One of the first questions many people have about credit scoring is what score lenders consider “good.” There is, however, no single answer to that question.

Generally, of course, the higher the score, the better. Each lender makes its own decision about where to draw the line, based on how much risk it wants to take and how much profit it thinks it can make with a given blend of customers. Many lenders don’t have a single cutoff but may have many, with each segment qualifying for different rates and terms. Finally, as noted earlier, a credit score is usually only one factor in the lending decision. Although scores typically have a big influence, a lender might decide that other factors are more important.

You can see from this national distribution chart of FICO credit scores that most of the U.S. population has a FICO score of 700 or higher. Many lenders use 700 or 720 as the cutoff for giving borrowers their best rates and terms. Many also use 620 as a cutoff point. Companies that deal with borrowers below that level are often called “subprime” lenders because their riskier borrowers are considered less than “prime.”

Because your score is constructed from the information in your credit report, it’s worth looking at what you’ll find there.

In addition to identifying information about you—your name, address, and Social Security number—your report lists the following:

Public records are culled from state and county courthouses. Lenders or collection agencies report most of the other information in your report.

This data is collected, stored, and updated by credit bureaus, which are private, for-profit companies. The three major credit bureaus are Equifax, Experian (formerly known as TRW), and TransUnion, and their business is selling information about you to lenders.

Because they’re competitors, the bureaus typically don’t share information, and not all lenders report information to all three bureaus. In fact, if you get copies of your credit reports from the bureaus on the same day, you’re likely to notice at least a few differences among them. An account that’s listed on one credit bureau’s report might not show up on the others, for example, or the balances showing on your various accounts might differ from bureau to bureau.

Because your score is based on the information that’s in your report at a given credit bureau, the number differs depending on which bureau’s credit report is used.

Also, each time you or a lender “pulls” your score (in other words, orders a score to be calculated), it’s likely to be at least somewhat different, because the information on which it’s based probably has changed. Fair Isaac says most people’s scores don’t change all that much in a short period, but about 25 percent of consumers can expect to see their scores at a single bureau vary by more than 20 points over a three-month stretch.

There are time limits to what can appear on your credit report. Although positive information can appear indefinitely, negative marks—late payments, collection actions, and foreclosures—by federal law generally must be removed after seven years. Bankruptcies can be reported for ten years. Inquiries should be deleted in two years.

When most of us think of scores, we think of the relatively straightforward systems used in sports or in school tests. You get points (and possibly demerits) for certain actions, behaviors, or answers, and those are totaled to determine your score.

Credit scoring isn’t nearly so easy. Credit-scoring models use “multivariate” formulas. That basically means that the value of any given bit of information in your report might depend on other bits of information.

To understand how this works, let’s use a noncredit example. Suppose that your sister calls you to report that her husband is more than an hour late in coming home from work, and she asks whether you think he’s having an affair. To answer the question, you would need to review what you know about this man, including his attitude about his family, his general moral standards, and whether he’s had dalliances in the past. Using all these variables, you could try to predict whether your brother-in-law is likely to be stepping out—or might just have stopped off to buy his wife an anniversary present.

Let’s suppose that your brother-in-law is a stand-up guy. But you’ve personally observed your neighbor in a clinch with a woman who was not his wife. If your neighbor was an hour late in coming home and his wife asked you your opinion of his likely faithfulness, you might reach quite a different conclusion. So the same behavior—coming home late—could evoke two very different predictions based on the information at your disposal.

The number of factors that the FICO formulas evaluate is infinitely greater, so you can see how difficult it can be sometimes to predict the outcomes of certain behaviors.

There’s one thing that’s always true, though: The FICO model is set up to place more value on current behavior than on past behavior. That means that the effect of your old credit troubles lessens over time if you start handling credit more responsibly.

However, the scores are also designed to react strongly to any signs that a once-good risk might be turning bad. That’s why someone with a good score might suffer more heavily from a late payment.

It’s generally a lot easier to lose points on your score than it is to gain them back, which is why it’s so important to know how to improve and protect your score.

Now that you understand in general how credit scores are calculated, we can move on to some specifics. The following are the five main factors that affect your FICO score according to their relative level of importance, along with a percentage figure that reflects how heavily that factor is weighed in calculating FICO scores for the general population. Each factor might weigh more or less heavily in your individual score, depending on your credit situation.

How these five factors are weighed when it comes to you—as opposed to the general population—depends on a little-known sorting system known at Fair Isaac as “scorecards.”

Scorecards allow the FICO formula to segment borrowers into one of ten different groups, based on information in their credit reports.

If the credit history shows only positive information, the model takes into account the following:

If the history shows a serious delinquency, the model looks for these:

After the model has this information, it decides which of the ten scorecards to assign. Although Fair Isaac keeps the details pretty secret, it’s known that there is at least one scorecard for people with a bankruptcy in their backgrounds, and another for people who don’t have much information in their reports.

Grouping people this way is supposed to enhance the formula’s predictive power. The theory is that the same behavior in different borrowers can mean different things. Someone with a troubled credit history who suddenly opens a slew of accounts, for example, might be seen as a much greater risk that someone with a long, clean history. Scorecards allow the FICO formula to give different weight to the same information.

Sometimes, however, the actual results of the scorecards can be a little bizarre.

Naomi of Richmond, Virginia, spent years rebuilding her credit and couldn’t wait for the seven-year mark to pass on three negative items on her credit report: two collection actions and a judgment. These items, she was sure, were the only things holding her credit score down.

When the black marks disappeared from her report, however, Naomi’s score actually dropped more than 20 points. Naomi got caught in what can be a jarring transition from one scorecard to the next.

The negative items on her credit report got her assigned to a certain scorecard, but her efforts to rebuild her credit—making payments on time and using credit responsibility—helped her rise to the top of that scorecard group.

When her negative marks disappeared, though, she was transferred to another group with tougher standards. In that group, she was closer to the bottom, and her credit score drop reflected her fall.

Naomi’s only solace is that the responsible credit behavior she’s learned should help boost her score and recover lost ground over time.

You need to know about a few more complications.

Although all three bureaus use the FICO scoring model, the actual formula differs slightly from bureau to bureau. That’s because the way the bureaus collect and report data isn’t exactly the same. It’s unlikely that these differences would have much impact on your score, but you should know that they exist. You’re much more likely, though, to have different scores from bureau to bureau because the underlying information is different.

As discussed earlier, lenders can have their own in-house scoring formulas in addition to, or instead of, using FICO scores. Lenders also can use different “editions” of the FICO formula. Just as not everyone updates to the latest computer operating systems when they’re released, not every lender uses the latest versions of credit-scoring formulas.

Older versions of the FICO formula, for example, counted participation in a credit-counseling program as a negative factor; newer versions view it as a neutral factor. So, if you’re currently in a debt management program, you might be viewed more negatively by some lenders than by others.

Just consider what happened to Marvin, a home buyer who learned too late that his scores weren’t what he thought they were.

Marvin purchased FICO scores from each of the three credit bureaus. Because lenders usually use the middle of your three scores to determine your interest rates, Marvin was happy to discover his middle score was 638—not great, but high enough to avoid the 620 mark many lenders use to classify a borrower as subprime, or high risk.

When Marvin applied for a loan, however, the lender told him his middle score was 593. It’s not clear whether the lender was using an older FICO formula or was simply using its own modified concoction and calling it a FICO, but Marvin paid the price:

“No one tells you this when you pay your money to get your score,” Marvin said. “We actually put our house on the market based on the information we received from the agencies, having to scramble later for a mortgage company to accept our lower score. We went from being able to receive competitive interest rates to being considered very high risk and receiving very high rates.”

You can help protect yourself somewhat from these discrepancies by being preapproved for a home loan before you start house shopping. But this is just another reason why it’s important to improve and protect your score. The higher your score is, the less you have to worry about a few points making a difference.

If you’ve surfed the Internet lately, you might find it hard to believe that credit scores were secret only a few short years ago. Sometimes it seems like every other Web site is either hawking credit scores or running an ad for a Web site that does.

As you’ve read, though, not all credit scores are created equal.

The credit bureaus, for example, sometimes market scores to consumers that aren’t based on the FICO formula—the one typically used by lenders. The bureaus say these scores are a good indicator of a consumer’s creditworthiness, but their results can differ—sometimes markedly—from the FICO numbers that lenders use.

Your first step: Make sure you’re getting a real FICO score. If it doesn’t say FICO or use one of the credit bureau’s trademarked names for FICO scores, it’s not the same formula lenders use.

The FICO score has different names at the three major credit bureaus.

Be careful not to be misled by pitches that promise “free” access to your credit score. Typically, those offers require signing up for credit monitoring or other ongoing services that are most assuredly not free. Although you might decide that these services are helpful, make sure to read the fine print so that you understand what you’re getting and how you can cancel if necessary. Another caution: Some fly-by-night operators might pitch credit scores as a way to get you to reveal your private financial information, such as your Social Security number or credit card numbers. As always on the Web, it’s best to do business with companies you know and to make sure you have a secure connection before transmitting sensitive information. Congress in 2003 gave U.S. residents the right to get free copies of their credit reports annually from each of the three bureaus. But that doesn’t include the right to free scores; the bureaus can and will continue to charge for those.

One place to look for your score is MyFICO.com, a joint venture between Fair Isaac and Equifax. The site offers your credit reports and FICO scores from each of the three bureaus for about $47.85. (One score and one report is $15.95.)

In Canada, you can get your FICO score from Equifax Canada.

Along with your score, MyFico.com provides a “fever” chart that shows where you stand in relation to other borrowers, along with a summary of how lenders are likely to view you as a credit risk.

In Figure 2.1, the borrower has an Experian FICO score of 776, which puts her ahead of about 75 percent of other Americans.

Figure 2.1. How you rank

Source: Fair Isaac Co. Used by permission.

MyFico.com goes on to tell you more what this means, saying in part:

Lenders consider many factors in addition to your credit score when making credit decisions. Looking solely at your FICO score, however, most lenders would consider this score as excellent.

This means: It is extremely unlikely your application for credit cards or for a mortgage or auto loan would be turned down, based on your score alone.

You should be able to obtain relatively high credit limits on your credit card.

Most lenders will consider offering you their most attractive and most competitive rates.

Many lenders will also offer you special incentives and rewards targeted to their “best” customers.

Source: MyFico.com

Because the primary purpose of a FICO score is to predict default risk, you might be interested to know how you stack up in that regard. As you can see from the following chart, compiled by MyFico.com for a borrower with a FICO score of 700, the risk of fault rises dramatically as scores drop:

Figure 2.2. Your risk of default

Source: Fair Isaac Co. Used by permission.

When you get your FICO, you should get a summary of the major factors influencing your score. Be sure to read these carefully, along with any additional explanatory information. These factors are provided to give you some clues about how to improve your score, but if you misinterpret the results, you could end up making things worse.

For example, many people with good credit often find that one of the reasons their score isn’t higher is that they have “too many credit cards.” They think they can solve the problem by closing cards, but the FICO formula doesn’t work that way. The closed cards remain on your credit report and continue to influence your score. In fact, the act of closing accounts can actually hurt your score, as I explain later, and can never help it.

The positive factors you’ll see should be listed in order of importance, and might be something like the following:

Negative factors, too, should be listed in order of importance. If you have a bankruptcy, collections action, or other serious delinquency, that would be mentioned first. Other negatives that can show up for even the best borrowers include the following:

Now, nobody likes criticism, and some people get absolutely furious when they read through the reasons they’re given for why their score isn’t higher. Interestingly, many of these folks tend to have excellent credit, but—like Brian in the previous chapter—they’re angry that their score isn’t “perfect.”

Understand that nobody is “perfect,” and even if you could achieve a perfect FICO score, the changing circumstances of your life and your credit use would mean you wouldn’t keep that score for long.

Also understand that the negative reasons listed are less and less important the higher your score. The bureaus need to give you some reason for why your scores aren’t higher, but when your score is already in the mid-700s and above, there’s no guarantee that even if you could fix the “problem” that your scores would rise that much.

Still, you can always learn something from reading the reasons given. A notation that your balances are too high should spur you to pay down your debt, for your own financial health as well as for the sake of your score. Getting dinged for having too many cards should keep you from applying for yet another department store card just to get a 10 percent discount. You don’t need one more piece of plastic to keep track of, anyway.

If your score is low, however, you should take the negative factors to heart. They can provide a blueprint for fixing your credit and boosting your score. In Chapter 4, you’ll find general information about improving your score, and in later chapters, I discuss more specific strategies for people who have troubled credit.

Early in 2008, Fair Isaac announced it would be rolling out a new iteration of the FICO called FICO 08.

The new score, Fair Isaac promised, would do a better job of predicting defaults, particularly among customers with poor, thin, or young credit histories. Compared to the classic FICO, FICO 08

As I discuss in Chapter 4, adding a spouse or child to your credit card as an authorized user has long been a good way to boost that person’s credit score, because your good history with the account could be imported to their credit file. But in 2007, credit repair firms began abusing this feature by “renting” authorized user slots from good credit risks and selling them to complete strangers who wanted to boost their scores. Some of these strangers bought slots on dozens of different people’s cards, boosting their scores by tens or even hundreds of points.

Fair Isaac originally said FICO 08 would combat possible fraud by ignoring all authorized user information, drawing protests from consumer advocates who pointed out that the change would punish the innocent as well as the guilty. Furthermore, experts theorized that ignoring information regarding spouses on authorized credit lines could be a violation of the Equal Credit Opportunity Act.

So Fair Isaac rejiggered the FICO 08 formula to include authorized user accounts “while materially reducing potential impacts to the score,” according to the company’s FICO 08 marketing brochure. Exactly how it does that is as secret as the rest of the formula, but speculation is that the new score will count a limited number of authorized user accounts and ignore the rest.

Another change Fair Isaac made after unveiling the new score was in how it counted inquiries. The original FICO 08 formula dinged credit seekers less than the classic FICO score for opening new accounts, based on research that inquiries had become less predictive of defaults over time. Interestingly, the relationship between inquiries and defaults reestablished itself in subsequent months, so the current FICO 08 formula treats them much the same way the classic FICO does.

Because of this and other delays, FICO 08 fell behind schedule. Fair Isaac now expects the credit bureaus to begin offering the score to lenders starting in early 2009.

There’s no telling whether, or how quickly, FICO 08 will supplant the classic FICO score. Fair Isaac’s previous major attempt to improve on the FICO, a scoring formula called NextGen, fell flat—in part because NextGen relied on a 150-to-950 scale that would have required lenders to revamp their underwriting systems and software—major modifications in which few companies wanted to invest.

FICO 08, however, retains classic FICO’s 300-to-850 scale and its “reason codes”—specific explanations of why the score is what it is. That means lenders have to go to much less effort to switch, which may improve its chances of adoption.

Fortunately, all the strategies I outline in Chapter 4 for improving your score work with both iterations of the FICO score. To better understand the nuances of the change, however, read the following scenarios Fair Isaac created to demonstrate how FICO 08 works.