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Federal Reserve Bank of Philadelphia


hen you apply for credit,
whether it’s a credit card, car
loan, or a mortgage, lenders
want to know whether you are likely to repay your loan and make the payments on
time. To determine if you are a good credit
risk, lenders examine your credit score
whenever you apply for credit. Your credit
score is an important factor in determining
whether creditors will approve your credit
application and, if you are approved, the
cost of your loan. Other factors that can
affect your credit application include your
income and employment history.
Your credit score is calculated based on
information in your credit report, which is
a profile of how you manage your credit
(loan) accounts. Your credit report details
how many credit accounts you have, how
much you owe, the amount of your credit
limits (primarily applies to credit cards),
when you opened the credit account, your
repayment history (including late payments), and certain public records (for
example, a bankruptcy filing or a tax lien).
Each of the three national credit bureaus
(Experian, Equifax, and TransUnion)
maintains a credit report about you.
Your credit report is updated once a
month by each of your creditors (for
example, your credit card issuer, car loan
lender, or mortgage lender), who provide
information to the three credit bureaus
about your loans. Your report is also updated regularly based on any new negative information obtained from public
records that indicate an increased credit
risk (for example, a bankruptcy, lien, or
judgment). Consumers with a high credit
score are likely to pay back their loans in
full and on time, whereas consumers with
low scores are likely to carry a high risk of

The information your creditors provide
to the credit bureaus affects your credit
score. For example, if a creditor reports
that you made a late payment, it’s likely
that your credit score will drop.
Most credit scoring models consider the
following factors when calculating your
• The number of late accounts
• The number of accounts paid on time
• Negative public records (for example,
bankruptcy, judgments, suits, liens,
and wage attachments)
• The amount past due on delinquent
accounts or collection items
• For credit cards and other revolving
credit with credit limits, the percent of
your credit limit that you currently are
using. For example, if your credit card
has a credit limit of $10,000, and your
current balance is $1,000, your credit
usage rate (often called your credit
utilization rate) is 10 percent.
• The amount owed on all accounts, as
well as on different types of accounts
• The number of accounts with balances
• The amount still owed on installment
loans relative to the amount originally
borrowed. For example, if you took
out a car loan for $25,000, but currently
only owe $2,000, the small remaining
balance relative to the large amount
originally borrowed will help raise
your credit score.
• The mixture of revolving credit (for
example, credit card or a home equity
line of credit) and installment loans
(for example, auto loan or mortgage).

A history of borrowing using
different types of credit (for example,
credit card, home mortgage, and car
loan) increases your score.
• The average time since the accounts
were opened
• The length of time since the accounts
were opened, by account type
• How long since there was account
• The number of recently opened accounts and inquiries by creditors
• The length of time since the last credit
• Re-establishment of a positive credit
history following past payment problems
• The length of time since a new account was opened
In calculating your credit score, most
credit scoring models assign a higher
weight to your payment history and
amounts owed than to the other factors.
These two factors will, therefore, have
a greater effect on your score than the
other factors. But it is important to try to
do well on all of the factors so you can
maximize your score.
Here are some important tips to increase
your credit score:
• At least once a year, review your
credit reports from each of the three
credit bureaus (Experian, Equifax,
and TransUnion) for inaccuracies and
file a dispute immediately if you find
an error. You are entitled to obtain
a free credit report once a year from
each of the three bureaus. To obtain
a free copy of your credit report, go





to or
call 877-FACT-ACT (877-322-8228).
It is important to note that your
credit report does not contain your
credit score. When you obtain your
free credit report from each of the
bureaus, you will be offered the
option to purchase your credit score.
However, you are not obligated to
purchase your credit score to receive
your free credit report.
Pay your bills on time. Late payments
can hurt your score significantly. If
you have missed payments, get current and stay current. The more you
pay your bills on time, the better your
Keep credit card balances low relative
to credit limits (30 percent or lower is
recommended). “Maxing out” your
credit cards means you have a very
high utilization rate, which significantly lowers your credit score.
Pay off debt rather than move it
Open new credit accounts only as
needed; new accounts decrease the
average age of your total accounts.
Having accounts that have been
opened a long time increases your
credit score.
Avoid closing credit card accounts
because this also decreases the average age of your accounts.
Apply for installment loans (mortgages, car loans, etc.) within a 30-day
period because most credit scoring
models will count multiple inquiries
within a short period of time as only
one inquiry.

Your credit score is presented as a number that can fall within a range — usually
from 300 to 850. However, some credit
scoring products use different ranges —

such as 501 to 990. If you obtain multiple
credit scores and the same range was
not used, you cannot directly compare
the scores. For example, a credit score of
720 within the 300 to 850 range is not the
same as a credit score of 720 using the 501
to 990 range.
Maintaining a high credit score is important because this is one of the factors that
determine whether you will be approved
for credit and the cost of your loan. Applicants with high credit scores typically
are offered lower interest rates and better
terms and conditions than applicants with
lower scores. A low credit score reduces
the chances that your loan application
will be approved. And if it is approved,
you will likely pay a higher interest rate
for the loan than a borrower with a higher
credit score.
If you apply for credit and are denied,
you have the right to obtain a free copy of
the credit report the creditor used when
denying your application. You should
obtain a copy of the credit report to make
sure that it is accurate. If you find inaccuracies, you should file a dispute with
that credit bureau. Here are the phone
numbers and websites of the three major
credit bureaus:


The Federal Reserve Bank of Philadelphia
has other brochures on credit topics.
To obtain copies of these brochures, or
for additional copies of this one, please
Federal Reserve Bank of Philadelphia
Public Affairs – Publications
P.O. Box 66
Philadelphia, PA 19105-0066


To view this and other
consumer publications
produced by the Federal
Reserve Bank of Philadelphia,
scan this code with your

Ten Independence Mall, Philadelphia, PA 19106