Understanding Credit Scoring

The Things That Count

Scores are part of the lending decision

What do lenders look at when deciding whether to approve a loan? Typically, lenders making almost any kind of credit decision will look at a variety of types of information, including one or more credit scores. While there are many kinds of credit scores, the most frequently used are credit bureau risk scores developed by Fair, Isaac. These are commonly known as FICO® scores, although they have different names at each of the national credit reporting agencies. A score is a number that tells a lender how likely an individual is to repay a loan, or make credit payments on time. When a lender requests a credit report and score from a credit reporting agency, the score is calculated by a "scorecard" or scoring model - a mathematical equation that evaluates many types of information from your credit report at that agency. By comparing this information to the patterns in thousands of past credit reports, scoring identifies your level of credit risk.

Types of information FICO scores consider

Listed below are the five main categories of information on a credit report that Fair Isaac scores evaluate, along with their general level of importance. Within these categories is a complete list of the information that goes into a FICO score. Please note that:

  • A score takes into consideration all these categories of information, not just one or two. No one piece of information or factor will determine your score.
  • The importance of any factor depends on the overall information in your credit report. For some people, a given factor may be more important than for someone else with a different credit history. In addition, as the information in your credit report changes, so does the importance given any one factor in determining your score. Thus, it's impossible to say exactly how important any single factor is in determining your score - even the levels of importance shown are for the general population, and will be slightly different for different credit profiles. What's important is the mix of information.
  • Your score only looks at information in your credit report. Lenders look at many things when making a credit decision, including your income and the kind of credit you are applying for. However, your FICO score does not reflect these facts, as it only evaluates your credit report at the credit reporting agency.
  • Your score considers both positive and negative information in your credit report. Late payments will lower your score, but having a good record of making payments on time will raise your score.
  • Your score does not consider your ethnic group, religion, gender, marital status and nationality. These are, in fact, prohibited from use in scoring by US law.

Using Score Reason Codes to Understand Your Score

When a lender receives your Fair, Isaac credit bureau risk score, up to four "score reason codes" are also delivered. These explain the top reasons why your score was not higher. They say things like "Number of accounts with delinquency." If the lender rejects your request for credit, these reason codes can help the lender tell you why your score wasn't higher.

These reason codes are more helpful than the score itself in helping you determine whether your credit report might contain errors, and how you might improve your score over time. However, if you already have a high score some of the reason codes may not be very helpful, as they may be marginal factors related to the last three categories above.

A Note About Fair, Isaac Scores

Fair, Isaac credit bureau risk scores are available to lenders through the major credit reporting agencies (Experian, Equifax and Trans Union). The score from each credit reporting agency considers only the data in your credit report at that agency. This is why you may have a different score from each of the credit reporting agencies.

Fair, Isaac credit bureau risk scores provide the best risk guide available based solely on credit report data. The higher the score, the lower the risk. There are also other types of scores available to lenders. But no score says whether a specific individual will be a "good" or "bad" customer. And 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.

FICO credit bureau risk scores are calculated by the credit reporting agency, using Fair, Isaac's scoring models, when the score is requested by a lender. Only the credit reporting agencies have the data needed to calculate a FICO score. Fair, Isaac can't access or correct data at the credit reporting agencies, or calculate a score. To get a copy of your credit report or to correct information in the report, contact the credit reporting agency directly.