Understand Your FICO Credit Score

Most of us know the importance of a good credit score. FICO (Fair Isaac Corporation) credit scores are the most widely used credit scores by lenders and insurers. An estimated 90% of lenders use FICO scores in their decisions. There are actually multiple versions of FICO scores, and lenders and credit bureaus or reporting agencies may use different versions. The basic information is the same, but the exact features may be different.

If you want to apply for a mortgage, buy a car, apply for a credit line, or buy insurance, your FICO score will almost certainly be considered. A low score can prevent you from getting the house or apartment you want or, worse yet, make you ineligible for certain jobs. You can learn how your FICO score is calculated, what the score means, and how you can improve your scores.

Steps

Getting Your FICO Score

1. Ask FICO for your scores. You can get all of your FICO scores from the Fair Isaac Corporation’s consumer website, myfico.com.
   • FICO does not provide these scores for free, but they will allow you to order your scores from all three credit bureaus -- Experian, TransUnion, and Equifax -- in one report. A one-time report costs $59.85.
2. Get your scores from the individual credit bureaus. You can order your FICO scores from each of the three major credit bureaus separately. Note that credit bureaus may use different versions of the FICO score. For this reason, it’s important to get your FICO scores from all three major credit bureaus. Visit their websites for details on how to purchase your credit reports.
   • Be aware that the credit bureaus often will not allow one-time report purchases. They prefer you to purchase a renewing membership for a monthly fee. You must cancel these memberships in order to avoid being charged the monthly fee.
3. Ask your credit card issuer for your FICO score. Several credit card companies will now provide you with a free copy of your FICO score. The terms and availability varies between companies (and sometimes even between credit card products), so contact your issuer to find out if this is an option.
   • In the United States, these companies include Bank of America, Barclaycard US, Chase, Citibank, Discover, and USAA.
   • Other credit card issuers may provide other types of access to some or all of your credit scores and reports. Contact them for details.

Interpreting Your FICO Score

1. Understand that you have different scores. The three major credit bureaus in the US -- Experian, Equifax, and TransUnion -- each use different types of FICO scores when calculating your credit score. They may even use different types of FICO scores for different products, such as mortgages vs. credit cards. You will likely have different credit scores from each bureau.
   • For example, according to FICO, Experian uses FICO Score 2 for mortgages, but FICO Score 3 for many credit cards and FICO Bankcard Scores 8 and 2 for others.
   • Equifax uses FICO Score 5 for mortgages and FICO Bankcard Scores 8 and 5 for credit cards.
   • TransUnion uses FICO Score 4 for mortgages, and FICO Bankcard Scores 8 and 4 for credit cards.
2. Visit each bureau’s website to determine how they calculate your score. Each of the credit bureaus will analyze your credit history and calculate your score slightly differently. Your FICO score at each bureau will depend on the information each bureau has about you, and how it uses that information in its calculations.
   • Your FICO scores may also differ from each bureau’s own credit scores because of score ranges. For example, FICO uses a score range of 300 (lowest) to 850 (highest), while Equifax uses a score range of 280 (lowest) to 850 (highest).
   • The name of your FICO score will also vary by bureau. Equifax uses the name BEACON, Experian uses Experian/FICO Risk Model, and TransUnion uses FICO Risk Score, Classic.
3. Learn how FICO calculates your FICO score. FICO takes five areas into account when calculating your FICO credit score. Each area is weighted by importance (approximate weights are given below). These areas are:
   • Payment history, 35%. This area investigates your “track record” of good credit behavior. It will consider things such as whether you pay on time, whether any accounts have gone into collection, and how many of your accounts you have no late payments on.
   • Amounts owed, 30%. This area considers the amount of debt you owe. Owing money on credit accounts will not necessarily give you a low FICO score. FICO usually considers things such as the number of accounts that carry a balance and the percentage of your available credit used. For example, if you have 6 credit cards, and 5 of them carry a high balance, you may be more of a credit risk and your FICO score will likely be lower.
   • Length of credit history, 15%. In general, the longer your credit history is, the higher your FICO score is likely to be. This is because you have shown yourself to be responsible over a long period of time. However, even short credit histories may have a high FICO score depending on the rest of the factors.
     • You need a minimum of 6 months of credit history to generate a FICO score. There must also be at least one undisputed account.
   • Type of credit used, 10%. This area examines your retail, installment loans (such as auto payments), mortgages, and credit cards. If you have a good mix, you are more likely to have a higher FICO score because you appear to use credit responsibly. FICO will also consider how many of each account type you have. For example, if you have a dozen credit cards but only one auto loan, this may be an imbalanced credit picture.
   • New credit, 10%. If you have opened several new accounts in a short period of time, this could damage your FICO score. This area also looks at how long it has been since you opened a new account, and how long it has been since a lender made a credit report inquiry.
4. Evaluate your score range. FICO has a score range from 300-850. However, different lenders interpret this range in different ways. Some of these differences may be due to state and federal lending laws. For some lenders, 680 may be a “good” credit score, while for others 720 may be considered “good.”
   • Different lenders are free to choose which FICO score they will use, and from which bureau. For example, ABC Car Dealership may use your FICO score from Experian, whereas XYZ Car Dealership may use your FICO score from TransUnion.
   • Most FICO and credit bureau scores range between 600-750.
   • A score above 700 usually indicates that you are a responsible credit manager.
   • If you can, speak with your lender about what they consider a “good” FICO score before you apply for a loan. This can help you avoid disappointments and rejected loans.

Improving Your FICO Score

1. Visit AnnualCreditReport.com for a free copy of your credit report. This website is operated by Central Source LLC, a joint company created by Equifax, Experian, and TransUnion. It is the only Federally authorized source for free credit reports. You should routinely examine your credit reports to ensure there are no mistakes in them that could be impacting your score. Report any errors to the credit bureau on whose report you found them.
   • You can also call them toll-free at 1-877-322-8228.
   • You can get a copy of your free credit reports by writing to P.O. Box 105281, Atlanta, GA 30348-5281.
   • In the United States, each bureau is required to provide you one free copy of your credit report each year under the Fair Credit Reporting Act (FCRA), enforced by the Federal Trade Commission (FTC). AnnualCreditReport.com’s services are not available outside the US.
   • The law requires the credit bureaus to provide you one free copy of your credit report each year. However, it does not require them to provide you with your credit score for free.
2. Call creditors about discrepancies. In addition to reporting any errors or discrepancies to the credit bureaus, you should also contact the lender or information provider and notify them of the error. Both the credit bureau and the information provider are legally required to investigate and correct “inaccurate or incomplete” information in your credit report.
   • For example, if a medical bill has been sent to collections, you should contact the hospital or doctor as well as the credit bureau. If you know the collection agency to which the bill was sent, contact them too.
   • The FTC has a sample dispute letter that you can use to notify the credit bureau and/or lender of errors.
   • They have 30 days to respond to your dispute. If they cannot verify the negative information, they have to remove it.
3. Protect your privacy. Identity theft can quickly affect your FICO scores. Thieves can open a host of new accounts using your personal information. It can be very difficult to undo the damage done by identity theft.
   • Shred sensitive documents, such as bills, credit card statements, and other documents with personal information.
   • Report lost or stolen credit and debit cards immediately.
   • Report fraudulent activity to each credit bureau and the lender in question.
4. Manage credit responsibly. Some people think that carrying any balance on credit cards will damage your FICO score, but the opposite is usually true. Making regular payments on very small account balances shows that you are a responsible credit holder. You can keep a good FICO score by managing how much of your available credit you use and making your payments on time.
   • Keep low balances on credit cards and other "revolving" credit accounts. Too many cards close to the "max" limits can raise a red flag.
   • Don't have balances on too many credit accounts at once, especially credit cards. This can indicate that you're overextending yourself, and suggests to lenders that you won't be able to pay them.
   • Don’t close old accounts to raise your FICO score. In most cases, this might actually lower your FICO score because it will reduce your available credit percentage. Any late payments or other negative items from those accounts will still affect your FICO score.
   • Open new accounts only as needed. You should aim for a healthy mix of credit accounts. However, opening new lines of credit to improve that mix will probably not improve your FICO score.
5. Negotiate late payments. You can often negotiate late payments with your original creditors if you are not more than 150 days late on your payments. You can ask your creditor to accept a lower amount, or to waive late fees. They may not cooperate with you, but it is in your best interest to ask. Ask if they will agree to mark your account “paid as agreed” (best) or at least “settled” (second-best).
   • Sometimes, you may be able to “erase” an account that went to collection by offering to pay the remaining balance. If the company agrees, they can report the account as “paid as agreed” or remove the debt entirely from the bureau’s records.
6. Avoid “Credit Repair” companies. Credit repair services often advertise themselves as a fast and easy “get out of debt” solution. However, their services can be very expensive, and in most cases they cannot do anything for you that you can’t do yourself.
7. Remember that improving your credit can take time. There is no “quick fix” for improving your credit score, no matter what some disreputable companies say.
   • For example, public records stay on your record for years. Liens and delinquencies stay on your credit report for seven years. Bankruptcies can stay on your report for up to ten years.

Tips

• Everybody wants to know their FICO score, but sometimes the most important information you'll receive from the credit bureaus is buried in the credit report itself. There may be inaccurate information or charges you've long forgotten about that are lowering your score. Go over your report carefully to make sure everything is correct.
• By U.S. law you are entitled to one free credit report per year from each of the credit bureaus. You are also entitled to a free report if adverse action has recently been taken against you because of information contained on the report. Adverse action includes, for example, denial of a loan, insurance, or a job.

Warnings

• If you want to get inaccuracies removed from your credit report, be prepared for a fight. Sometimes the credit reporting bureaus will cooperate and remove inaccurate information without any hassle, but sometimes it can turn into a real headache. Unfortunately, you may have to sue them to remove inaccurate information.

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