RCRS Answers Your Credit Questions

Understanding Credit Scores

What is a credit score?

Credit scores influence the credit that’s available and the terms (interest rate, down payments etc.) that lenders may offer.  It’s a vital part of credit health.

When a consumer applies for credit – whether for a credit card, an auto loan, or a mortgage – lenders want to know what risk they’d take by loaning money. When lenders order a credit report, they can also buy a credit score that’s based on the information in the report.  A credit score helps lenders evaluate a credit report because it is a number that summarizes credit risk, based on a snapshot of a credit report at a particular point in time.

What is a FICO score?

The most widely used credit scores are FICO® Scores, the credit scores created by Fair Isaac Corporation.  It’s estimated that around 90% of top lenders use FICO® Scores to help them make billions of credit-related decisions every year.  FICO® Scores are calculated based solely on information in consumer credit reports maintained at the credit reporting agencies.

By comparing this information to the patterns in hundreds of thousands of past credit reports, FICO® Scores estimate your level of future credit risk.

What is a good credit score?

According to Experian, Equifax and TransUnion, the base FICO® Scores that they show on their reports have a 300–850 score range.  The higher the score, the lower the risk.  But no score says whether a specific individual will be a “good” or “bad” customer.

While many lenders use FICO® Scores to help them make lending decisions, each lender has its own strategy, including the level of risk it finds acceptable for a given credit product. There is no single “cutoff score” used by all lenders and there are many additional factors that lenders use to determine your actual interest rates.

Why do my FICO® scores differ between credit bureaus?

In the U.S., there are three main national credit bureaus (Equifax, Experian and TransUnion) that compete to capture, update and store credit histories on most U.S. consumers.  While most of the information collected on consumers by these three credit bureaus is similar, there are differences.  For example, one credit bureau may have unique information captured on a consumer that is not being captured by the other two, or the same data element may be stored or displayed differently by the credit bureaus.

A predictive FICO scoring system resides at each of these credit bureaus from which lenders request a FICO® Score when evaluating a particular consumer’s credit risk.  The FICO scoring system design is similar across the credit bureaus so that consumers with high FICO Scores on bureau “A’s” data will likely see a similarly high FICO Score at the other two bureaus. Conversely consumers with lower FICO scores at bureau “A” will likely get low FICO Scores at the other two bureaus when the underlying data is the same across the bureaus.

When the scores are significantly different across bureaus, it is likely the underlying data in the credit bureaus is different and thus driving that observed score difference.  However, there can be score differences even when the underlying data is identical as each of the bureau’s FICO scoring system was designed to optimize the predictive value of their unique data.

Keep in mind the following points when comparing scores across bureaus:

  • Not all credit scores are “FICO” scores. So, make sure the credit scores you are comparing are actual FICO Scores.
  • The FICO scores should be accessed at the same time. The passage of time can result in score differences due to model characteristics that have a time based component. Comparing a FICO score pulled on bureau “A” from last week to a score pulled on bureau “B” today can be problematic as the “week-old score” may already be “dated”.
  • All of your credit information may not be reported to all three credit bureaus. The information on your credit report is supplied by lenders, collection agencies and court records. Don’t assume that each credit bureau has the same information pertaining to your credit history.
  • You may have applied for credit under different names (for example, Robert Jones versus Bob Jones) or a maiden name, which may cause fragmented or incomplete files at the credit reporting agencies.  While, in most cases, the credit bureaus combine all files accurately under the same person, there are many instances where incomplete files or inaccurate data (social security numbers, addresses, etc.) cause one person’s credit information to appear on someone else’s credit report.
  • Lenders report credit information to the credit bureaus at different times, often resulting in one agency having more up-to-date information than another.
  • The credit bureaus may record, display or store the same information in different ways.

How are my FICO® scores calculated?

FICO® scores are calculated from many different pieces of credit data in your credit report.  This data is grouped into five categories:

Payment History 35%  Amounts Owed 30%  Length of Credit History 15% New Credit 10%  Types of Credit 10%

These percentages in the chart reflect how important each of the categories are in determining how your FICO®scores are calculated.

Your FICO® scores consider both positive and negative information in your credit report.  Late payments will lower your scores, but establishing or re-establishing a good track record of making payments on time will raise your score.

Your FICO Scores are calculated based on these five categories. For some groups, the importance of these categories may vary; for example, people who have not been using credit long will be factored differently than those with a longer credit history.

However, the importance of any one factor in your credit score calculation depends on the overall information in your credit report.  For some people, one factor may have a larger impact than it would for someone with a much different credit history.  In addition, as the information in your credit report changes, so does the importance of any factor in determining your FICO® Scores.

Therefore, it’s impossible to measure the exact impact of a single factor in how your credit score is calculated without looking at your entire report.  Even the levels of importance discussed above are for the general population, and will be different for different credit profiles.

What's not in my FICO® scores?

FICO Scores consider a wide range of information on your credit report. However, they do not consider:

  • 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 Credit Protection Act.
  • Your age.
    Other types of scores may consider your age, but FICO Scores don’t.
  • Your salary, occupation, title, employer, date employed or employment history.
    Lenders may consider this information, however, as may other types of scores.
  • Where you live.
  • Any interest rate being charged on a particular credit card or other account.
  • Any items reported as child/family support obligations.
  • Certain types of inquiries (requests for your credit report).
    Your scores do not count certain types of “consumer-initiated” inquiries – requests you have made for your credit report, in order to check it. They also do not count certain types of  “promotional inquiries” – requests made by lenders in order to make you a “pre-approved” credit offer – or certain “administrative inquiries” – requests made by lenders to review your account with them.  Requests that are marked as coming from employers are not counted either.
  • Any information not found in your credit report.
  • Any information that is not proven to be predictive of future credit performance.
  • Whether or not you are participating in a credit counseling of any kind.

Credit payment history determines 35% of a FICO Score

The first thing any lender wants to know is something about your credit history. Namely, whether your credit payments have been made on time.  This is one of the most important factors in a FICO® Score.

A few late payments are not an automatic “score-killer.”  An overall good credit history can outweigh one or two instances of late credit card payments.

However, having no late payments in your credit report doesn’t mean you’ll get a “perfect score.”  Your payment history is just one piece of information used in calculating your FICO scores.

Account types considered for credit history could include:

  • Credit cards (Visa, MasterCard, American Express, Discover, etc.)
  • Retail accounts (credit from stores where you shop, like department store credit cards)
  • Installment loans (loans where you make regular payments, like car loans)
  • Finance company accounts
  • Mortgage loans

Amounts owed on accounts determines 30% of a FICO Score

Owing money on credit accounts doesn’t necessarily mean you’re a high-risk borrower with a low credit Score.  However, when a high percentage of a person’s available credit is being used, this can indicate that a person is overextended, and is more likely to make late or missed payments.

Part of the science of scoring is determining how much is too much for a given credit profile.  Your FICO Scores take into account several factors.

Note, that even if you pay off your credit cards in full each month, your credit report may show a balance on those cards. The total balance on your last statement is generally the amount that will show in your credit report.

In addition to the overall amount you owe, your FICO® Scores consider the amount you owe on specific types of accounts, such as credit cards and installment loans.

Length of credit history determines 15% of a FICO score

In general, a longer credit history will increase your FICO® scores.  However, even people who haven’t been using credit long may have high FICO Scores, depending on how the rest of the credit report looks.

Your FICO scores take into account:

  • how long your credit accounts have been established, including the age of your oldest account, the age of your newest account and an average age of all your accounts
  • how long specific credit accounts have been established
  • how long it has been since you used certain accounts

Credit mix determines 10% of a FICO score

FICO® scores will consider your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans.  It’s not necessary to have one of each, and it’s not a good idea to open credit accounts you don’t intend to use.

The credit mix usually won’t be a key factor in determining your FICO scores—but it will be more important if your credit report does not have a lot of other information on which to base a score.

Have credit cards – but manage them responsibly!

Having credit cards and installment loans with a good credit history will raise your FICO scores.  People with no credit cards tend to be viewed as a higher risk than people who have managed credit cards responsibly.

Do you have experience with both revolving credit and installment type accounts, or has your credit experience been limited to only one type?

Your FICO® scores also look at the total number of accounts you have.  How many is too many will vary depending on your overall credit picture.

Closing an account doesn’t make it go away!

A closed account will still show up on your credit report, and related credit history will be considered by your FICO scores.

New credit determines 10% of a FICO score

People tend to have more credit today and shop for new credit more frequently than ever.  FICO® scores reflect this reality.  However, research shows that opening several new credit accounts in a short period of time represents greater risk – especially for people who don’t have a long credit history.  Your FICO scores take into account several factors, including how you shop for credit.

Your FICO® scores look at how many new accounts you have by type of account. They also may look at how many of your accounts are new accounts.

Don’t open new accounts too rapidly!

If you have been managing credit for a short time, don’t open a lot of new accounts too rapidly.  New accounts will lower your average account age, which will have a larger effect on your FICO® scores if you don’t have a lot of other credit information.  Even if you have used credit for a long time, opening a new account can still lower your FICO scores.

Public record and collection items

These types of events are considered quite serious, although older items and items with small amounts will count less than recent items or those with larger amounts.

Negative factors include:

  • Bankruptcies – will stay on your credit report for 7-10 years, depending on the type
  • Foreclosures
  • Lawsuits
  • Wage attachments
  • Liens
  • Collections

Regarding late or missed payments, often known as “delinquencies” , public record and collection items, FICO® scores consider:

  • How late they were
  • How much was owed
  • How recently they occurred
  • How many there are

Some credit ratios to pay attention to

Your credit utilization ratio on revolving accounts—the percentage of your available credit you’re using—is an important factor in your FICO® scores. Using a high percentage of your available credit means you’re close to maxing out your credit cards, which can have a negative impact on your FICO scores. On the other hand, using a low percentage of your available credit can have a positive impact.  In some cases, a low credit utilization ratio will have a more positive impact on your FICO scores than not using any of your available credit at all.

It’s also important to note that your current account balance isn’t necessarily the balance that shows up on your credit report and factors into your FICO Scores.  Your account balance on your credit report will reflect the account balance your lender reported to the credit bureau (typically the balance from your latest monthly statement).  So even if you pay your credit card balances in full each month, your account balance won’t necessarily show on your credit report as $0.

Keep in mind that a larger number of accounts with amounts owed can indicate higher risk of over-extension.


How much of the installment loan amounts is still owed, compared with the original loan amount

For example, if you borrowed $10,000 to buy a car and you have paid back $2,000, you still owe (with interest) more than 80% of the original loan. Paying down installment loans is a good sign that you’re able and willing to manage and repay debt.

Is there any difference in how the FICO scoring formula considers Chapter 7 and Chapter 13 bankruptcies?

The FICO scoring formula treats both Chapter 7 and Chapter 13 Bankruptcies similarly in terms of how they affect one’s FICO score.  That is, the formula considers these two forms of bankruptcy as having the same level of severity and, for both types, uses the filing date to determine how long ago the bankruptcy took place.  As with other negative credit information, the negative effect of a bankruptcy to one’s FICO score will diminish over time.

Both types of bankruptcy are considered in this similar manner because our research has found both types to be similarly predictive in assessing future creditworthiness.  This similarity in treatment among these two types of bankruptcy, however, should not be interpreted as FICO (Fair Isaac Corporation) recommending one of these types over another, or in any way recommending a particular type of bankruptcy based on its effect to one’s FICO score, as every consumer’s personal situation is different.

How To Establish Initial Credit

Open a checking account

If you don’t have a checking account, potential lenders become very skeptical about the way you handle your financial affairs.

Open a savings account

When potential lenders see a savings account on your credit application, it gives them a good feeling, regardless of the amount you have in your account.

Open a credit card

There are many different types credit cards available.  Some of the most common include a department store card, a traditional credit card or even a secured credit card.

Each card has it’s pros and cons and must be used responsibly.  If used correctly, your card can help your overall financial situation.  Please seek counsel on which card is most appropriate for your situation and how to properly apply and use for best credit results.

Try to get a loan from a finance company

Financial companies are usually more receptive to individuals who are just starting out in credit. The interest rate is a lot higher than a bank, but your chances of getting started are greater. Be sure you talk with your banker first to see the chances of getting a loan from your bank before applying to a finance company.

Find a co-signer

Try to get your parent or other responsible party to co-sign a loan for you.

Build credit using your current bills

Although paying your utility and other bills on time does not necessarily help raise your credit scores with the major credit bureaus, don’t lose focus of your due dates!

Paying your bills on time is an important component of building and preserving good credit.  Late payments can hurt your scores with the major bureaus.  Also, there are alternative means of evaluating credit worthiness used by some lenders.  In these situations, lenders may use your rent or utility payment history as a way of approving a loan.



It’s important to note that building credit, whether it’s new credit, improving poor credit or trying to boost an already good credit situations – is a bit like losing weight: It takes time and there is no quick way to fix a credit score.  In fact, out of all of the ways to improve a credit score, quick-fix efforts are the most likely to backfire, so beware of any advice that claims to improve your credit score fast.  The best advice for building credit is to manage it responsibly over time.  If you haven’t done that, then you need to start.

“Fixing” a credit score is more about fixing errors in your credit history (if they exist) and then following the guidelines below to maintain consistent, good credit history.  Raising your scores after a poor mark on your report or building credit for the first time will take patience and discipline.

3 Important Things You Can Do Right Now

  1. Check Your Credit Report – Building positive credit begins with your credit report.  If you haven’t already, request a free copy of your credit report and check it for errors.  Your credit report contains the data used to calculate your credit score and it may contain errors.  In particular, check to make sure that there are no late payments incorrectly listed for any of your accounts and that the amounts owed for each of your open accounts is correct.  If you find errors on any of your reports, dispute them with the credit bureau.  Also, checking your credit report will let you know if there are any collections or public records being reported to the bureaus that need to be addressed.
  2. Setup Payment Reminders – Making your credit payments on time is one of the biggest contributing factors to your credit scores.  Some banks offer payment reminders through their online banking portals that can send you an email or text message reminding you when a payment is due. You could also consider enrolling in automatic payments through your credit / debit card or checking on the availability to have payments automatically debited from your bank account.
  3. Reduce the Amount of Debt You Owe – This is easier said than done, but reducing the amount that you owe is going to be a far more satisfying achievement than improving your credit score.  The first thing you need to do is start using your credit cards responsibly.  Use your credit report to make a list of all of your accounts and then go online or check recent statements to determine how much you owe on each account and what interest rate they are charging you.  Come up with a payment plan that puts most of your available budget for debt payments towards the highest interest cards first, while maintaining minimum payments on your other accounts.

Payment History Tips

Payment history can contribute 35% to a FICO Score calculation.  Therefore, this category can have a great effect on improving your scores, but past problems like missed or late payments are not easily fixed.

  • Pay your bills on time.
    Delinquent payments, even if only a few days late, and collections can have a major negative impact on your FICO Scores.
  • If you have missed payments, get current and stay current.
    The longer you pay your bills on time after being late, the more your FICO scores should increase. Older credit problems count for less, so poor credit performance won’t haunt you forever.  The impact of past credit problems on your FICO scores fades as time passes and as recent good payment patterns show up on your credit report.
  • Be aware that paying off a collection account will not remove it from your credit report.
    You can request for it to be removed but it could stay on your report for seven years.
  • If you are having trouble making ends meet, contact your creditors or see a legitimate credit counselor.
    This won’t build your credit score immediately, but by being proactive you can prevent further to your credit and financial situation.  Also,  if you can begin to manage your credit and pay on time, your score should increase over time.  Seeking assistance from a credit counseling service will not hurt your FICO scores.

Amounts Owed Tips

This category contributes 30% to a FICO score’s calculation and can be easier to clean up than payment history, but that requires financial discipline and understanding the tips below:

  • Keep balances low on credit cards and other “revolving credit”.
    High outstanding debt can affect a credit score.
  • Pay off debt rather than moving it around.
    The most effective way to improve your credit scores in this area is by paying down your revolving (credit cards) debt.  In fact, owing the same amount but having fewer open accounts may lower your scores.
  • Don’t close unused credit cards as a short-term strategy to raise your scores.
  • Don’t open a number of new credit cards that you don’t need, just to increase your available credit.
    This approach could backfire and actually lower your credit scores.

Length Of Credit History Tips

  • If you have been managing credit for a short time, don’t open a lot of new accounts too rapidly.
    New accounts will lower your average account age, which will have a larger effect on your scores if you don’t have a lot of other credit information. Also, rapid account buildup can look risky if you are a new credit user.

New Credit Tips

  • Do your rate shopping for a given loan within a focused period of time.
    FICO scores distinguish between a search for a single loan and a search for many new credit lines, in part by the length of time over which inquiries occur.
  • Re-establish your credit history if you have had problems.
    Opening new accounts responsibly and paying them off on time will raise your credit score in the long term.
  • Note that it’s OK to request and check your own credit report.
    This won’t affect a score, as long as you order your credit report directly from the credit reporting agency or through an organization authorized to provide credit reports to consumers.

Types of Credit Use Tips

  • Apply for and open new credit accounts only as needed.
    Don’t open accounts just to have a better credit mix – it probably won’t raise your credit score.
  • Have credit cards – but manage them responsibly.
    In general, having credit cards and installment loans (and paying timely payments) will rebuild your credit scores. Someone with no credit cards, for example, tends to be higher risk than someone who has managed credit cards responsibly.
  • Note that closing an account doesn’t make it go away.
    A closed account will still show up on your credit report, and may be considered by a score.


Missing accounts on my credit report

Your credit file may not reflect all your credit accounts.  Although most national department store and all-purpose bank credit card accounts, along with other credit lenders,  will be included in your file, not all creditors voluntarily supply information to the credit bureaus.

If you’ve been told you were denied credit because of an “insufficient credit file” or “no credit file” and you have accounts with creditors that don’t appear in your credit file, you might consider asking your creditors to begin reporting your credit information to credit bureaus.  It won’t hurt to ask, but keep in mind that creditors are not required to report consumer credit information to credit bureaus.  Another possible option is to move your account to a different creditor who does report regularly to credit bureaus.

Fixing credit report errors

To insure that the mistake gets corrected as quickly as possible, contact both the credit bureau and organization that provided the information to the bureau.  Both these parties are responsible for correcting inaccurate or incomplete information in your report under the Fair Credit Reporting Act.

First, tell the credit bureau what information you believe is inaccurate.
The credit bureau must investigate the item(s) in question – usually within 30 days – unless they consider your dispute frivolous.  Include copies (NOT originals) of documents that support your position.  In addition to providing your complete name and address, your letter should:

  • Clearly identify each item in your report you dispute.
  • State the facts and explain why you dispute the information.
  • Request deletion or correction.

You may want to enclose a copy of your report with the items in question circled.  Many like to send their letters by certified mail, return receipt requested, so you can document that the credit bureau received your correspondence.  Many bureaus now allow you to dispute errors online.  Keep copies of your dispute letter and enclosures, emails and/or online dispute transaction numbers.

Second, write to the appropriate creditor or other information provider, explaining that you are disputing the information provided to the bureau.
Again, include copies of documents that support your position.  Many providers specify an address for disputes.  If the provider again reports the same information to a bureau, it must include a notice of your dispute.  Request that the provider copy you on correspondence they send to the bureau.  Expect this process to take between 30 and 90 days.

In many states, you will be eligible to receive a free credit report directly from the credit bureau, once a dispute has been registered, in order to verify the updated information. Contact the appropriate credit bureau to see if you qualify for this service.

Credit bureau investigation

An investigation may not resolve your dispute with the credit bureau with the outcome you wanted.  If that’s the case, ask the credit bureau to include your statement of the dispute in your file and in future reports.  If requested, the credit bureau also will provide your statement to anyone who received a copy of the old report in the recent past.  There usually is a fee for this service.

If you tell the information provider that you dispute an item, a notice of your dispute must be included anytime the information provider reports the item to a credit bureau while that dispute is being investigated.

If the investigation does not produce the results you feel are correct and inaccurate information in your credit report is causing you harm, you may consider hiring a lawyer or credit counselor to help you resolve your dispute as a last resort.