scoring models review a set of consumers – often over a million. The credit profiles of the consumers are examined to identify common variables they exhibited. The designers then build statistical models that assign weights to each variable, and these variables are combined to create a credit score.

Models for specific types of loans, such as auto or mortgage, more closely consider consumer payment statistics related to these loans. Model builders strive to identify the best set of variables from a consumer's past credit history that most effectively predict future credit behavior.

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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

If a business card/corporate card or gas card does not appear on your credit report, it will not affect your score. Credit scores do not consider:

• Your race, color, religion, national origin, sex or 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.
• Your age.
• Your salary, occupation, title, employer, date employed or employment history. However, lenders may consider this information in making their approval decisions.
• Where you live.
• Any interest rate being charged on a particular credit card or other account.
• Any items reported as child/family support obligations or rental agreements.

Certain types of inquiries (requests for your credit report). The score does not count "consumer disclosure inquiry” requests you have made for your credit report in order to check it. It also does not count "promotional inquiry" requests made by lenders in order to make a "pre-approved" credit offer – or "account review inquiry" requests made by lenders to review your account with them. Finally, inquiries for employment purposes are not counted.

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Why don't I have a credit score?

Credit scoring models cannot generate a score without sufficient credit information. If you have little or no credit history, you will probably not have a credit score available. If you have never had a credit account, try applying for a retail, gas or secured credit card to begin your credit history. If you keep your outstanding debt low and pay your bills on time, before long you'll receive additional offers for credit. However, you may want to be cautious and only apply for credit that you really need.

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Who calculates credit scores?

When a lender requests your score, it is calculated by a computer at the lender's location, by a third-party service provider such as a mortgage reporting agency, or may be applied at a consumer reporting agency. The score is one of many pieces of information the lender may use in evaluating your credit application.

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How often do credit scores change?

Your credit score is a fluid number that changes as your credit report changes. Therefore, any change to your credit report could impact your score. However, most credit scores do not change more than 30 points in a quarter.

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Will I be penalized for shopping around for the best interest rate?

Credit scores count every consumer-initiated credit application. Therefore, excessive applications for credit can adversely affect a score. However, it is becoming more common for risk score models to recognize when a consumer is shopping for the best rates and either ignore inquiries for a specific purpose within a period of time, or count multiple inquiries for a specific purpose as only one. This is most common in mortgage and auto lending. In such cases, shopping around will have little or no impact on a risk score.

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Can I use a credit score as leverage for a lower interest rate when seeking a loan or line of credit?

It is never a bad idea to work with issuers and lenders to reduce your interest rate. You definitely have more leverage if a credit score puts you in the low risk range. However, because there are many different credit scores, the model used to calculate the score you obtain, and the score itself, may be different than the one the lender uses in making its decision. For instance, you may get a generic credit risk score from Experian, but an auto lender might use its own custom scoring model with a different scale, so the numbers won't be the same but will likely represent a similar level of risk.

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Will most lenders approve a loan or line of credit if the credit score is equal to or greater than 720?

Criteria for accepting loans vary by lender. Some lenders will only extend loans to low risk consumers; others accept loans from consumers with a more risky credit history. There are many different risk score models with different scales, so a 720 on one might be good but a 720 might represent high risk in another risk scoring system. That is why the number alone is not very helpful. A lender should be able to describe what the number represents, whether it is good or bad, and more importantly provide the risk factor statements that explain what from your credit history or application most impacted the score at the time it was calculated.

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Do lenders and creditors look at all three credit reporting agency reports and credit scores calculated using information from each report before approving a credit or loan application?

Not always. Most mortgage lenders will look at reports from all three credit reporting agencies and credit scores calculated using information from each; but other lenders will use just one agency's report and one credit score.

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Do pre-approved offers get considered as new credit and affect a credit score?

No, only applications for credit initiated by the consumer will affect your score. Inquiries into your credit for account review purposes as well as preapproved offers of credit have no effect on credit scores.

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Does having too many credit cards affect a credit score?

Having too many credit cards with either high balances or large amounts of credit available can negatively impact risk scores depending on the overall credit history.

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If my spouse had bad credit before we were married, will that affect a credit score?

If you hold a joint credit account, have co-signed a loan or have authorized use of another person's credit, these items could affect a score if they appear on your credit report. It's important that joint account holders or authorized users understand that their credit behavior does affect the other joint account holder or main account holder.

A credit account held solely in the name of your spouse, child or any other family member cannot impact your credit score. However, in community property states, all debt acquired during a marriage is considered a joint debt, regardless if the account is joint or in the name of an individual spouse.

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Does co-signing for a loan affect a credit score?

Absolutely. By cosigning, you are accepting full responsibility for the debt if the other person does not pay as agreed. A cosigned account will appear on both your credit history and the other person's. All loans and credit card accounts that appear on your credit report will impact credit scores.

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Do late payments affect a credit score?

Paying bills on time is generally the single most important contributor to a good credit score. Being late on any bill, for any length of time, is a possible indication of future non-payment of debt and is almost always viewed negatively by lenders. Any late payments will remain on your credit report for up to seven years.

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Does renting or leasing a home affect a credit score in any way?

The presence of a real estate loan that has always been paid on time shows lenders that you have established a strong credit base, and reflects positively on your credit responsibility. The lack of a real estate loan on your credit report does not decrease your score; however, it generally means that your credit score is not as high as it could be.

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Do inquiries affect a credit score?

Careful study has shown that inquiries are an indicator of credit risk. Recent inquiries indicate a person may have outstanding accounts that are not yet part of the credit report. The more inquiries that appear on a borrower's credit file, the more likely a borrower may not be able to pay his or her bills as agreed. However, inquiries have a relatively small impact on your credit score. In a credit scoring model, there are other, stronger indicators of future payment performance, such as past payment history and use of credit. These indicators can offset an inquiry. Inquiries are rarely, if ever, the only reason for poor credit scores or being declined. They only become significant if there are other issues, such as late payments or very high debt as compared to income you include on your credit application.