Need Credit or Insurance?

Your Credit Score Helps Determine What You’ll Pay

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 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 

these factors 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.”

July 2007

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, many more types of 

businesses — including insurance companies and 

phone companies — are using credit scores to decide 

whether to approve you for a 

loan or service and on what 

terms. Auto and homeowners insurance companies 

are among the businesses 

that are using credit scores 

to help decide if you’d be a 

good risk for insurance. A 

higher credit score means you are likely less of a risk, 

and in turn, means you will be 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.

The FTC wants you to know 

how credit scoring works.
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, 

generally around $8, for 

the score. When you buy your score, often you get 

information on how you can improve it.

To order your free annual report from one 

or all the national credit reporting companies, and to purchase your credit score, visit 

www.annualcreditreport.com, call toll-free 1-877-

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 www.ftc.gov/credit. 

For more information, see Your Access to Free Credit 

Reports at ftc.gov/credit.

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 its customers, or a sample of similar 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 in properly 

designed scoring systems. But 

any credit scoring system that 

includes age must give equal 

treatment to elderly applicants.

What can I do to improve 

my 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 scoring 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: 

n 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.

Your credit report is 

a key part of many 

credit scoring systems.

FTC Facts For Consumers 2
n 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.

n How long have you had credit? Generally, scoring systems consider the length of your credit 

track record. An insufficient credit history may 

affect your score negatively, but factors like 

timely payments and low balances can offset 

that.

n 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.

n 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.

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.

Scoring models may be 

based on more than the 

information in your 

credit report.

FTC Facts For Consumers 3
If you’ve been denied credit or insurance or 

didn’t get the rate or terms you want, ask questions:

n 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.

n If you get the credit or insurance, ask the creditor or insurance company whether you are getting the best rate and terms available. If you’re 

not, ask why.

n 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 How to Dispute Credit Report Errors at ftc.gov/credit.

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 new video, How to 

File a Complaint, at ftc.gov/video 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. 

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 initially be charged a higher premium 

— because of information in your credit report. In 

that case, the FCRA requires the creditor or insurance company to give you the name, address, and 

phone number of the credit reporting company that 

supplied the information. Contact the company to 

find out what your report said. This information is 

free if you ask for it within 60 days of being turned 

down for credit or insurance. The credit reporting 

company can tell you what’s in your report; only the 

creditor or insurance company can tell you why your 

application was denied.

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.

FTC Facts For Consumers 4
following information is required to process 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.

Copyright 2004, Central Source LLC

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

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 >

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

Omission of any information may delay your request.

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.
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.

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

name, street address, and phone number.

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

when buying from a company you know and trust.

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

tomorrow, too.

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

means you could lose your investment — all of it.

5. 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.

6. “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.

7. 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!

For The Consumer Federal Trade Commission

ftc.gov 1-877-ftc-help

Federal Trade Commission

Bureau of Consumer Protection

Division of Consumer and Business Education