Reliable Credit Builders

HOW CREDIT SCORE WORKS

Applying for credit.

When you're applying for credit, whether it's a credit card, a car loan, a personal loan or a mortgage, lenders want to know your credit risk level. In other words, "If I give this person a loan or credit card, how likely is it that I will get paid back on time?" There are three major credit reporting agencies:

Equifax
Experian and
TransUnion

In the United States they maintain records of your use of credit and other information about you. These records are called credit reports, and lenders will want to check your credit report when you apply for credit. In most cases, lenders will also want to know your credit score.

The credit reporting agencies maintain information on millions of individuals. Lenders making credit decisions buy credit reports on their prospects, applicants and customers from the credit reporting agencies. Your report details your credit history as it has been reported to the credit reporting agency by lenders who have extended credit to you. Your credit report lists what types of credit you use, the length of time your accounts have been open, and whether you've paid your bills on time. It tells lenders how much credit you've used and whether you're seeking new sources of credit. It gives lenders a broader view of your credit history than do other data sources, such as a bank's own customer data.

Your credit report contains many pieces of information that reveal many aspects of your borrowing activities. The ability to quickly, fairly and consistently consider all this information, including the relationships between different types of information, is what makes credit scoring so useful.

Sample Credit Report

Personal Information

Name: John Peterson

Date of Birth: June 1, 1975

Social Security Number: 987-65-4320

Current Address: 7500 Six Avenue, Los Angeles, CA 90012

Accounts Summary

Accnt. Type Company Account No. Balance Neg. Items

Installment Ford Mot. BFM915X $23,000 No

Revolving Citicorp 427188888 $325 No

Negative Items

Accnt. Type Company Status Delinquency Neg. Descrip.

Installment Ford Pays as agreed 30 days past due

Inquiries

Date Company requesting your credit record

1/4/2008 Main Street Bank

9/21/2007 XKK Cellular Phone Service

What is a credit score?

A credit score is a number that summarizes your credit risk, based on a snapshot of your credit report at a particular point in time. A credit score helps lenders evaluate your credit report and estimate your credit risk. The most widely used credit scores are FICO® scores, the credit scores created by Fair Isaac Corporation. Lenders can buy FICO® scores from all three major credit reporting agencies. Lenders use FICO® scores to help them make billions of credit decisions every year. Fair Isaac develops FICO® scores based solely on information in consumer credit reports maintained at the credit reporting agencies.

Your credit score influences the credit that's available to you and the terms (interest rate, etc.) that lenders offer you. It's a vital part of your credit health.

YOU HAVE THREE FICO® SCORES

In general, when people talk about "your score," they're talking about your current FICO® score. But in fact there are three different FICO® scores developed by Fair Isaac-one at each of the three main US credit reporting agencies. And these scores have different names.

Credit Reporting Agency FICO® Score Name
Equifax BEACON®
Experian Experian/Fair Isaac Risk Model
TransUnion FICO® Risk Score, Classic
The FICO® scores from all three credit reporting agencies are widely used by lenders. The FICO® score from each credit reporting agency considers only the data in your credit report at that agency. Fair Isaac develops all three FICO® scores using the same methods and rigorous testing.

How FICO® works?

FICO® scores are the best-known and most widely used credit scores. Most credit scores used in the US and Canada are produced from software developed by Fair Isaac Corporation.

FICO® scores are provided to lenders by the three major credit reporting agencies:

Equifax, Experian and TransUnion.

When lenders order your credit report, they can also buy a FICO® score that is based on the information in the report. That FICO® score is calculated by a mathematical equation that evaluates many types of information from your credit report at that agency. By comparing this information to the patterns in hundreds of thousands of past credit reports, the FICO® score estimates your level of future credit risk. In order for a FICO® score to be calculated on your credit report, the report must contain enough information-and enough recent information-on which to base a score. Generally, that means you must have at least one account that has been open for six months or longer, and at least one account that has been reported to the credit reporting agency within the last six months.

FICO® scores provide a reliable guide to future risk based solely on credit report data. FICO® scores 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. 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.

How a FICO® Score Breaks Down

These percentages are based on the importance of the five categories for the general population. For particular groups-for example, people who have not been using credit long-the relative importance of these categories may be different.

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

What FICO® scores ignoree

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.

Where you live.

Any interest rate being charged on a particular credit card or other account.

Any items reported as child/family support obligations or rental agreements.

Certain types of inquiries (requests for your credit report or score).Your FICO® score does not count any inquiries you initiate, any inquiries from employers, or any inquiries lenders make without your knowledge.

Any information not found in your credit report.

Any information that is not proven to be predictive of future credit performance.

Length of Credit History.

How established is yours? Approximately 15% of your FICO® score is based on this category. In general, a longer credit history will increase your FICO® score. Your FICO® score takes into account:

How long your credit accounts have been established, in general. Your FICO® score considers 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.

MANAGE YOUR CREDIT HEALTH

Improving your FICO® score can help you:

Get better credit offers

Lower your interest rates

Speed up credit approvals

You should review your credit report from each credit reporting agency at least once a year and especially before making a large purchase, such as a house or car. You have the right to obtain one free copy of your credit report a year from each of the three major credit reporting agencies. For more information, contact the Annual Credit Report Request Service at:

P.O. Box 105281 Atlanta, GA 30348-5281 1 877 FACT ACT (1 877 322 8228) www.annualcreditreport.com

If you report an error to a credit reporting agency, it must investigate and respond to you within 30 days. In addition, if you are in the process of applying for a loan, immediately notify your lender of any incorrect information in your report.

You can also dispute any errors by contacting the credit reporting agencies directly:

Equifax: (800) 685-1111, www.equifax.com

Experian (formerly TRW): (888) 397-3742, www.experian.com

TransUnion: (800) 888-4213, www.transunion.com

More information on FICO® scores and credit scoring can be found online at www.myfico.com/crediteducation.

FICO® 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 FICO® score 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® score.

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 FICO® score.

Have credit cards-but manage them responsibly. In general, having credit cards and installment loans (and making timely payments) will raise your FICO® score. People with no credit cards, for example, tend to be higher risk than people who have 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 its history will be considered by your FICO® score.

Keep balances low on credit cards and other "revolving credit." High outstanding debt can lower your FICO® score.

Pay off debt rather than moving it around. The most effective way to improve your FICO® score in this area is by paying down your revolving credit.

Don't close unused credit cards as a shortterm strategy to raise your FICO® score. Owing the same amount but having fewer open accounts may lower your FICO® score.

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 FICO® score.

Avoid credit repair agencies that charge a fee to improve your FICO® score by removing negative, but accurate, information from your credit reports. No one can force credit reporting agencies or lenders to remove accurate information from a credit report. Credit repair companies often take your money without delivering what they promise, or provide only temporary improvements of your score, sometimes by removing accurate information that will reappear later.

Pay your bills on time. Delinquent payments and collections can have a major negative impact on your FICO® score.

If you have missed payments, get current and stay current. The longer you pay your bills on time, the better your FICO® score.

Be aware that paying off a collection account, or closing an account on which you previously missed a payment, will not remove it from your credit report. Your FICO® score will still consider this information, because it reflects your past credit pattern.

If you are having trouble making ends meet, contact your creditors or see a legitimate credit counselor. This won't improve your FICO® score immediately, but if you can begin to manage your credit and pay on time, your score should get better over time. And seeking assistance from a legitimate credit counseling service will not hurt your FICO® score.

Do your rate shopping for a given auto or mortgage loan within a short 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.

Be careful about opening new accounts that you don't need. Opening new accounts can lower your FICO® score in the short term. Beware of discounts or low interest rates being offered to entice you to open a new charge account that you don't need.

Re-establish your credit history if you have had problems. Opening new accounts responsibly and paying them off on time will raise your FICO® score in the long term.

Note that it's OK to request and check your own credit report and your own FICO® score. This won't affect your FICO® 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.