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 receive a high APR or other unattractive terms on this credit card. 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 lender. 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 any balances low. Pay off your balance each month, and never miss a payment. This will help build a positive credit history.
Should I take advantage of promotional credit card offers?
In many instances, credit has been harder to obtain these days. Recent changes in lending practices can be seen in more stringent requirements for opening accounts and the offering of lower initial credit limits. That said, we don't recommend that you accept promotional credit card offers just because you receive them. Opening new accounts can indicate increased risk to lenders and can hurt your FICO® Score. Every individual's situation is different, 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 a credit history.
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 any credit scores.
Many web sites offer generic credit scores, but before you look for a score, think about why you want it. If you're planning to make 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 score it gets and the name of the credit bureau. Then you can go to the credit bureau and request that score and the underlying credit report.
For example, mortgage lenders typically check all three FICO® Scores when evaluating your loan application, one score each from Equifax, Experian and TransUnion. In contrast, some auto lenders may only use one FICO® Score to qualify you for an auto loan. So you should purchase your score and credit report from the appropriate credit reporting agency. FICO® Score and credit reports are available at myFICO.com.
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 knowing your score long before you apply for credit. That way, you have an opportunity to raise your score so that you have a better chance of getting the best loan rates.
Also, be wary of web sites offering "free" credit reports or "free" credit scores. 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.
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 a stronger emphasis on recently reported information. Below are some general tips to follow that may increase your FICO® Score:
- Focus on the negative reason factors provided with your FICO® Score. These represent the main areas of credit activity that could improve your score over time.
- 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 all your bills on time. Delinquent payments, even if only a few days late, and any account in collections can significantly lower 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. 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. FICO® Scores always weigh any credit problems against any positive information that shows you are 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 types of "revolving credit". High outstanding credit card debt can lower your FICO® Score.
- Pay off debt rather than moving 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 credit card debt.
- If you have had problems in the past, re-establish your credit history by opening one or two new accounts, keeping any balances low and paying your bills on time.
- Closing credit cards will not increase your score and may actually lower it at least slightly. A better way to help your score is by managing credit cards responsibly. Keep any balances low and always pay your bills on time. In general, having credit cards and installment loans (and making timely payments) will slowly raise your FICO® Score.
- If you need a big loan, do your rate shopping within a focused period of time. Too many "inquiries" – the requests that lenders make for your credit report when you apply for loans – can negatively affect your score. However, FICO® Scores protect your score when you are rate shopping for an auto, mortgage or student loan. (For more information about the affect rate shopping has on scores, see the question: What are inquiries and how do they affect my FICO® Score?).
- If you have been using credit for only a short time, don't open many new accounts quickly, as rapid account build-up can lower your score.
Will closing a credit card account help my FICO® Score?
The short answer is no. Closing a credit card will never improve your FICO® Score, and in some situations it can actually lower your score at least slightly.
When it considers how much you owe, your FICO® Score takes into consideration your "credit utilization rate" or ratio. This ratio compares your outstanding credit card debt with your card limits; the higher their ratio, the more it can negatively affect your FICO® Score. If you have an outstanding balance on one or more other credit cards when you closean old or unused card, the result can be an increase in your credit utilization ratio.
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 close credit card 2 because it's an old card that you never use, your credit utilization ratio now would look 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. The best way to protect your score when you close credit cards is to make sure the balances on any other credit cards are zero. That way, closing one or more cards won't affect your credit utilization ratio.
What are the minimum requirements to produce a FICO® Score?
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 to be deceased).
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.
Are the alternatives to foreclosure any better for one's FICO® Score?
The common alternatives to foreclosure, such as short sales and deeds-in-lieu of foreclosure, are all classified as "not paid as agreed" accounts. They have roughly the same impact to the borrower's score.
Bankruptcy is different, and usually has a greater impact to the person's FICO® Score. While a foreclosure represents a single defaulted account, bankruptcy often represents a default on several accounts. For this reason it usually drop's the person's score farther.
Loan modification under a federal government plan does not currently have a negative impact on the borrower's FICO® Score.
What are inquiries and how do they affect my FICO® Score?
A search for new credit can mean greater credit risk. This is why the FICO Score counts inquiries, which are requests a lender makes for your credit report or score when you apply for credit. FICO Scores consider inquiries very carefully, as not all inquiries are related to credit risk. There are three important facts to know about inquiries:
- Inquiries usuall have a small impact. For most people, one additional credit inquiry will take less than five points off their FICO Score. However inquiries can have a greater impact 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 can be up to eight times more likely to declare bankruptcy than people with no inquiries on their reports.
- Many kinds of inquiries are ignored completely. Your FICO Score does not count an inquiry when you order your credit report or credit score from myFICO.com, or when another company provides this information to consumers. Also, the FICO Score does not count inquiries a lender has made for your credit report or score in order to make you a "pre-approved" credit offer, or to review your account with them, even though you may see these inquiries on your credit report. Inquiries that are marked as coming from employers or insurers are not counted either.
- The score allows for "rate shopping." If you're looking for a mortgage, an auto loan or a student loan, you may want to check with several lenders to find the best rate. This can cause multiple lenders to request your credit report, even though you are only looking for one loan. To compensate for this, 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. When you need an auto, home, or student loan, you can avoid lowering your FICO Score by doing your rate shopping within a short period time, such as 45 days.
When a lender receives your FICO Score, up to four "key factors" are also delivered. These key factors are the top reasons why your score was not higher. If the lender rejects your request for credit, and your FICO Score was part of the reason, these factors can help the lender tell you why your score wasn't higher.
Since 2011, federal law has required an additional score factor related specifically to inquiries. This fifth factor is reported only if inquiries materially affected the calculation of the score, but inquiries were not a significant enough factor to be included in the four primary key factors. In some instances, the inquiry-related score factor will be reported as a statement rather than as a key factor.
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® Scores 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.
What is the lowest and highest possible FICO® Score?
The general-risk FICO® Scores now used by most lenders 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.
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.