Understanding My Credit Score


What is my credit score?

When you purchase a vehicle, a house, or any other big ticket item, you may need to apply for credit. When you do, a retailer will typically check your credit score, the most popular being the FICO® score.
FICO scores range from 300 to 850 and are determined by reviewing credit histories from three national bureaus in the United States - Equifax, Experian, and TransUnion - along with other factors.
 
 

How is my credit score calculated?

Several components make up your credit score but the makers of the FICO score, Fair Isaac Corporation, do not openly disclose exactly how the score is calculated. The company has, however, given some indication of the weighting of various criteria including:
  • Payment history 35%
  • Amount owed 30%
  • Length of history 15%
  • New credit 10%
  • Types of credit used 10%

What is a credit "inquiry?"

If you authorize a lender to obtain a copy of your credit report from a credit bureau, that is an "inquiry." You will then notice that these credit inquiries are listed on your credit report, possibly along with other businesses inquiring about your credit. The only inquiries that impact your FICO score are ones resulting from new credit applications.
 
 

Does my FICO score drop if I apply for new credit?

If you apply for many credit cards in a short time span, these multiple inquiries appear on your report. New credit inquiries may mean higher risk, but most scores are not affected by multiple auto, mortgage or student loan lender inquiries. 

Often these are viewed as rate shopping and considered a single inquiry, thus not having a major impact on your credit score.

How do credit inquiries affect my score?

Applying for credit will impact your score differently based on your unique credit history. Credit inquiries usually have little impact on your FICO score. Typically, one credit inquiry will take around five points off your FICO score. Since the full range of FICO scores is 300-850, this equates to an impact of less than two percent. Inquiries will impact your score more dramatically if you have a fewer number of accounts or a shorter credit history. 
Keep in mind that multiple inquiries can signal greater consumer risk to lenders. Statistics show that consumers with six inquiries or more can be up to eight times more likely to declare bankruptcy than people with no inquiries. Although inquiries play a part in assessing risk, they play just a minor part. Factors like paying your bills in a timely manner and your overall debt burden are weighted more heavily.
 
 

Are all credit inquiries weighted the same?

No. FICO scores treat loans that commonly involve rate-shopping, such as mortgage, auto and student loans, more favorably. For example, if you find a loan within 30 days, these rate shopping inquiries won't adversely affect your score. In addition, FICO Scores look on your credit report for rate-shopping inquiries older than 30 days.

How should I go about "rate shopping?"

Looking for a mortgage, auto or student loans may result in multiple lenders requesting your credit report, even though you're simply looking for one loan. Luckily, FICO scores will ignore multiple loan inquiries made in a 30-day period prior to scoring. 
When you obtain a loan within 30 days of rate shopping, your score isn't impacted. FICO scores look for loan inquiries older than 30 days and if any are found, they will consider them as just one inquiry. FICO scores calculated from older versions of the formula use a shopping period of 14 days, and the newest versions of the formula use a 45-day span. Lenders are free to choose which version of the FICO scoring formula they want their credit reporting agency to use to calculate your FICO score.
 
 

How can I improve my FICO score?

When rate shopping, try to do it within a defined period of time, such as 30 days. FICO scores treat a search for a single loan preferentially as opposed to a search for many new credit lines, partially based on the length of time during which inquiries occur. Also, consider using these other best practices to take care of your FICO score:

  • Pay bills on time
  • Keep low credit card balances
  • Apply for and open new credit accounts only as needed
  • Check your credit report regularly to be sure it is accurate and up-to-date. You are entitled to one free credit report every 12 months from each national credit bureau
  • Reestablish your credit history if you've had past issues. Consider opening new accounts and paying balances on time to raise your FICO score.
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