What is a Credit Score?

A credit score is an estimate of your credit risk based on a snapshot of your credit report at a specific point in time. It attempts to condense a borrower's credit history into a single number that ranges from about 350 to more than 800. Credit scoring was developed in the 1960s.

Credit scores analyze a borrower's credit history considering numerous
factors such as:

• Late payments



• The amount of time credit has been established



• The amount of credit used versus the amount of credit available



• Length of time at present residence



• Employment history



• Negative credit information such as bankruptcies, charge-offs, collections, etc.

In general, when people talk about "your score," they may be talking about your current score with any of the three main US credit reporting agencies--Experian®, TransUnion® and Equifax. The credit score from each credit reporting agency considers the data in your credit report at that agency. This gives lenders a fast, objective estimate of your credit risk. Some lenders use one of these three scores, while other lenders may use the middle score. In other words, your credit score is a powerful piece of information. And because it is a snapshot of your borrowing and bill paying behavior over the previous 24 months, you have the power to change it for the better. As you do that, you'll be able to swap some of your higher-rate credit card debts, mortgages and auto loans for lower rate ones, and that will enable you to pay back the money you owe both faster and cheaper.

     Thirty-five percent of your score is based on how well you pay your bills.

Start paying on time. If you make late payments, the amount your score will suffer depends on how late and how frequent you are with delinquent payments. Late payments are not an automatic "score-killer." An overall good credit picture can outweigh one or two instances of late credit card payments.

     Thirty percent of your score is a measure of how much credit you have available to you and how much of that credit you're using.

Having credit accounts and owing money on them does not mean you are a high-risk borrower with a low score. You're in the best shape if you're using 20 to 30 percent of the credit available to you.

     Fifteen percent is a measure of the length of your credit relationships: How long have you had the cards in your wallet?

In general, a longer credit history will increase your score. If and when you decide to cancel your credit cards, try not to cancel the ones you've had the longest. It's good to have at least one card in your wallet that's more than two years old. Once you've had a card for 15 to 20 years, it won't send your score any higher.

     Ten percent is based on your search for new credit-how recently you have opened (or inquired about opening) new accounts.

Today, the smart shopper shops around for the best rates. Along the way, it wouldn't be unusual for 10 or 15 different institutions to check their credit score. Credit scores generally do a good job of distinguishing between a search for many new credit accounts and rate shopping for one new account, i.e., auto- or mortgage-related inquiries.

     Ten percent is the financial composition of your file - what percentage is bank-card debt and what percentage is installment debt?

In the world of credit scoring, it's better to have a ratio of 60 to 70 percent bank-card debt to 30 to 40 percent installment debt than to have much more of one or the other. It is not necessary to have one of each, and it is not a good idea to open credit accounts you don't intend to use. The credit mix usually won't be a key factor in determining your score - but it will be more important if your credit report does not have a lot of other information on which to base a score.

What is Not in Your Score.¹

Credit scores consider a broad range of information on your credit report. However, they do not take into account the following:

• 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



• Your salary, occupation, title, employer, date employed or employment history - Lenders may consider this information, however, as may other types of scores.



• 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) - The score disregards:
  a) "consumer-initiated" inquiries - requests you have made for your credit report, in order to check it;
  b) "promotional inquiries" - requests made by lenders in order to make you a "pre-approved" credit offer;
  c) "administrative inquiries" - requests made by lenders to review your account with them; or
  d) requests that are marked as coming from employers are not counted either.



• Whether or not you are participating in a credit counseling of any kind

How do I find out my score?

It's OK to request and check your own credit report. This won't affect your 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. To order your report and dispute any errors, contact the credit reporting agencies below:

There is a little known credit reporting agency to add to the list: Innovis Data Solutions. Unlike the Big Three credit bureaus, Innovis doesn't sell consumers' credit histories to lenders, insurers and potential employers. Innovis specializes in helping creditors compile mailing lists. Adverse information on your Innovis credit report, accurate or not, could prevent you from getting favorable credit offers in the mail. Whether you think that's a good thing or a bad thing is up to you.² To request a copy of your credit report, go to their website at http://www.innovis.com/customer_assistance.htm.

Monitor for Identity Theft.³

Another important reason to check your credit report regularly is for an early detection of identity theft. Identity theft is when someone uses your personal information - such as your name, Social Security number, credit card number or other identifying information - without your permission to make purchases, open accounts, take-out loans, buy cars and even get new jobs. By regularly checking your credit report from each of the credit reporting agencies, you can make sure it's accurate and includes only those activities you've authorized. If you suspect that your personal information has been hijacked and misappropriated to commit fraud or theft, take action immediately, and keep a record of your conversations and correspondence. These four basic actions are appropriate in almost every case:

1. Contact the credit reporting agencies to place a "fraud alert" on your credit reports and to review your credit reports.



2. Close any accounts that have been tampered with or opened fraudulently.



3. File a report with your local police or the police in the community where the identity theft took place.



4. File a complaint with the Federal Trade Commission.

How do I improve my score?

There is no swift and immediate fix to improving your credit score. It takes time. The best advice is to manage credit responsibly over time and by following these tips⁴:

• Pay your bills on time. If you have missed payments, get current and stay current. The longer you pay your bills on time, the better your score. Be aware that paying off a collection account will not remove it from your credit report. It will stay on your report for seven years.



• Pay off debt rather than moving it around. The most effective way to improve your score in this area is by paying down your revolving credit. In fact, owing the same amount but having fewer open accounts may lower your score.



• 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.



• Keep balances low on credit cards and other "revolving credit". High outstanding debt can affect a score.



• Don't close unused credit cards as a short-term strategy to raise your score. A closed account will still show up on your credit report, and may be considered by the 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 score. 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 score if you don't have a lot of other credit information. Also, rapid account buildup can look risky if you are a new credit user.



• Do your rate shopping for a given loan within a focused period of time. Credit 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.



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



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

Negative items affect your credit score much more quickly than positive items. Late payments can negatively affect your score in just a few months, whereas paying bills on time may take 6 to 12 months to generate a significant improvement in your score.

Why should I improve my score?

Everywhere you turn, you hear and read about credit scores. Are they really that important if you're not in the market for a loan or credit card? The answer is yes. Your credit score is important because it may affect every major purchase you will ever make. It may determine what interest rate you will be charged on a mortgage, car loan or credit card. Even your car insurance premiums can be higher due to a poor credit score⁵. In some cases, your credit score can even determine whether you get that job offer you've been hoping for.
Just remember: a poor score costs you more.

What if I'm turned down for credit?

If you have been turned down for credit, the Equal Credit Opportunity Act (ECOA) gives you the right to obtain the reasons why within 30 days. You are also entitled to a free copy of your credit bureau within 60 days, which you can request from the credit reporting agencies. If the score was a primary part of the lender's decision, the lender will use the score reasons to explain why you didn't qualify for the credit.⁶

1. "What is Not In Your Score," myFICO.com, 14 Nov. 2006,
   <http://www.myfico.com/CreditEducation/WhatsNotInYourScore.aspx>.


2. Holden Lewis, "The credit report you don't know about," Bankrate.com, 14 Nov 2002, 29 Nov 2006, <http://www.bankrate.com/brm/news/mortgages/20021114a.asp?prodtype=mtg>.


3. "Your Credit Report - The Basis of Your Score," FICO.org, 16 Nov 2006 <http://www.fico.org/YourCreditReport.aspx>.


4. "Improving Your FICO® Score," myFICO.com, 14 Nov 2006 <http://www.myfico.com/CreditEducation/ImproveYourScore.aspx>.


5. "Two Ways To Improve Your Credit Score," Free News Network Inc. 16 Nov 2006, <http://successblog.biz/content/Improve_Your_Credit_Score.html>


6. "Interpreting Your Score," FICO.org, 14 Nov 2006 <http://www.fico.org/InterpretingYourScore.aspx>.

© Ocwen Financial Corporation. All Rights Reserved.

Return to Ocwen Homepage | Web Terms and Conditions