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Credit Scoring 101

Justin DurrantSr. Engineer - Windows Server/Virtualization
Greetings all! Along with answering technical questions on EE, I also write and educate about credit and scoring. Enjoy!

These are the three major credit bureaus (aka credit reporting agencies): Equifax (EQ), Experian (EX), and TransUnion (TU). You'll need to find out all three of your FICO scores to properly grasp your overall credit picture.

What is the range of FICO scores?

FICO (aka Classic or BEACON) scores can range from 300 to 850, but the majority of scores usually fall within the 600s and 700s.


FICO, FAKO, Credit Score, PlusScore, ScoreX, Vantage are all the same right? WRONG!

FICO = The score lenders use and the only score you care about.

FAKO = Any score that isn't a FICO. Most people like to buy the ScoreWatch product because you can quite often get updates as to your current EQ FICO score. myFICO Identity Theft Security Deluxe is similar to Score Watch except that is monitors TU. There is no FICO monitoring service for all three credit reporting agencies.

There are generally two reasons why you might not be able to get a score from MyFICO. Your score does not contain enough positive data to calculate a score, or there is a fraud alert on your file.

Classic or BEACON FICO scores are generally the best indicator of credit-worthiness and a good overall indicator of where your credit (mortgage, credit card, auto,etc.) stands.

Credit card enhanced (or bankcard enhanced scores) are specific indicators of credit worthiness with regards to credit cards only (not mortgages, auto, loans, etc.).

Auto-enhanced scores are specific indicators of credit worthiness with regards to an auto loan. Consumers cannot purchase auto-enhanced scores.

Your actual FICO score ranges from 300-850, remember you have three separate FICO scores for each credit reporting agency EQ, EX, and TU.

Scores higher than 720-750+ are ideal. Any higher really doesn't matter. Once you get this high, you have excellent scores regardless.

Also, just because you have your score today doesn't mean you can walk into the car dealership tomorrow and say I have an 800+ FICO please give me the APR I want on my loan, the lender may calculate a completely different FICO score and if you were to pull your FICO score again that day it may be different for you.

Remember, a FICO score is a quick look at the overall status of your credit. It may mean getting a better APR on the credit card you want, but it likely wont determine whether you get the card or not (your credit report(s) will!).

How is my score calculated?

-35% affects Payment History. Meaning any lates; collections; charge offs; bankruptcies; judgments; liens or the such will hurt the score. All is time based, the older the information the less it is contributing to the scores.

-30% affects Utilization. It is best to have several accounts with low balances distributed then it is to have fewer accounts maxed out. To figure utilization: Balance (divided) by Credit Limit = percentage. Lower than 10% recommended per account, this is one of the fastest means for increasing the over all credit score.

-15% affects Established History. The longer you maintain open accounts with creditors the better. When first starting out of course this is not easy; but this is where getting added as an Authorized User to another persons established credit comes in best. Remember that the contributor must have an account that has long history; clean payment record; high credit limit; and low balance. Also need to check with the creditor to insure that they have a policy to report authorized user accounts to all three major credit reporting agencies.

Note: Authorized user accounts are the best way to go; since you are not legally responsible for the debt rather than Joint or Co-Signer accounts. Also, if this account starts to report negatively; these accounts are usually easier to remove from the credit reports by either contacting the creditor and requesting termination of the relationship; or disputing through the CRAs.

Update: In its original form, FICO 08 would not use AU accounts in scoring. It has been modified: FICO 08 now WILL continue to count legitimate AU accounts. As of the end of 2008, the EX version of FICO 08 is only being used by a few lenders.

10% affects Inquiries. Don't apply for credit unless you know you can get it or that you need to get it; unnecessary credit inquiries are going to hurt the scores - especially if your over all credit file is small to begin with.

Tip: When applying for credit pull your own credit report first (this is a soft hit and won't drop your scores). With credit report in hand go visit your local banks or credit unions. Show them the reports; and don't allow them to pull a credit report of their own unless they can say for sure that you will be approved, this way you save your self unnecessary pulls on your credit report if they decline you. If they say yes, you are approved, then they will need to pull credit report to seal the deal.

Mortgage & Auto industry has special rules for inquiries: all applications for credit resulting in pulled credit reports within a 14 day period of time will only count as one inquiry & will be suppressed from affecting credit scores for 30 days. So if you plan to go shopping for a mortgage or a car, do your research first picking what companies you want to apply with and do this all within a 2 week period of time so that the scores are not affected too much.

-10% affects Mix of Credit. Use different types of credit (revolving; installment; auto; mortgage...) evenly.

Also remember the advice which a lender gives you is productive for getting a loan; but not always good for the credit scores. If they tell you to consolidate and close accounts be careful how you go about this, most people's compliance usually results in dropped credit scores. You are shrinking your overall available credit limit verses your balances... so remember you don't want to hurt the utilization by consolidating and closing accounts behind you.

What types of information are NOT used in calculating my FICO score?

1. Your race, color, religion, national origin, sex or marital status

2. Your age

3. Your salary, occupation, title, employer, date employed or employment history

4. Where you live

5. Certain types of inquiries such as promotional, account review, insurance or employment related inquiries

6. Any information not found in your credit file

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

How often does my score change?

Your credit file is continually updated with new information from your creditors. The FICO score is calculated based on the latest "snapshot" of information contained in your file at the time the score is requested. Therefore, your FICO score from a month ago is probably not the same score a lender would get from the credit reporting agency today. Fluctuations are quite common.

Why are my scores different?

Your scores may be different at each of the three main credit reporting agencies as the FICO score only considers the data in your credit file from that agency. If your score from the three credit reporting agencies is different, it is probably because the information those agencies have on you differs. Also keep in mind that there is a different FICO formula for each credit reporting agency.

How can I improve my score?

It takes time and there is no quick fix. In fact, quick fix efforts can backfire. Scores reflect credit payment patterns over time with more emphasis on recent information. The best advice is to manage your credit responsibly over time.

Scores automatically improve, as one's overall credit picture gets better. That means showing a historical pattern of paying your bills on time and using credit conservatively.

Here are some suggested tips to follow:


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

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

3. If you are having trouble making ends meet, contact your creditors or see a legitimate credit counselor. This will not improve your score immediately, but if you can begin to manage your credit and pay on time, your score will get better over time.

4. Keep balances low (1-9% util) on credit cards and other revolving credit. High outstanding debt can affect a score.

5. Pay off debt rather than move it around.

6. Re-establish your credit history if you have had problems.

7. Opening new accounts responsibly and paying them off on time will raise your score in the long term.

8. Note that it is OK to request and check your own credit file. This will not affect your score, as long as you order your credit file directly from the credit reporting agency or through an organization authorized to provide credit files to consumers (such as myFICO).

9. Apply for and open new credit accounts only as needed.

10. Have credit cards but manage them responsibly. In general, having credit cards and installment loans (and paying timely payments) will raise your score. Someone with no credit cards, for example, tends to be higher risk than someone who has managed credit cards responsibly.


1. Close unused credit cards as a short-term strategy to raise your score. NEVER close an open account unless it is costing you money!

2. Open a number of new credit cards that you do not need, just to increase your available credit. This approach could backfire and actually lower your score.

3. If you have been managing credit for a short time, do not open a lot of new accounts too rapidly. New accounts will lower your average account age, which will have a larger effect on your score if you do not have a lot of other credit information. Also, rapid account build-up can look risky if you are a new credit user. 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.

How to I dispute inaccurate info?

I recommend you dispute online. Remember to print a copy of the confirmation page.




If derogatory information is removed, will my score increase?

It depends. It is impossible to say how important any single factor or new information is in determining your score because the importance of each factor depends on the overall information in your credit report. What is important in scoring is the mix of information, which varies from person to person and for any one person over time.

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 of any factor in determining your score. Some helpful tips are:

1. If there is inaccurate derogatory information on your credit report, get it corrected.

2. The score evaluates derogatory information in several ways - how often, how recent and how severe. If you have a pattern (e.g. several derogatory items and late payments) of this type of behavior, removing one of these may not impact the score very much.

Be aware that:

1. Paying off a collection account, late pay or derogatory item will not remove it from your credit file. It will stay on your file for seven years along with any dollar amount associated with the past due.

2. Closing an account does not remove it from your credit file. A closed account will still show up on your credit file, and may be considered in calculating your score.

How long will a derog stay on my reports?

(1) In general. The 7-year period referred to in paragraphs (4) and (6)(2) of subsection (a) shall begin, with respect to any delinquent account that is placed for collection (internally or by referral to a third party, whichever is earlier), charged to profit and loss, or subjected to any similar action, upon the expiration of the 180-day period beginning on the date of the commencement of the delinquency which immediately preceded the collection activity, charge to profit and loss, or similar action. 

In legalese, that means that an account reports 7.5 years from the date it goes bad, period. Paying shouldn't reset it.

No derogatory information was reported on my file, why did I receive a reason code relating to derogatory data?

Delinquency or serious delinquency may be flagged on any accounts that are currently delinquent, as well as on any accounts that are currently in good standing but may indicate historical delinquency in the past e.g. going into collection status.

Evidence of current or historical delinquency may appear in the following fields:

1. The "Account Status" of the account (e.g. 30 or more days past due, chapter 13, repossession, bad debt, placed for collection, foreclosure, included in bankruptcy, etc.).

2. An indication of any "Past Due" amount.

3. The "Times Past Due" and "Previous High Status" of the account or other historical payment indicators showing previous 30, 60, 90, or 120 days delinquent status on the account, or previous derogatory status, and when it occurred.

4. Counters indicating the number of times an account has been "30 Days", "60 Days", "90 Days" or "120 Days" past due during the life of the account.

5. "Description" associated with the account, containing narrative codes (comments) attached to accounts, if they contain any comment that is categorized as a derogatory event (e.g. account placed for collection, paid by garnishment, etc.).

Note that accounts that have gone into a derogatory status but were subsequently satisfied (e.g., paid charge-off, account paid after foreclosure started) still have a derogatory event associated with them, which results in a reason code indicating derogatory data.

Feel free to post any comments or suggestions!
Justin DurrantSr. Engineer - Windows Server/Virtualization

Comments (7)

Author of the Year 2009

Another point for the "DO:" list:

Use online-banking to set up automatic payments on key recurring expenses.  

The only bad mark on my credit report is that about 5 years ago, the mortgage bill fell behind the filing cabinet, then I was on vacation when the next one came in.   So I ended up being 61 days late, and that's the sort of thing that sticks like glue.

So I set up an automatic payment and now that can never happen.    In the worst-case scenario, my checking account is low (say, I forgot to make a deposit) and the bank dings me with an overdraft charge, but it makes the payment on time -- by drawing from my ODLOC.  I'd rather pay that fee than risk getting another derogatory on my credit report.

Setting up to auto-pay the minimum payment on your credit card might also makes sense.  Banks love it when you are one day late because they can charge you a late fee AND charge you the extra interest.  

Procrastination on bill-paying can be costly.   I occasionally put off paying the bills too long and end up with a late fee.  Once I found that I'd paid over $150 in late fees for the year.   You probably won't get dinged on your FICO score for being one day late on a credit card (31 days is a different story).  But it's a simple thing to avoid.
Justin DurrantSr. Engineer - Windows Server/Virtualization


Good tip, Dan. You may want to try asking the lender to make a goodwill adjustment to your credit reports. Here is an example letter you can use:


Dear Creditor:

I am writing you regarding account *****I have been a Creditor customer since 2002, and during that time I have enjoyed my experience with Creditor greatly. I am writing to see if you would be willing to make a "goodwill" adjustment to your reporting to the three credit agencies. I have one 90 day late payment on the above referenced account that dates back to 2004. Since that time I have been an exceptional customer paying every month on time.

Because of my exceptional payment history over the last several years, I would like you to consider removing the negative payments from my credit report. At the time of the late payments, I was under the impression that my account was in deferment, when in fact it was not (or other reason you may have been late). I say that not to justify why the payments were late, but rather to show that the late payments are not a good indicator of my actual credit worthiness. I hope that Creditor is willing to work with me on erasing this mark from my credit reports.

I have been a very happy customer in the past and hope to continue a long relationship with Creditor. With today’s credit industry so competitive, I know how important it is to maintain good relationships with customers. Creditor has been exceptional in my book so far and I highly recommend it to all my friends and relatives. I hope that you will deeply consider my request and prove once again, why Creditor is heads above the rest. I look forward to your reply. Please feel free to send your reply to
Author of the Year 2009

That's a good template.

Unrelated, chatty, note:
I've talked to some "old timers" in the credit industry and in their demographic number crunching, they found that recently-divorced women were the single most likely group to fall into a derogatory status.  

But the FCRA laws make it a Felony to use that information.  Also, the FCRA has real teeth -- the feds can take a percentage of your entire corporate gross revenue.  If you are a big company, like Sears (for instance), that's enough to scare you away from breaking the law.
IT GuySys Admin/Windows Admin

Can anyone provide me with a list of websites that will help me calculate how my credit score will change if I pay down certain credit card accents by a certain amount, take out a car loan, take out a mortgage, take out a student loan, etc.?

I've heard about these services being available I'm just not sure which websites to go to in order to calculate this information.
Justin DurrantSr. Engineer - Windows Server/Virtualization



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