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Understanding your credit score

This is National Credit Education Week, the perfect time to learn more about credit scoring and how this mysterious process works.

It’s the three-digit number that can have a huge impact on your life — now and in the future. I hear from a lot of people about their credit scores. In most cases, they want to know why their score dropped and what they can do to bring it back up.

This is National Credit Education Week, the perfect time to learn more about credit scoring and how this mysterious process works. I spoke with Craig Watts, public affairs manager of the Fair Isaac Corporation, the company that created automated credit scoring back in 1959. Today, their FICO score is the most commonly used credit score in the U.S.

Q: Let’s start with a very simple question. What is a credit score?
Watts: A credit score helps lenders determine how likely a borrower is to repay them as agreed. The FICO score is a three digit number that summarizes the real-time information on your credit report. It ranks you with other consumers according to your risk, on a scale of 300 to 850, where higher scores mean less risk of future defaults. So it tells the lender you’re a better risk than Mary, but you’re not quite as good of a risk as Bob.

Q: What’s considered to be a good credit score?
Each lender has its own standards, and they use those standards to determine who is going to qualify for a credit card, car loan or mortgage. If your score is in the 700s or certainly the 800s, you have a low risk in the eyes of most lenders and you should qualify for credit. With a higher score, you will probably be offered a better interest rate. If your score is below 600, you represent a high risk of default. If you qualify for the credit at all, you will very likely pay a higher interest rate.

Q: A lot of people talk about “my credit score” as if there’s only one. But we have lots of credit scores, don’t we?
That’s true. Just because you know your credit score from TransUnion, for example, doesn’t mean that lenders are seeing that same score if they happen to be using information from Equifax or Experian. If you really want the full picture of what lenders see, you need to get your score from each of the big three credit bureaus. What you see from our Web site,, is likely to be the same score your lender is using. Of course, there’s always a chance your lender is asking the credit bureaus for a score from a different industry-based formula.

Q: What sorts of things go into creating my FICO score?
The FICO score only looks at your credit history. It does not see information that is not in your credit report. Your income is not considered by a credit score. How much money you have in the bank is ignored. Whether you are employed, how long you’ve been employed and where you live, all that information is ignored by the FICO score. It’s really only looking at your credit history — how you handled credit in the past and your current credit relationships.

Q: If I use lots of credit and have plenty of debt, will that give me a good score?
Credit scores measure your risk of future default; they don’t measure how profitable you are to a lender. The best way to get a high credit score is to be very frugal and sparing in the way you use credit. People who have the highest credit scores tend to be the most the cautious of individuals when it comes to opening new accounts.

Q: I always pay my bills on time. Does that insure that I have a high FICO score?
That’s a great way to help your credit score. But there’s another factor the score looks at that could penalize you — how close you are to your credit limits with the balances on your credit cards. In order to get a good FICO score you want to keep your balances on credit cards, gas company cards and retail store cards as low as you can. There is no single ideal percentage in terms of how much of your credit limit you should have outstanding. But the lower your balance, the better.

Q: What about people who only pay with cash because they feel it’s the more responsible thing to do? Will they have a low credit score?
Not necessarily. They’re not hurting their score, but they’re probably not helping it. The best way to help your credit score is to use credit, but sparingly and responsibly. For example, if you have a credit card, use it every couple of months and then pay off that balance in full. That record of moderate use and timely payments will significantly help your credit score over time.

Q: Are there minimum requirements to get a credit score?
Yes. To calculate a FICO score, your credit report must have at least one account that has been open for six months or longer. It also needs one account on which the lender has updated your payment information within the past six months.

Q: What’s worst thing you can do, the thing that is most likely to drive down your score?
The worst thing you can do is pay bills late. Your payment history accounts for roughly a third of your FICO score. The fastest way to drop that score, like an elevator plummeting down the shaft, is to become seriously late in repaying your creditors, such as your bank or credit card issuers. If you pay on time, you’re protecting your score and you’re building a positive history that will improve your score gradually as time goes on.

Are there any quick ways to improve your credit score?
There are only a few things you can do. Generally, these scores assess your long-term credit history, and it’s really hard to get the score to rise quickly. If you have high balances on credit cards, and you happen to be in the enviable position of being able to pay down those balances, that can help your score quickly. Everything else you can do to help your score is a long-term game. It’s something that will take you months, and in some cases years, in order to restore a really good score.

ConsumerMan warning: Steer clear of any company that promises to repair your credit score quickly. It’s a scam.