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By John D. Rossi III, CPA

Most credit-reporting agencies use a third party to determine the credit score of an individual’s credit report. The most widely known comes from the Fair Isaac Corporation (FICO), but it is worth noting that not every credit score offered online is a FICO score. You have to consider the source of your credit score so you can understand and, hopefully, improve it.

A credit score is a number based on an analysis of an individual’s credit report that tries to represent your credit health. Your credit score may be used by others to make a variety of decisions, including lending, employment, and rental. There are three major credit-reporting agencies: Equifax (which uses a 280 to 850 scale), Experian (which uses a 360 to 840 scale), and TransUnion (which uses a 300 to 850 scale). There are also other minor credit agencies – such as the VantageScore – that use their own proprietary scoring scales.

FICO evaluates creditworthiness based upon five different pieces of information, and uses a scoring scale that ranges between 300 and 850. FICO is used by 90 percent of lenders. These are the five factors FICO uses in calculating an individual’s credit score and how important each factor is:

• Punctuality of payments. This is one of the most important factors in your FICO score, with about a 35 percent weighting. It generally only includes payments more than 30 days past due.
• The amount owed, expressed as the ratio of debt (balances) to total available (credit limits). About a 30 percent weighting.
• Length of credit history. A longer credit history will increase your FICO score. About a 15 percent weighting.
• Credit mix (types of accounts, such as student loans, car loans, credit cards, etc.) in use. About a 10 percent weighting.
• Recent search for credit and/or amount of credit obtained recently and/or new credit. About a 10 percent weighting.

Your FICO score does not include personal information, child support, requests for your credit report, and information that is not proven to be predictive of creditworthiness. However, lenders do look at other factors beyond FICO scores when making credit decisions, including income, length of employment, and the type of credit requested. For example, an unemployed individual with no sources of income will not usually be approved for a loan, regardless of the FICO score.

Improving a low FICO score will take time. There are no quick and easy fixes. Do not establish new loans within a short period of time if your goal is to raise your FICO score. FICO scores ignore searches for loans, where it is customary to shop for the best rate, as compared to searches for credit (additional loans).

Good financial habits do not necessarily lead to good FICO scores. Often, the opposite is true. For example, using cash and debit cards exclusively may help you better manage your money, but your efforts may not reflect positively on your credit score.

One way to check that your FICO score is accurate is to make sure that your credit report is correct. To look for inaccurate information or fraud, one should request a report from the different credit-reporting agencies. If you find an error, the first point of contact should be the source of the inaccurate information, such as the lender. If the organization that reported the inaccurate information fails to fix it, you should bring your dispute to the major credit reporting agencies. Most of these agencies allow you to file your dispute online, by mail, or phone.

Credit scores use the information that is contained in credit-reporting agencies’ files. An occasional peek, before a lender looks at your credit application, never hurts.

John D. Rossi III, CPA, is an associate professor of accounting at Moravian College in Bethlehem, Pa. He can be reached at rossij@moravian.edu.