Frequently Asked Questions
Below are some commonly asked questions about credit and credit scores, including those specific to FICO® Scores.
How do I go about building my credit history?
If you are new to credit and are trying to build a credit history, here are a few ways you can get started.
- Apply for, and open one new credit card. Because you have little or no credit history, you may not get very good terms on this credit card – such as a high APR. However, if you charge small amounts and pay off the balance each month, you won't be paying interest each month so the high interest rate won't affect your bottom line.
- Open a secured credit card. If you are unable to get approved for a traditional credit card, a secured credit card can help you build your credit history. This type of card requires you to deposit money with the credit card company. You can then make charges on the secured card up to the amount you have deposited.
Whether you obtain a traditional credit card or a secured credit card, it is important to keep low balances and pay off your balance each month, and never miss a payment. This will help build a positive credit history.
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Should I take advantage of promotional credit card offers?
In many instances, credit has been harder to obtain these days as many financial institutions are re-evaluating how they extend credit. Such changes in lending practices can be seen in the form of more stringent credit requirements to open accounts and lower credit limits being offered. That said, we don't recommend that you accept promotional credit card offers just because you are being offered them. Opening new accounts can indicate increased risk to lenders and can hurt your FICO® Score. Every individual's situation is unique, but as a general rule, you should only apply for credit when you need it, or if you are new to credit and want to establish credit history.
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How do I get my free credit report and score from each credit reporting agency?
You can get one credit report from each of the three major credit reporting agencies (TransUnion, Equifax, and Experian) once every 12 months from annualcreditreport.com. However, this site doesn't provide credit scores, or more specifically FICO® Scores.
Many web sites offer generic credit scores, but before you access those scores, or any score, think about why you want your credit score. If you're planning on making a major purchase, you probably want to check your FICO® Score since the FICO® Score is the one most lenders use. If you really want to be sure that you are seeing the same information and score that your lender is using to evaluate your credit application, then ask the lender which credit report and score they are using and then request that report and purchase that exact score, or set of scores.
For example, it's typical for a mortgage lender to check all three FICO® Scores, one from each of the three major credit reporting agencies, when evaluating you for a loan. However, some auto lenders may only use one FICO® Score to qualify you for an auto loan. So you'd want to purchase the score based on the information from that particular credit reporting agency. The point is, it's worth it for you to find out and make sure you're seeing the credit score that your lender is using to evaluate you!
As the Disclosure Notices section of this web site indicates, you will receive a free credit score if you were denied credit or did not receive the most favorable terms. But you are better off to know your score before you apply for credit so that you have an opportunity to raise your score in order to obtain the best loan rates.
Also, be cautious of web sites offering "free" credit reports. Many of them are offering a service that is free for only a short period of time and then you get charged. Always read the fine print before buying a credit product that you may not need.
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How can I increase my FICO® Score?
Increasing your FICO® Score may take time, and often there is no quick fix. FICO® Scores reflect credit payment patterns over time with more of an emphasis on recently reported information than older information. Below are some general tips to follow that may increase your FICO® Score:
- Focus on the negative factors provided with your FICO® Score. These represent the main areas of credit practices that could improve your score.
- Apply for and open new credit accounts only as needed. Don't open accounts for the purpose of providing a better credit picture – it probably won't raise your FICO® Score and, in some instances, may even lower your score.
- Pay off your bills on time. Delinquent payments, even if only a few days late, 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 after being late, the more your FICO® Score should increase. Older credit problems count for less, so poor credit performance won't haunt you forever. The impact of past credit problems on your FICO® Score fades as time passes, and as recent good payment patterns show up on your credit report. And FICO® Scores weigh any credit problems against the positive information that indicates that you're managing your credit well.
- If you are having trouble making ends meet, contact your creditors or see a legitimate credit counselor. This will not improve your FICO® Score immediately, but if you can begin to manage your credit and pay on time, your score should increase over time. And seeking assistance from a credit counseling service will not hurt your FICO® Score.
- Keep balances low on credit cards and other "revolving credit". High outstanding credit card debt can negatively impact your FICO® Score.
- Pay off debt rather than move it around from one credit card to another. The most effective way to increase your FICO® Score in this area is by paying down your total revolving (credit card) debt.
- If you have had problems in the past, re-establish your credit history by opening new accounts responsibly and paying them on time.
- Rather than purposely pay off and close credit cards hoping to increase your score, manage credit cards responsibly by keeping balances well under the credit limit. 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.
- Do your rate shopping for a loan within a focused period of time. Too many "inquiries" – the number of requests from a lender for your credit report when you apply for loans – can negatively affect a score. However, FICO® Scores distinguish searches for a mortgage or auto loan from other types of loans, because when purchasing a house or a car it is customary to shop for the best rate, resulting in more inquiries. (For more information on rate shopping affecting scores, see question: What are inquiries and how do they affect my FICO® Score?).
- Don't close unused credit cards as a short-term strategy to raise your FICO® Score. This approach could backfire and actually lower your FICO® Score.
- If you have been using credit for only a short time, don't open a lot of new accounts too quickly, as rapid account build-up can lower your score.
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Will closing a credit card account help my FICO® Score?
The short answer is no. We never recommend closing a credit card for the sole purpose of raising your FICO® Score.
This may sound a bit counter-intuitive; after all, cleaning up your credit profile by getting rid of old or unused credit cards sounds like a good idea – and it may be from an overall credit management perspective. If you are tempted to charge more than you should just because you have more availability to credit, then getting rid of that temptation by closing some credit cards might be your best course of action.
However, your FICO® Score takes into consideration something called a "credit utilization ratio". This ratio basically looks at your total used credit in relation to your total available credit; the higher this ratio is, the more it can negatively affect your FICO® Score. So, by closing an old or unused card, you are essentially wiping away some of your available credit and thereby increasing your credit utilization ratio.
It's a bit tricky, so here's an example:
Say you have three credit cards. Credit card 1 has a $500 balance and a $2000 credit limit. Credit card 2 is an unused card with a zero balance and a $3000 limit. Credit card 3 has a $1,500 balance and a $1,500 limit. In this scenario your credit utilization ratio looks like this:
Total balances = $2,000 ($500 + $1,500)
Total available credit = $6,500 ($2,000 + $3,000 + $1,500)
Credit utilization ratio = 30% (2,000 divided by 6,500)
Now, if you decide to close credit card 2 because it's an old card that you never use, your credit utilization ratio looks like this:
Total balances = $2,000 ($500 + $1,500)
Total available credit = $3,500 ($2,000 + $1,500)
Credit utilization ratio = 57% (2,000 divided by 3,500)
You can see that your utilization ratio rose from 30% to 57% by closing the unused credit card.
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What are the minimum requirements to produce a FICO® Score?
There's really not much to it; in order for a FICO® Score to be calculated, a credit report must contain these minimum requirements:
- At least one account that has been open for six months or more
- At least one undisputed account that has been reported to the credit reporting agency within the past six months
- No indication of deceased on the credit report (Please note: if you share an account with another person this may affect you if the other account holder is reported deceased).
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How long will negative information remain on my credit report?
It depends on the type of negative information. Here's the basic breakdown of how long different types of negative information will remain on your credit report:
- Late payments: 7 years
- Bankruptcies: 7 years for a completed Chapter 13 and 10 years for Chapter 7
- Foreclosures: 7 years
- Collections: Generally, about 7 years, depending on the age of the debt being collected
- Public Record: Generally 7 years, although unpaid tax liens can remain indefinitely
Keep in mind:
For all of these negative items, the older they are the less impact they will have on your FICO® Score. For example, a collection that is 5 years old will hurt much less than a collection that is 5 months old.
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What's the best way to manage my growing credit card debt?
There are a number of different things to consider when managing credit card debt. We'll touch on a few of the key things to be aware of.
Avoid a single credit card
If you only have one credit card available and your coming close to maxing out that card, you might consider applying for another card. Having only a single credit card can be risky. If an emergency like an unexpected hospital stay hits, do you have a way to pay for it? You should always try to keep an unused, available amount of credit for an emergency.
Another reason to consider opening an additional card has to do with what's called credit utilization. Utilization measures how much of your credit you are using in relation to your total available credit. If you have one credit card with $500 charged to it and a credit limit of $1,000, then your utilization is 50%. There's no ideal utilization to shoot for, because as with most things, it depends on everything else on your report. But as a general rule, you want to try to keep your utilization on any one card, and across all of your credit cards, below 50% to avoid the risk of hurting your FICO® Score. Research has shown that people who max out a single credit card are more likely to miss future payments, and therefore the FICO® Score considers people using more of their available credit more risky than people who are using very little of their available credit. (For a further explanation of credit utilization, see question above: Will closing a credit card account help my FICO® Score?)
Avoid a large number of credit cards
At the other end of the spectrum, maintaining a large number of credit cards can complicate your debt management. The more cards you have, the more likely it is that you will simply miss seeing a bill and making a payment. Paying your bills on time, even if it is the minimum amount required, is one of the most important things you can do to avoid damaging your credit. Make sure you are comfortable managing the number of cards you have and your total minimum payment obligation so you can remain current.
If you have a lot of cards and it feels unmanageable, one instinct may be to close those cards so you don't have to worry about them. We recommend you do not close credit cards you no longer need as a way of raising your FICO® Score. Instead, do what you need to in order to remove the temptation to use it, but keep the account open with no balance. Closing an account reduces the amount of available credit you have, and as a result your credit utilization will go up.
Don't forget about APRs
In addition to the number of cards, their limits and the amount you use them, it's also important to consider the annual percentage rate (APR) of each card you are using. APRs are not currently reported by credit card companies to the credit reporting agencies, and therefore they are not explicitly considered when computing your FICO® Score. However, you should definitely know the APR of all your cards so you can add debt, if necessary, to a low APR card and pay it off from a high APR card.
Paying off cards with higher APRs devotes less money towards interest, and leaves more money available to pay down your balances.
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Are the alternatives to foreclosure any better as far as my FICO® Score is concerned?
The common alternatives to foreclosure, such as short sales, and deeds-in-lieu of foreclosure, are all "not paid as agreed" accounts, and considered the same by your FICO® Score. This is not to say that these may not be better options for you from a financial perspective; it's just that they will be considered no better or worse for your FICO® Score.
If you are considering bankruptcy as an alternative to foreclosure, that may have a greater impact to your FICO® Score. While a foreclosure is a single account that you default on, declaring bankruptcy has the opportunity to affect multiple accounts and therefore has potential to have a greater negative impact on your FICO® Score.
Loan modification within a federal government plan does not currently have a negative impact on your FICO® Score.
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What are inquiries and how do they affect my FICO® Score?
Credit inquiries are requests by a "legitimate business" to check your credit.
As far as your FICO® Score is concerned, credit inquiries are classified as either "hard inquiries" or "soft inquiries" – only hard inquiries have an effect on your FICO® Score.
Soft inquiries are all credit inquiries where your credit is NOT being reviewed by a prospective lender. These include inquiries where you're checking your own credit, credit checks made by businesses to offer you goods or services (such as promotional offers by credit card companies) and inquiries made by businesses with whom you already have a credit account.
Hard inquiries are inquiries where a potential lender is reviewing your credit because you apply for credit with them. These include credit checks when you've applied for an auto loan, mortgage, credit card or other types of loans. Each of these types of credit checks count as a single inquiry. One exception occurs when you are "rate shopping". That's a smart thing to do, and your FICO® Score considers all inquiries within a 45-day period for an auto, student loan or mortgage as a single inquiry.
Inquiries may or may not affect your FICO® Score. A FICO® Score takes into account only voluntary inquiries that result from your application for credit. The relative information with an inquiry that can be factored into your FICO® Score includes:
- Number of recently opened accounts, and proportion of accounts that are recently opened, by type of account.
- Number of recent credit inquiries.
- Time since recent account opening(s), by type of account.
- Time since credit inquiry(ies).
The FICO® Score does not take into account any involuntary inquiries made by businesses with which you did not apply for credit, inquiries from employers, or your own requests to see your credit report. For many people, one additional credit inquiry (voluntary and initiated by an application for credit) may not affect their FICO® Score at all. For others, one additional inquiry would take less than 5 points off their FICO® Score.
Inquiries can have a greater impact, however, if you have few accounts or a short credit history. Large numbers of inquiries also mean greater risk: people with six inquiries or more on their credit reports are eight times more likely to declare bankruptcy than people with no inquiries on their reports.
Beginning in July 2011, new regulations require an additional score factors, for a maximum of five. This fifth score factor is related specifically to inquiries and will only be reported if inquiries is not one of the first four and inquiries materially affected the calculation of the score. In some instances, the inquiry-related score factor will be reported as a statement rather than as a score factor.
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Why are my scores at each of the three credit reporting agencies different?
In general, when people talk about "your score," they're talking about your FICO® Score. But in fact, your FICO® Score is calculated separately by each of the three credit reporting agencies – Equifax, Experian and TransUnion – using the formula that FICO® has developed. It's normal to have slightly different FICO® Scores from those agencies for any of the following reasons:
- Your FICO® Score is based on the credit information in your credit report at the time your score is calculated. The information on your credit report is supplied by lenders, collection agencies and court records. Some of these sources may provide your information to just one or two of the credit reporting agencies, not all three. Differences in the underlying credit data will often result in differences in your FICO® Scores.
- You may have applied for credit under different names (for example, Robert Jones versus Bob Jones) or a maiden name, which may cause fragmented or incomplete files at the credit reporting agencies. In rare situations, this can result in your credit report not having certain account information, or including information that should be on someone else's credit report.
- Lenders may report your credit information to one credit reporting agency today, and to another credit reporting agency tomorrow. This can result in one agency having more up-to-date information which in turn can cause differences in your FICO® Score from both agencies.
- Two credit reporting agencies may record the same information in slightly different ways which can affect your FICO® Scores.
- FICO® adjusts its scoring formula at each credit reporting agency to take maximum advantage of the strengths in that agency's data architecture. These adjustments can cause your scores to be slightly different at the agencies.
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What is the lowest and highest possible FICO® Score?
The general-risk FICO® Scores which are in use today by the vast majority of lenders all fall within the 300-850 score range. This score range was introduced to establish an easy-to-understand, common frame of reference for lenders and consumers. Industry-specific FICO® Scores, such as those for auto lending or bankruptcy prediction, were developed to accommodate the unique characteristics of their respective industry and may have ranges outside the 300-850 score range.
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If you have a question that was not answered by one of the FAQs above, please visit our Ask FICO page to see questions posed by other people or to ask your own question.
