Ever wonder how a creditor 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 and auto loans. More 

recently, credit scoring has been used to 

help creditors evaluate your ability to repay 

home mortgage loans. Here’s how credit 

scoring works in helping decide who gets 

credit — and why.

What is credit scoring? 

Credit scoring is a system creditors use 

to help determine whether to give you 

credit.

Information about you and your 

credit experiences, such as your bill-paying history, 

the number and type of accounts you have, late payments, collection actions, outstanding debt, and the 

age of your accounts, is collected from your credit 

application and your credit report. Using a statistical program, creditors compare this information to 

the credit performance of consumers with similar 

profiles. A credit scoring system awards points for 

each factor that helps predict who is most likely to 

repay a debt. A total number of points — a credit 

Credit Scoring

score — helps predict how creditworthy 

you are, that is, how likely it is that you 

will repay a loan and make the payments 

when due. 

Because your credit report is an important part of many credit scoring systems, it 

is very important to make sure it’s accurate 

before you submit a credit application. An 

amendment to the federal Fair Credit Reporting Act (FCRA) requires each of the 

major nationwide consumer reporting 

companies to provide you with a free 

copy of your credit reports, at your 

request, once every 12 months.

To order your free annual report 

from one or all national consumer reporting companies, visit www.annualcreditreport.com, call tollfree 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. The form is at the back of this 

brochure; or you can print it from 

ftc.gov/credit. Do not contact the three nationwide 

consumer reporting companies individually. They 

provide free annual credit reports only through 

May 2006

FTC Facts

For Consumers Federal Trade Commission

For The Consumer

www.ftc.gov 1-877-ftc-help
877-322-8228, www.annualcreditreport.com, and 

Annual Credit Report Request Service, P. O. Box 

105281, Atlanta, GA 30348-5281.

For more information, see Your Access to Free 

Credit Reports at ftc.gov/credit.

Why is credit scoring used? 

Credit scoring is based on real data and statistics, 

so it usually is more reliable 

than subjective or judgmental 

methods. It treats all applicants objectively. Judgmental 

methods typically rely on 

criteria that are not systematically tested and can vary 

when applied by different 

individuals.

How is a credit scoring model developed?

To develop a model, a creditor selects a random sample of its customers, or a sample of similar customers if their sample is not large enough, and analyzes 

it statistically to identify characteristics that relate 

to creditworthiness. Then, each of these factors is 

assigned a weight based on how strong a predictor it 

is of who would be a good credit risk. Each creditor 

may use its own credit scoring model, different scoring models for different types of credit, or a generic 

model developed by a credit scoring company. 

Under the Equal Credit Opportunity Act 

(ECOA), a credit scoring system may not use certain characteristics — like race, sex, marital status, 

national origin, or religion — as factors. However, 

creditors are allowed to use age in properly designed 

scoring systems. But any scoring system that includes 

age must give equal treatment to elderly applicants.

What can I do to improve my score?

Credit scoring models are complex and often vary 

among creditors and for different types of credit. If 

one factor changes, your score may change — but 

improvement generally depends on how that factor relates to other factors considered by the model. 

Only the creditor can explain what might improve 

your score under the particular model used to evaluate your credit application. 

Nevertheless, scoring 

models generally evaluate the 

following types of information 

in your credit report:

 Have you paid your 

bills on time? Payment history 

typically is a significant factor. 

It is likely that your score will 

be affected negatively if you have paid bills late, 

had an account referred to collections, or declared bankruptcy, if that history is reflected on 

your credit report.

 What is your outstanding debt? Many scoring 

models evaluate the amount of debt you have 

compared to your credit limits. If the amount 

you owe is close to your credit limit, that is likely 

to have a negative effect on your score.

 How long is your credit history? Generally, models 

consider the length of your credit track record. 

An insufficient credit history may have an effect 

on your score, but that can be offset by other 

factors, such as timely payments and low 

balances.

Many scoring models 

evaluate the amount of debt 

you have compared to your 

credit limits.

FTC Facts For Consumers 2
 Have you applied for new credit recently? Many 

scoring models consider whether you have applied for credit recently by looking at “inquiries” 

on your credit report when you apply for credit. 

If you have applied for too many new accounts 

recently, that may negatively affect your score. 

However, not all inquiries are counted. Inquiries 

by creditors who are monitoring your account or 

looking at credit reports to make “prescreened” 

credit offers are not counted.

 How many and what types of 

credit accounts do you have?

Although it is generally good 

to have established credit 

accounts, too many credit 

card accounts may have a 

negative effect on your score. 

In addition, many models 

consider the type of credit accounts you have. 

For example, under some scoring models, loans 

from finance companies may negatively affect 

your credit score.

Scoring models may be based on more than just 

information in your credit report. For example, the 

model may consider information from your credit 

application as well: your job or occupation, length of 

employment, or whether you own a home.

To improve your credit score under most models, 

concentrate on paying your bills on time, paying 

down outstanding balances, and not taking on new 

debt. It’s likely to take some time to improve your 

score significantly.

How reliable is the credit scoring system?

Credit scoring systems enable creditors to evaluate 

millions of applicants consistently and impartially on 

many different characteristics. But to be statistically 

valid, credit scoring systems must be based on a big 

enough sample. Remember that these systems generally vary from creditor to creditor.

Although you may think such a system is arbitrary or impersonal, it can help make decisions 

faster, more accurately, and more impartially than 

individuals when it is properly designed. And many 

creditors design their systems so 

that in marginal cases, applicants 

whose scores are not high enough 

to pass easily or are low enough 

to fail absolutely are referred to 

a credit manager who decides 

whether the company or lender 

will extend credit. This may allow 

for discussion and negotiation 

between the credit manager and the consumer.

What happens if I am denied credit or don’t 

get the terms I want?

If you are denied credit, the ECOA requires that the 

creditor give you a notice that tells you the specific 

reasons your application was rejected or the fact 

that you have the right to learn the reasons if you 

ask within 60 days. Indefinite and vague reasons 

for denial are illegal, so ask the creditor to be specific. Acceptable reasons include: “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.”

If a creditor says you were denied credit because 

you are too near your credit limits on your charge 

Scoring models may be 

based on more that just 

information in your 

credit report.

FTC Facts For Consumers 3
enters Internet, telemarketing, identity theft, and 

other fraud-related complaints into Consumer Sentinel, a secure, online database available to hundreds 

of civil and criminal law enforcement agencies in the 

U.S. and abroad.

cards or you have too many credit card accounts, you 

may want to reapply after paying down your balances or closing some accounts. Credit scoring systems 

consider updated information and change over time.

Sometimes you can be denied credit because of 

information from a credit report. If so, the FCRA requires the creditor to give you the name, address and 

phone number of the consumer reporting company 

that supplied the information. You should contact 

that company to find out what your report said. This 

information is free if you request it within 60 days of 

being turned down for credit. The consumer reporting company can tell you what’s in your report, but 

only the creditor can tell you why your application 

was denied.

If you’ve been denied credit, or didn’t get the rate 

or credit terms you want, ask the creditor if a credit 

scoring system was used. If so, ask what characteristics or factors were used in that system, and the best 

ways to improve your application. If you get credit, 

ask the creditor whether you are getting the best rate 

and terms available and, if not, why. If you are not 

offered the best rate available because of inaccuracies 

in your credit report, be sure to dispute the inaccurate information in your credit report.

Where can I get more information or file a 

complaint?

The FTC works for the consumer 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 to 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. The FTC 

FTC Facts For Consumers 4
You have the right to get a free copy of your credit file disclosure, commonly called a credit report, once every 12 months, from each of

the nationwide consumer credit reporting companies - Equifax, Experian and TransUnion.

For instant access to your free credit report, visit www.annualcreditreport.com.

For more information on obtaining your free credit report, visit www.annualcreditreport.com or call 1-877-322-8228.

Use this form if you prefer to write to request your credit report from any, or all, of the nationwide consumer credit reporting companies. The

following information is required to process your request. Omission of any information may delay your request.

If additional information is needed to process your request, the consumer credit

reporting company will contact you by mail.

Your request will be processed within 15 days of receipt and then mailed to you.

Annual Credit Report Request Form

Once complete, fold (do not staple or tape), place into a #10 envelope, affix required postage and mail to:

Annual Credit Report Request Service P.O. Box 105281 Atlanta, GA 30348-5281.

Copyright 2004, Central Source LLC

Equifax

Experian

TransUnion

I want a credit report from (shade

each that you would like to

receive):

Shade here if, for security

reasons, you want your credit

report to include no more than

the last four digits of your

Social Security Number.

Shade Circle Like This >

Not Like This >

Social Security Number:

- -

Date of Birth:

/ /

Month Day Year

First Name M.I.

Last Name JR, SR, III, etc.

Current Mailing Address:

House Number Street Name

City State ZipCode

City State ZipCode

Apartment Number / Private Mailbox For Puerto Rico Only: Print Urbanization Name

House Number Street Name

Previous Mailing Address (complete only if at current mailing address for less than two years):

Fold Here Fold Here

Fold Here Fold Here

Please use a Black or Blue Pen and write your responses in PRINTED CAPITAL LETTERS without touching the sides of the boxes like the examples listed below:

Apartment Number / Private Mailbox For Puerto Rico Only: Print Urbanization Name

31238

A B C D E F G H I J K L M N O P Q R S T U V W X Y Z 0 1 2 3 4 5 6 7 8 9
General Tips

The Federal Trade Commission (FTC) is the nation’s consumer protection agency. Here 

are some tips from the FTC to help you be a more savvy consumer.

Know who you’re dealing with. Do business only with companies that clearly provide 

their name, street address, and phone number.

Protect your personal information. Share credit card or other personal information only 

when buying from a company you know and trust. 

Take your time. Resist the urge to “act now.” Most any offer that’s good today will be 

good tomorrow, too. 

Rate the risks. Every potentially high-profit investment is a high-risk investment. That 

means you could lose your investment — all of it. 

Read the small print. Get all promises in writing and read all paperwork before making 

any payments or signing any contracts. Pay special attention to the small print. 

“Free” means free. Throw out any offer that says you have to pay to get a gift or a “free” 

gift. If something is free or a gift, you don’t have to pay for it. Period. 

Report fraud. If you think you’ve been a victim of fraud, report it. It’s one way to get 

even with a scam artist who cheated you. By reporting your complaint to 

1-877-FTC-HELP or ftc.gov, you are providing important information to help law 

enforcement officials track down scam artists and stop them! 

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FTC Facts For Consumers 6

For The Consumer Federal Trade Commission

ftc.gov 1-877-ftc-help

Federal Trade Commission

Bureau of Consumer Protection

Office of Consumer and Business Education