Lenders use credit scoring systems to analyze and decide whether you are a good candidate in terms of risk for credit cards, car loans and mortgages. Telephone companies and companies that sell car and home insurance also use credit scores along with other factors to decide whether to sell you a policy or service. Credit scores can also have an effect on the credit terms you are offered. Having a higher credit score means that businesses perceive you as less of a financial risk, which in turn means you are more likely to get credit or insurance or pay less.
What is a
credit score?
How can I
find out my credit score?
Is it
important for me to get my credit score?
What is the
relationship between my credit report and my credit score?
What if I
am denied credit or insurance, or don't get the terms I want?
What can I
do to improve my credit score?
How does a
credit scoring system work?
What is a credit score?
A credit score
is a number that represents a rating of your level of likelihood to repay a
loan and your timeliness in repaying it. Lenders calculate your credit score
using information from your credit report, such as your history of repaying the
money you borrowed, the types of loans you have taken out, how long you have
held a particular line of credit or loan, and the total amount of your debts.
Each credit scoring system calculates your score differently, but the credit
scoring system used by most lenders is called FICO scoring. Various types of
businesses use your credit score to decide whether to extend you credit and
under what terms. That includes what interest rate you will pay to borrow
money.
How can I find out my credit score?
Unlike your
free annual credit report, there is no such thing as a free annual credit
score. A credit reporting company may give you free credit scores. Other
companies may give you a free credit score if you sign up for their paid credit
monitoring service. This type of service checks your credit report for you. It
is not always clear whether you will be charged for the credit monitoring
service. If you see an offer for free credit scores, check it carefully to find
out if you are being charged for credit monitoring.
Is it important to get my credit score?
Before you
pay to get your credit score, ask yourself if you really need it. Your credit
score is based on your credit history, so if you know you have a good credit
history you know your credit score will be good. You may be interested in
knowing your score, but you can decide if you want to pay to get it.
Typically,
your credit score will be between 300 and 850.
A high
score means you have "good" credit, which means businesses think you
are a low financial risk. With a high score, you are more likely to get credit:
a loan, credit card, insurance, or to pay less for that credit.
A low score
means you have "bad" credit, which means it will be harder for you to
get credit. With a low score, you are more likely to have to pay higher
interest rates when you get credit.
Some
insurance companies also use credit report information, along with other
factors, as an aid in predicting how likely you are to file an insurance claim
and the amount of the claim. Insurance companies may consider this information
when making a decision to issue insurance and determine the amount of the
premium. Credit scores commonly used by insurance companies are sometimes
called "insurance scores" or "credit-based insurance
scores".
What is the relationship between my credit report and my credit score?
Credit
grantors use your credit score to decide whether to grant you credit and what
terms to offer you, particularly in deciding the rate you will pay for the
money you borrow. Your credit score is calculated based on information in your
credit report. Your credit report, which contains your payment history and debt
data, is a key part of many credit scoring systems. That's why it's so
important to make sure the information in your credit report is accurate. Federal
law entitles you to one free copy of your credit report from each of the
nation's three credit reporting companies every 12 months.
In
addition, the three agencies have permanently extended a program that allows
you to check your credit report from each of the credit reporting companies
once a week for free at AnnualCreditReport.com.
To order
your free annual credit report from any or all of the credit reporting
companies:
Visit
AnnualCreditReport.com,
call toll
free 877-322-8228
or complete
the Annual Credit Report Request Form and mail it to:
Annual
Credit Report Request Service
P. O. Box
105281
Atlanta, GA
30348-5281
In
addition, everyone in the U.S. can get 6 free credit reports per year through
2026 through the Equifax website or by calling 1-866-349-5191. That's in
addition to the free Equifax report (plus your Experian and TransUnion reports)
you can get at AnnualCreditReport.com.
What if I'm denied credit or insurance, or don't get the terms I want?
Under
federal law, a credit grantor's scoring system cannot use certain
characteristics, such as race, gender, marital status, national origin or
religion, as factors in determining whether or not to grant you credit. The law
allows credit grantors to use age, but in any credit scoring system that
includes age, equal treatment must be given to older applicants.
You have
the following rights:
To know
whether your application was accepted or denied within 30 days of submitting a
completed application form.
Know the
reason why the credit grantor rejected your application. The lender must:
Tell you
the specific reason it based its denial of your application (for example,
"your income is too low" or "you have not been employed long
enough").
Or tell you
that you have the right to know the reasons, if you ask for them, within 60
days.
Know the
specific reason why the lender offered you less favorable terms than those on
your application, but only if the lender denies you those terms. For example,
if the lender offers you a loan for a lower amount or charges you a higher
interest rate and you do not accept the offer, you have the right to know why
you were offered those terms. For more information, read about discrimination
in credit transactions.
If a
business rejects your application for credit or insurance (or offers you less
favorable terms) because of information in your credit report, federal law
requires the business to do the following:
Send you a
notice that includes, among other things, the name, address and phone number of
the credit reporting company that provided the information.
Include
your credit score in the notice if that credit score was a factor in the
decision to deny you credit or to offer you less favorable terms than most
customers get.
If you
receive one of these notices:
You are
entitled to receive a free copy of your credit report from the credit reporting
company that was used to review your credit report.
To find out
what information may have caused you to be denied credit or more favorable
terms, contact the credit grantor or insurance company. The credit reporting
company can tell you what is on your report, but only the credit grantor or
insurance company can tell you what happened to your application.
If the
credit grantor or insurance company says they turned down your application for
credit or insurance or denied you more favorable terms because you are too
close to reaching the credit limits on your credit cards, you may want to
reapply after paying off your balances. Credit scores are based on credit report
information, so the score often changes when credit report data changes.
If a credit
grantor or insurance company rejects your application because of an error on
your credit report, be sure to dispute the inaccurate information with the
credit reporting company and the business that provided the inaccurate
information. For more information on this right, see Disputing Credit Report
Errors.
What can I do to improve my credit score?
When you
receive your credit score, you may receive information on how you can improve
it. It will probably take some time to improve your score significantly, but it
can be done. In most scoring systems, you need to focus on paying your bills on
time, paying off outstanding balances and avoiding incurring new debt.
How does a credit scoring system work?
Credit
scoring systems are complex and can vary for different types of businesses.
Some systems may consider additional factors or weight factors differently. But
in almost all of the ways used to calculate your score, the following types of
information from your credit report are considered:
Have you
paid your bills on time? If your credit report shows that you've paid bills
late, had any of your accounts referred for collection, or filed for
bankruptcy, your score is likely to be negatively affected.
Are you on
the edge? There are several scoring systems that evaluate the amount of your
outstanding debt against your credit limits. If the amount you owe is close to
your credit limit, it is likely to hurt your score.
How long have
you had credit? In general, scoring systems consider the age of your credit
record. A short credit history can hurt your score, but this can be
counteracted if you demonstrate that you make your payments on time and
maintain low balances.
Have you
recently applied for new credit? Several scoring systems look at the
"inquiries" on your credit report to see if you have recently applied
for credit. If you have applied for too many new accounts recently, this could
hurt your score. Not all inquiries are considered: for example, inquiries from
credit grantors who monitor your account or make "prescreened" credit
offers will not be used against you.
How many and what type of credit accounts do you have?
Although it
is generally considered an advantage to have established credit accounts,
having too many credit card accounts can hurt your score. In addition, several
scoring systems take into consideration the type of accounts you have. For
example, for some scoring models, loans to consolidate your debts, but not
loans to buy a home or car, can hurt your credit score.
Credit scoring models compare this information with the credit behavior of others with similar profiles and assign you a score. These scoring models may use information other than the data in your credit report. For example, when you apply for a mortgage loan, the system may consider factors such as the amount of your down payment, your total debt, and your income, among other things.
