Federal Trade Commission | consumer.ftc.gov

Credit Scores

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Ever wonder how a lender decides whether to grant you credit? For years, creditors have been using 

credit scoring systems to determine if you’d be a 

good risk for credit cards, auto loans, and mortgages. 

These days, other types of businesses — including 

auto and homeowners insurance companies and 

phone companies — are using credit scores to decide 

whether to issue you a policy or provide you with a 

service and on what terms. A higher credit score is 

taken to mean you are less of a risk, which, in turn, 

means you are more likely to get credit or insurance 

— or pay less for it.

The Federal Trade Commission (FTC), the nation’s 

consumer protection agency, wants you to know how 

credit scoring works.

What is credit scoring?

Credit scoring is a system creditors use to help 

determine whether to give you credit. It also may be 

used to help decide the terms you are offered or the 

rate you will pay for the loan.

Information about you and your credit experiences, 

like your bill-paying history, the number and type of 

accounts you have, whether you pay your bills by the 

date they’re due, collection actions, outstanding debt, 

and the age of your accounts, is collected from your 

credit report. Using a statistical program, creditors 

compare this information to the loan repayment 

history of consumers with similar profiles. For 

example, a credit scoring system awards points for 

each factor that helps predict who is most likely to 
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repay a debt. A total number of points — a credit 

score — helps predict how creditworthy you are: how 

likely it is that you will repay a loan and make the 

payments when they’re due.

Some insurance companies also use credit report 

information, along with other factors, to help 

predict your likelihood of filing an insurance claim 

and the amount of the claim. They may consider 

this information when they decide whether to grant 

you insurance and the amount of the premium they 

charge. The credit scores insurance companies use 

sometimes are called “insurance scores” or “creditbased insurance scores.”

Credit scores and credit reports

Your credit report is a key part of many credit 

scoring systems. That’s why it is critical to make sure 

your credit report is accurate. Federal law gives you 

the right to get a free copy of your credit reports from 

each of the three national credit reporting companies 

once every 12 months.

The Fair Credit Reporting Act (FCRA) also gives you 

the right to get your credit score from the national 

credit reporting companies. They are allowed to 

charge a reasonable fee for the score. When you buy 

your score, you often get information on how you can 

improve it.

To order your free annual credit report from 

one or all of the national credit reporting 

companies, and to purchase your credit score, visit 

www.annualcreditreport.com, call toll-free 877-

322-8228, or complete the Annual Credit Report 

Request Form and mail it to:

Annual Credit Report Request Service

P. O. Box 105281

Atlanta, GA 30348-5281

For more information, see Free Credit Reports at 

consumer.ftc.gov.

How is a credit scoring system developed?

To develop a credit scoring system or model, a 

creditor or insurance company selects a random 

sample of customers and analyzes it statistically to 

identify characteristics that relate to risk. Each of 

the characteristics then is assigned a weight based on 

how strong a predictor it is of who would be a good 

risk. Each company may use its own scoring model, 

different scoring models for different types of credit 

or insurance, or a generic model developed by a 

scoring company.

Under the Equal Credit Opportunity Act (ECOA), 

a creditor’s scoring system may not use certain 

characteristics — for example, race, sex, marital 

status, national origin, or religion — as factors. The 

law allows creditors to use age, but any credit scoring 

system that includes age must give equal treatment to 

applicants who are elderly.
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What can you do to improve your score?

Credit scoring systems are complex and vary 

among creditors or insurance companies and for 

different types of credit or insurance. If one factor 

changes, your score may change — but improvement 

generally depends on how that factor relates to 

others the system considers. Only the business using 

the system knows what might improve your score 

under the particular model they use to evaluate your 

application.

Nevertheless, scoring models usually consider the 

following types of information in your credit report to 

help compute your credit score: ● Have you paid your bills on time? You can 

count on payment history to be a significant 

factor. If your credit report indicates that you 

have paid bills late, had an account referred to 

collections, or declared bankruptcy, it is likely 

to affect your score negatively.

● Are you maxed out? Many scoring systems 

evaluate the amount of debt you have compared 

to your credit limits. If the amount you owe is 

close to your credit limit, it’s likely to have a 

negative effect on your score.

● How long have you had credit? Generally, 

scoring systems consider your credit track 

record. An insufficient credit history may affect 

your score negatively, but factors like timely 

payments and low balances can offset that.

● Have you applied for new credit lately? 

Many scoring systems consider whether you 

have applied for credit recently by looking at 

“inquiries” on your credit report. If you have 

applied for too many new accounts recently, 

it could have a negative effect on your score. 

Every inquiry isn’t counted: for example, 

inquiries by creditors who are monitoring your 

account or looking at credit reports to make 

“prescreened” credit offers are not considered 

liabilities.

● How many credit accounts do you have and 

what kinds of accounts are they? Although 

it is generally considered a plus to have 

established credit accounts, too many credit 

card accounts may have a negative effect on 

your score. In addition, many scoring systems 

consider the type of credit accounts you have. 

For example, under some scoring models, loans 

from finance companies may have a negative 

effect on your credit score.

Scoring models may be based on more than the 

information in your credit report. When you are 

applying for a mortgage loan, for example, the 

system may consider the amount of your down 

payment, your total debt, and your income, among 

other things.
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Improving your score significantly is likely to 

take some time, but it can be done. To improve 

your credit score under most systems, focus on 

paying your bills in a timely way, paying down any 

outstanding balances, and staying away from new 

debt.

Are credit scoring systems reliable?

Credit scoring systems enable creditors or insurance 

companies to evaluate millions of applicants 

consistently on many different characteristics. To be 

statistically valid, these systems must be based on 

a big enough sample. They generally vary among 

businesses that use them.

Properly designed, credit scoring systems generally 

enable faster, more accurate, and more impartial 

decisions than individual people can make. And some 

creditors design their systems so that some applicants 

— those with scores not high enough to pass easily 

or low enough to fail absolutely — are referred to a 

credit manager who decides whether the company 

or lender will extend credit. Referrals can result in 

discussion and negotiation between the credit manager 

and the would-be borrower.

What if I am denied credit or insurance, or 

don’t get the terms I want?

If you are denied credit, the ECOA requires that the 

creditor give you a notice with the specific reasons 

your application was rejected or the news that you 

have the right to learn the reasons if you ask within 

60 days. Ask the creditor to be specific: Indefinite 

and vague reasons for denial are illegal. Acceptable 

reasons might be “your income was low” or “you 

haven’t been employed long enough.” Unacceptable 

reasons include “you didn’t meet our minimum 

standards” or “you didn’t receive enough points on 

our credit scoring system.”

Sometimes you can be denied credit or insurance 

— or offered less favorable terms — because of 

information in your credit report. In that case, the 

FCRA requires the creditor or insurance company to 

give you a notice that includes, among other things, 

the name, address, and phone number of the credit 

reporting company that supplied the information. If 

a credit score was a factor in the decision to deny 

you credit or to offer you terms less favorable than 

most other customers receive, the notice also will 

include that credit score. If you receive one of these 

notices, you are entitled to a free copy of your credit 

report. Contact the company to find out what your 

report said. The credit reporting company can tell 

you what’s in your report, but only the creditor or 

insurance company can tell you why your application 

was denied.
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If a creditor or insurance company says you were 

denied credit or insurance because you are too near 

your credit limits on your credit cards, you may want 

to reapply after paying down your balances. Because 

credit scores are based on credit report information, a 

score often changes when the information in the credit 

report changes.

If you’ve been denied credit or insurance or didn’t get 

the rate or terms you want, ask questions:

● Ask the creditor or insurance company if a 

credit scoring system was used. If it was, ask 

what characteristics or factors were used in 

the system, and how you can improve your 

application.

● If you receive a notice explaining that you are 

being offered less favorable credit terms than 

those offered to most other consumers, ask the 

creditor or insurance company why you aren’t 

getting its best offer.

● If you are denied credit or not offered the best 

rate available because of inaccuracies in your 

credit report, be sure to dispute the inaccurate 

information with the credit reporting company. 

To learn more about this right, see Disputing 

Errors on Credit Reports at consumer.ftc.gov.

For More Information

The FTC works to prevent fraudulent, deceptive 

and unfair business practices in the marketplace 

and to provide information to help consumers spot, 

stop and avoid them. To file a complaint or get free 

information on consumer issues, visit ftc.gov or call 

toll-free, 1-877-FTC-HELP (1-877-382-4357); TTY: 

1-866-653-4261. 

Watch a video, How to File a Complaint, at 

consumer.ftc.gov/media to learn more. The FTC 

enters consumer complaints into the Consumer 

Sentinel Network, a secure online database and 

investigative tool used by hundreds of civil and 

criminal law enforcement agencies in the U.S. and 

abroad. 
Federal Trade Commission

consumer.ftc.gov

September 2013