It's Not Just a Number, It's the Number

Jean B. Morisseau-Kuni

What has the power to lower car insurance rates, rent an apartment and buy a cell phone? It's certainly not Superman or Wonder Woman. The answer is a number—but not just any number. It's the number: your credit score.

It's hard to believe that a number has so much effect on what you can buy and where you can work or live. So, why do credit scores have such influence? And who creates them, what information do they use, where does it come from and why?

At one time, mortgage bankers were the only lenders who looked at credit reports. In today's world, landlords, employers, government agencies, and insurance, utility and cell phone companies all use credit reports to determine the character and creditworthiness of potential customers, tenants and employees. Why? Because credit reports provide a quick snapshot of how people handle personal finances.

Studies have shown that those with high credit scores act more responsibly in their lives and are less likely to file claims than those with lower credit scores. (See the Insurance Information Institute's web site,

There is a lot of misunderstood information and mystery surrounding credit scores and the credit-scoring process. Even financially savvy consumers may not know what elements make up their credit scores or how data is compiled to create their scores.

Taking the Mystery Out of Credit Scoring

Fair Isaac Corp. (FICO), the developer of the credit-scoring system, defines a credit score as an automated statistical analysis of creditworthiness—a numerical profile to assess how debts are repaid, how much and to whom money is owed and how responsibly available credit is used. Some lenders refer to a credit score as a FICO score.

However, FICO is not the only credit-scoring system. Experian, TransUnion and Equifax, the credit reporting agencies, also use credit-scoring systems. All credit-scoring systems are similar and provide much of the same information. However, the file formats are not the same and the end reports have different appearances.

Lenders, utility companies, department stores, landlords and other players in the financial world electronically forward payment and liability information to the credit-reporting agencies. The agencies use an automated system to compile the data into individual consumer files and evaluate the file by dividing the data into categories for analysis.

The data normally include payment history, outstanding debt, length of credit history, newly established credit accounts, number of inquiries from creditors, and the types of credit used by the consumer. Because personal characteristics such as age, race, sex, education or ethnic background are not included in the analysis, credit-scoring systems are believed to remove any illegal bias from the analysis.

Once the analysis is complete, the system assigns a number, between 300 and 850. The number is the credit score and represents the risk factor of the borrower.

According to Fair Isaac's web site,, 2 percent of the U.S. population's credit scores are in the lowest range (300-499) and 15 percent are in the highest range (800-850). Other scores are between 500 and 800, with the majority, 27 percent, falling in the 750-799 range. The median score is 723, meaning that half of scores are below and half are above 723 and the average credit score is 692.

The Bottom Line

Consumers with established credit histories, who pay bills in a timely manner and use credit responsibly, generally have higher scores. Those without established credit histories or who have liens, collections, foreclosure, bankruptcy or a history of paying their bills late will have lower scores.

Credit scores below 620 are in the high-risk range. Consumers with scores in that range will generally pay higher interest and insurance rates. In addition, they also may be denied credit or employment and may have problems renting a place to live.

Consumers can improve low credit scores by changing the way they handle personal finances. Payment history and outstanding debt make up 65 percent of a credit score. By improving payment history, lowering the amount of outstanding revolving debt and limiting the amount of available credit, a consumer can significantly raise a credit score.

Those who have trouble making credit card or other loan payments should talk to their lenders. Most are willing to work with customers by changing billing dates, lowering the amount of available credit and, in some cases, changing the minimum amount payable each month.

Whether credit scoring is a good thing depends on who you talk to. Some say there is a strong case that it is unfair to low-income, historically underserved people and those without established credit. Others say it gives consumers greater access to credit by providing fair, fast and thorough information. Either way, in today's world, credit scoring is a consumer's link to getting credit. For that reason, it is crucial for borrowers to understand how it works.

Payment History
35 percent
  • account payment history for specific types of accounts, such as credit cards, retail accounts, installment loans and mortgage payments;
  • presence of adverse public records, such as bankruptcies, liens and delinquencies;
  • number of past-due items; and
  • number of accounts paid as agreed.

Outstanding Debt
30 percent
  • amount of money owed on each account;
  • amount of money owed on specific types of accounts;
  • number of accounts with a balance;
  • proportion of balances on certain types of credit lines, such as revolving accounts; and
  • proportion of installment loan amounts.

Length of Credit History
15 percent
  • amount of time since accounts were opened;
  • amount of time since specific types of accounts were opened, such as revolving accounts; and
  • time since last activity on accounts.

New Credit
10 percent
  • types and number of recently opened accounts;
  • number of recent credit inquiries by certain lenders; and
  • re-establishment of positive credit history following past payment problems.

Types of Credit Used and Inquiries
10 percent
  • types of credit most frequently used;
  • how many of each type of account is used; and
  • how many recent inquiries have been made.


Keep up with what’s new and noteworthy at the St. Louis Fed. Sign up now to have this free monthly e-newsletter emailed to you.

Subscription Options

Additional Fed Publications

Fed in Print: An index of the economic research conducted by the Fed.


2015 Federal Reserve System
Community Development
Research Conference