Your credit score is an evaluation of the information in your credit report which estimates the probability that you will become delinquent on a new credit application. A lender will decide whether to offer you a loan based on credit score, as well as other information such as your income, type of loan, and collateral.
Criteria for scoring
The score is based on items in your credit report which predict future delinquencies; the exact criteria and weights vary by provider. The following weights are used in the FICO score, one of the most commonly used scoring models.
- Payment history (number of accounts with on-time payments; number and recency of late payments, collections, public record items such as judgments): 35%
- Amounts owed (including the ratio of the amount owed to the limits on credit cards, or to the original balance for an installment loan): 30%
- Length of credit history (age of oldest, newest, and average accounts): 15%
- New credit (new accounts and inquiries): 10%
- Types of credit in use (revolving or installment, number of each): 10%
A newer model, the VantageScore, has similar weights.. Older versions gave more weight to recent behavior and current balances. VantageScore 3.0 listed the weights as bars, and version 2.0 listed the weights as percentages.
- Payment history: 41%, was 6 bars in 3.0, 28% in 2.0 (35% of FICO)
- Percent of credit limit used: 20%, was 4 bars in 3.0, 23% in 2.0 (including the two criteria below, 30% of FICO)
- Total of balances: 6%, was 3 bars in 3.0, 9% in 2.0 (not a separate factor with FICO)
- Available credit: 2%, was 1 bar in 3.0, 1% in 2.0 (not directly considered by FICO)
- Age and type of credit: 20%, was 4 bars in 3.0, 9% in 2.0 (25% of FICO)
- Recent credit: 11%, was 2 bars in 3.0, 30% in 2.0 (10% of FICO)
These weights are averages; the actual relevance of each factor depends on the rest of your report. In addition, lenders use variations of the scores depending on the type of credit, as the factors which predict delinquency for credit cards, installment loans, and mortgages may be slightly different.
The score is based on the information in your report at the time it was last reported by the creditor. Therefore, if you had a balance on a credit card and paid it in full by the due date, the balance owed on the statement date will be reported even though the current balance may be zero. This also explains why you may have a different score at the different credit bureaus; not all creditors report to all of the bureaus, and even when they do, the last report date may be different.
Maintaining and improving your score
The criteria for scoring indicate how to maintain a good score. Most important, of course, is to make payments on time; setting up a reminder, or an automatic payment from your checking account, ensures that payments will be made. If you have delinquencies, there is nothing you can do to improve this part of your report except for continuing to make payments on time; older delinquencies are less important, and delinquencies more than seven years old are no longer reported.
Similarly, you need to limit the ratio of the balance owed to the credit limit on your credit cards. If you are about to apply for credit, ensure that you do not have a large balance on any card in the previous month; paying off the balance in full will not help if the new balance has not yet been reported. If you are carrying a large balance, paying it down is both an excellent investment and good for your credit score in case you need to apply for credit later.
The length of your credit history includes both open and closed accounts. Opening new accounts does decrease your score slightly, both because it reduces the average age of accounts and because new accounts themselves represent an increased risk. The new-account effect is temporary; once the new accounts are no longer new, the effect of the new accounts will go away, while other effects on your credit score such as more open accounts or a higher credit limit will remain. Therefore, you should avoid opening new accounts if your score will be important soon.
However, closing an old account will not reduce your score directly unless it affects some other factor such as the ratio of balances to credit limits or the types of credit in use. And this makes sense; if you paid a credit card on time six years ago, that is just as relevant to your credit whether that particular card is currently open or closed. (An account with no delinquencies which has not been active for ten years will disappear from your report; therefore, it may slightly decrease your score ten years after you close it, as the payment record and age of accounts will no longer count it.)
Inquiries are counted for only twelve months, and scoring models recognize when multiple inquiries are not the result of multiple attempts to open accounts. Multiple auto, student, or home loan inquiries within a short time are counted as only one inquiry because you are probably shopping for rates rather than buying multiple cars, college funds, or homes. The inquiries are another reason to avoid opening other new accounts if your score will be important soon.
Inquiries which are not credit-related should be listed on your credit report as "Inquiries reported only to you"; they will not affect your score because potential creditors do not see them. This includes requests for your own file, account reviews by existing creditors, promotional inquiries, and requests for non-credit purposes such as insurance and employment.
Checking your score
When you check your credit report (for example, the free annual report from AnnualCreditReport.com), or a paid report directly from the bureau, you will usually be given the option to purchase a credit score at the same time.
There are also commercial services which will give you a credit score. Most such services advertise a "free" score or report, but the score is only free with enrollment in a credit monitoring service. Two commercial services which are actually free (supported by advertising or by internal promotions):
- Credit Karma gives VantageScores (version 3.0) from both Trans Union and Equifax, full credit reports from both bureaus, and auto and home insurance scores from Trans Union's internal models.
- Credit Sesame gives Experian's National Equivalency Score from your Experian report.
A lender may give you your score as part of the loan process, but it is usually too late for you to do anything with the score unless there is an error on the credit report.
Checking your own credit report and score does not count as an inquiry for scoring purposes, and is not disclosed to lenders.
Credit reporting companies
Consumer reporting companies (also known as credit reporting agencies, or credit bureaus) collect information and provide reports to other companies about you. These companies use these reports to inform decisions about providing you with credit, employment, residential rental housing, insurance, and in other decision making situations.
Consumer reporting companies must follow legal restrictions but generally can provide consumer credit reports and scores to an array of businesses, including:
- Lenders (including those that offer credit cards, home, payday, auto (including auto leasing) and student loans)
- Employers and others such as government agencies (employment and background screening)
- Landlords and residential real estate management companies (tenant screening)
- Banks, credit unions, payment processors and retail stores that accept personal checks (check screening)
- Companies that market and sell products and services to low-income consumers and subprime credit applicants, such as short-term lending and rent-to-own businesses among others
- Debt buyers and collectors (e.g., medical debt collectors)
- Insurance companies (health, life, property insurance screening)
- Communications and utility companies (e.g., mobile phone; pay TV, electric, gas, water for utility bill repayment screening)
- Retail stores for product return fraud and abuse screening; as well as retail stores that offer financing such as appliance and rent-to-own businesses, among others
- Gaming casinos that extend credit to consumers
The Consumer Financial Protection Bureau (CFPB) publishes a comprehensive list which includes the three largest nationwide consumer reporting companies (Equifax, Experian, Transunion) and several specialty reporting companies that focus on certain market areas and consumer segments. The list is available here: List of consumer reporting companies (2016)
The CFPB list indicates which companies will supply free credit reports. Also note the disclaimer (page 5 footnote) which states this information is self-reported and has not been independently verified.
What should appear in a score report
A score report should give your numerical score, and an indication of how that score compares to other credit reports. The percentile is what is important; as different scoring systems, even with the same range, may have a different score distribution.
It should also give the primary reasons that the score is not higher. Note that these reasons are written as reasons for denial of credit; "Ratio of amount owed on revolving accounts to credit limits is too high" could mean that you were denied credit because you have maxed out your credit cards, or it could mean that you have excellent credit and one reason it is not perfect is that you owe 15% of the credit limit on your cards and it would be better if you owed 5%.
Credit Karma does not give standard score explanations; its "Credit Factors" list a single number for the main scoring factors, but not the details of that number. If you want to see how to improve your credit score, you need to get a score with the full explanations. For example, Credit Karma gives a color rating for the number of accounts on your report, not distinguishing open and closed accounts, or accounts of different types.
A credit score is only used when you apply for credit (and, in some states, for insurance). Therefore, your score today is irrelevant if you are not planning to apply for any credit until next year; it doesn't hurt to charge the full limit on a credit card if the balance is paid in full before you need the credit report for any purpose, and it will not hurt your score significantly if you open a new credit card a year before you need a good score (as long as you pay on time and keep the balance low). You should check your report regularly (to check for errors), but need not check your score.
In addition, lenders do not care about differences between very high scores, as they all represent a very low risk. Therefore, if it is clear from your credit report that your credit is excellent (no late payments, several accounts that have been open for years, no card anywhere near the limit, at most one new account), you do not need your score. And if you have an excellent score, you can afford to do things which will benefit you but lower the score, such as opening a new credit card with better benefits, closing a card you no longer want, or charging 25% of the limit on a card.
Insurers have found that credit behavior also predicts the probability that customers will file claims and the amount of claims. In many states, insurers will use a score based on your credit file as part of the determinantion of insurance rates; the use is restricted by state law in some states.
FICO gives the following breakdown for its credit-based insurance score. The criteria are similar to FICO's standard criteria, with slightly more emphasis on payment history and less on types of credit.
- Previous credit performance: 40%
- Current level of indebtedness: 30%
- Length of credit history: 15%
- New credit/pursuit of new credit: 10%
- Types of credit used: 5%
However, there is much more variation among models. A model which Allstate filed with the NC Department of Insurance gives a much higher weight to inquiries; in this model, a single credit-card inquiry for a customer costs 5-10 times as much as a recently opened account. Credit Karma does not provide criteria for its insurance scores, but reports from the score it provides also show that it is very sensitive to inquiries, as a poster reported a huge jump in his score when his one inquiry became 18 months old.
Value of high scores
In contrast to credit scores, very high scores are important for insurance scoring. Allstate's insurance scoring model reports that the customers with the top 10% of insurance scores had 81% of the average loss ratio for auto and 62% for homeowner's insurance, while the second 10% had 85% of the average loss ratio for auto and 75% for homeowner's insurance. Thus it is likely that an insurer will give a larger discount for excellent scores than for merely good scores.
Taking advantage of your insurance score
Many insurers will only use credit scoring for new policies. Therefore, if your insurance score has improved since you obtained a policy, you may get a significantly lower rate if you ask your insurer to recheck your score; it will not be done automatically.
Since insurance scores may be very sensitive to inquiries, and most inquiries are made with only one credit bureau, shopping for insurance with companies which use different bureaus (or different scoring models with the same bureau) may give you different scores and rates. You need not be concerned about inquiries affecting your credit score, as insurance inquiries are not reported to anyone other than you.
- FICO is a registered trademark of the Fair Isaac Corporation.
- Understanding Your FICO® Score
- VantageScore is a registered trademark of VantageScore Solutions, LLC; the VantageScore itself was developed by the credit bureaus.
- VantageScore 4.0 fact sheet, September 17, 2018
- VantageScore 3.0 information sheet
- VantageScore 2.0 white paper
- Closing Credit Cards
- List of consumer reporting companies (2016),Consumer Financial Protection Bureau, 2016, Viewed September 16, 2017.
- What's in your score (FICO)
- Allstate Insurance Scoring Model 7
- Forum post: Insurance score quirks may encourage shopping
- FTC page for annual free report
- Trans Union
- Forum post: Credit Karma review update
- FICO: Credit-based insurance scores
- FICO forum post on the different FICO scores