Learn more about Your Credit Score

Frequently Asked Questions

01. What is credit scoring?

Credit scoring is the quickest, most accurate and consistent way of determining the likelihood that credit users will pay their bills. Credit scoring began in the late 1950s, and since then, it has become widely accepted by lenders as a reliable means of credit evaluation. Consumers have benefited from scoring's speed and accuracy, which have helped them gain access to a wide variety of credit products.

02. Why should you care?

Increasingly, lenders are trying to fund loans with prices (rates, fees and terms) that more precisely match your risk. In theory, someone with a 900 credit score should get much better rates than someone with a 650 score.

So far, though, it hasn't exactly worked that way, at least not that precisely. There are several grades of credit which have arisen, most notably below the 620 line (A-, B, C, D). But above the 620 line, everyone pretty much pays the same. Lenders can penalize you for poorly managing credit, but don't much reward you for effectively and wisely managing your debt, at least so far.

03. Why credit score at all?

It's not as though consumers have been clamoring for some sort of number, so why are we even bothering to go though this process for each loan? In the past, mortgages have been pooled together for sale, with these pools containing a range of credit risks -- all pretty good, but some better than others, and some worse than others.

Some borrowers would be more likely to pay off their loans early, and others might fail to make timely payments at all. The securities derived from these pools each carried a vaguely known level of risk to the investor, which made holding and hedging these as a part of an investment portfolio a bit of a tricky business.

It's long been the desire of investors to be able to slice and dice portfolios of mortgage loans to add or remove risk (and rewards) to a larger investment portfolio. With known risk, a greater level of performance could be assured. Investors are willing to pay more for a greater level of precision, and began pressing the industry to adopt a means to achieve it. Hence, credit scores; now, a seller can put together a package of loans for sale that aren't from a wide muddy pool of credit risks, but rather from a very specific kind or kinds of borrowers, all with scores which are close together.

04. Who really benefits from credit scores?

Credit scoring is actually a good idea, at least on paper, and some ways in practice, too. The sub-prime lending industry (for borrowers with not-so-good credit) could not have been developed without it. Certain borrowers have seen an explosion in the credit available to them, with more competitors vying for their business, lower rates and more choices in product.

It's safe to say that thousands of homeowners have their credit score to thank for their chance to get a mortgage. The credit score is helping to make loan approvals faster, simpler and more convenient for all kinds of loans. At least so far, however, only folks at the bottom of the scale have seen significant "rewards" for the adoption of credit scoring on a wide basis in mortgage lending.

05. What are credit bureau scores?

Credit bureau scores are just one type of credit score. It is computed and calculated from the information on your credit bureau file at the time it was requested. A credit score is like a snapshot: It sums up, at any given point in time, what your credit history and current usage predicts about your future credit performance.

06. Where do credit scores come from?

Statistical scoring models calculate credit scores. Mathematical tables assign points for different pieces of information that best predict future credit performance. Developing these models involves studying how millions of people have used credit. Score model developers find predictive factors in the data that have proven to indicate future credit performance.

Credit score models can be developed from different sources of data. A custom model can developed from a business's own data on its customers. Information is taken from credit application forms and credit bureau reports. Credit bureau models are developed from information in consumer credit bureau reports.

07. How are credit scoring models used?

Credit scores give lenders a fast, consistent and reliable indication of how likely you'll be to repay a loan according to the terms of your agreement. Scores are usually just one of many factors a lender considers in making a decision. This is particularly true in industries like mortgage lending where appraisals and other information play an important part.

08. Who calculates credit bureau scores?

Credit bureau scores are calculated by the credit bureaus and are based solely on the data in their credit reports at the time a lender requests the score. Lenders usually calculate application scores directly. Custom credit scores can be calculated by lenders or by the credit bureaus with whom they work.

09. What is considered a good credit score?

This is a difficult question to answer. With most scoring models, the higher the score the better. Higher credit scores mean lower risk. For other scoring models it's the other way around. More importantly, every company using scoring decides for itself which scores are "good" and which are "not so good," based on its goals and estimates for certain types of loans.

The credit score is only a tool, not a recommendation; the lender always makes the final determination. That decision may be to offer people with lower credit scores a different product, rather than turning them down.

10. What's bad about credit scoring?

In a word, secrecy. In the bad old days of mortgage lending, you may have been judged by a person or committee who used some subjective process to evaluate you, a process which may have been arbitrary. You didn't know what they wanted to see in a borrower, so you applied and hoped.

Especially in the last 20 years, more and more light has been let into the underwriting process, and that knowledge turned into power for the consumer. Knowing where they stood in a lender's eyes, potential borrowers went from place to place in search of a better deal.

Credit scoring is a high-tech way to draw a big, black curtain between borrower and underwriter. Since the credit score data could not be released to consumer, by both choice and contract, the power in pricing returned to the lender. Armed with a score, the lender knows precisely who you are; but you no longer have any idea exactly how good or bad you appear.

For some loans, lenders have stopped even providing rate quotes when you call. They want you to fill out an application first, so they can extract a credit score for you, knowing full well that once you've applied (and perhaps paid a fee) you're less likely to go elsewhere.

11. Why all the secrecy?

It's been a competitive stance by FICO not to release credit scores. It's simple enough to understand that once that FICO proved that scoring works, that other competing models would be developed. They are, including entries from the credit bureaus, Fannie Mae and Freddie Mac, and others.

But there's a good reason why they have resisted telling consumers about their credit scores and what goes into them. The scoring model depends upon consumers going about their business as usual, paying or not paying bills on time, opening lines of credit and getting credit cards as they normally would.

If you knew that closing out a Visa account you barely use might raise your score by some amount, you would close it. That change in behavior, repeated millions of times (and across the various kinds of credit weighting) would distort or destroy the model, rendering the credit score and scoring process worthless.

FICO has claimed that revealing the score to a consumer would merely confuse the borrower even further, and that the credit score by itself isn't useful without proper understanding of the process.

12. Do credit scores cause overcharging?

Because you can't know how you appear, you might be charged far in excess of what you might pay. Credit scoring may have helped foster "predatory lending", a situation where a borrower, especially less sophisticated borrowers, may fall victim to an unscrupulous lender or broker. This can occur especially in cases where a borrower fails to shop far and wide for a loan, and happens largely in lesser-educated areas, and among the poor and elderly.

While the borrower might have pretty good credit, the salesperson might only offer them loans with high rates, fees, or both; not knowing that they might do far better elsewhere, and lacking both the credit score information and understanding of the process, the borrower signs on for the loan. If the borrower had access to his/her score and a little knowledge of the lending process, they could search more aggressively.

13. What's in the future?

Enough pressure has been building around this issue that regulators and even legislators are getting into the act. Recent, Congress has been considering the Fair Credit Full Disclosure Act (H.R. 2856), sponsored by Rep. Chris Cannon (R-Utah), but no action has yet been take to advance the bill along. The California legislature is also considering a law to force release of credit scores. Soon, FICO and the credit reporting agencies TransUnion, Equifax and Experian are planning to provide evaluations of your credit profile to you, for a fee.

In the meantime, if you are applying for a mortgage, you can certainly ask what your credit score is. FICO has stated that it has no specific objection to providing you with the number as part of a financial transaction.

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