Credit Scoring, What Everyone Needs To Know

Risk scoring (aka “credit risk scoring”) is the process of summarizing the data on your credit reports into a 3-digit number.  Lenders, landlords, insurance companies, and utility providers use that number, called a “credit bureau based risk score”, to determine your credit or insurance risk.  The most common brand or variation of credit risk score is the FICO® credit score.  FICO is the acronym for its inventor, FICO (formerly Fair Isaac Corporation).  While there are certainly other brands of credit scores on the market to consumers and lenders, FICO is still the dominant player.

The FICO score will fall into a published range of 300 to 850 but most people will score between 500 and 800.  A higher score equates to lower risk and a lower score equates to higher risk.  And, obviously, a higher score will make it easier for you to qualify for loans and insurance and competitive rates and terms.  A lower score will cause you to be denied or approved with disadvantaged terms.

The FICO scoring model is a actually a collection of several scoring models called “scorecards.”  Scorecards are models designed to evaluate unique and homogenous consumer types.  For example, consumers who have a bankruptcy on their credit report will be scored in a scorecard designed to evaluate the risk of bankrupt consumers.  And another…consumers who have very young credit reports will be scored in a scorecard designed to evaluate the risk of consumers who don’t have a long history of credit usage.  The point of doing it this way is to ensure that each unique population of consumers is fairly evaluated.

In general the FICO score “points” are broken down and awarded from 5 different categories.  They are…

Payment Performance – 35% of the points in your FICO score come from this category.  This is where negative information is going to be evaluated.  Late payments, bankruptcy, settlements, charge offs, repossessions, collections, partial payment plans, liens, foreclosures, judgments and other derogatory information can severely punish your score.  Additionally, the frequency, severity and prevalence of these items is also a meaningful measurement in this category.

Debt Usage – 30% of the points in your FICO score come from this category.  This is where your installment, revolving and open debt is going to be evaluated.  While installment debt (fixed payment for a fixed number of months) is important, it takes a back seat to revolving credit card debt because it’s unsecured and an elevated risk for lenders.  You can repossess a car if you default on a car loan but you can’t repossess items purchased on a credit card.  The number of accounts with a balance, aggregate and line item revolving utilization (balances divided by your credit limits) and the total amount of debt is seen by this category.  In fact, the revolving utilization percentage might be the most profiled aspect of the FICO scoring system in the media.

Time in File – 15% of the points in your FICO score come from this category.  This is where the age of your credit report AND the average age of your accounts is going to be evaluated.  The age of your file is determined by taking the “date opened” from the oldest reporting account.  The average age is determined by averaging all of the accounts together. For example…if you have two accounts on your credit reports, one opened 5 years ago and the second opened 3 years ago then your “age” is going to be 5 and your “average age” is going to be 4.  Older is better in both categories.

Account Diversity – 10% of the points in your FICO score come from this category. This is where you’ll be rewarded for having different types of accounts on your credit reports.  Mortgage, auto, credit card are among the different types of accounts you can have on your credit history.  Having a diverse account set is good for your scores.

Search for Credit – 10% of the points in your FICO score come from this category.  Some people call this the “Inquiry” category because this is where credit inquiries are going to be measured.  This category also gets a lot of media attention which is a little confusing because the majority of inquires are ignored by FICO and the category is only worth 10% of your score.


John Ulzheimer is the President of Consumer Education at, the credit blogger for, and the author of the “credit rating” definition on Wikipedia.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and, John is the only recognized credit expert who actually comes from the credit industry.  He has served as a credit expert witness in more than 70 cases and has been qualified to testify in both Federal and State court on the topic of consumer credit.