Read Score Boost free: the opening pages

How Your Credit Score Really Works

You filled out the application, waited, and got the answer you were afraid of. Maybe it was a car dealer who came back with a 19% interest rate and a speech about "your situation." Maybe it was a landlord who said the unit went to someone else, and you are pretty sure you know why. Maybe it was a credit card company that sent a letter so vague you could not tell what you did wrong. Whatever happened, you are holding a number somewhere between roughly 500 and 670, and that number is costing you money, options and some dignity.

Here is the good news, and it is not a pep talk. Credit scores are calculated by formulas. Formulas respond to inputs. Once you know which inputs matter and how quickly each one shows up in your score, you stop guessing and start working a plan. That is what this guide is: a plan, built on how scoring actually works, with templates, scripts and timelines you can use this week.

This first section explains what happened when you were denied, what a credit score really is, and which of your many scores the lender looked at. Everything else in the guide builds on it.

What actually happened when you were denied

When you apply for credit, the lender usually pulls a credit report from one or more of the three national credit bureaus: Equifax, Experian and TransUnion. It then runs a scoring model on that report, and often combines the score with its own rules about income, debt load, job history and the size of the loan.

If the lender denies you or gives you worse terms because of something in your credit report, federal law (the Fair Credit Reporting Act, usually called the FCRA) requires it to send you an adverse action notice. That notice is far more useful than most people realize. It should tell you:

1. The name and contact details of the credit bureau that supplied the report.
2. That the bureau did not make the decision and cannot explain why it was made.
3. Your right to a free copy of that report within 60 days.
4. Your right to dispute inaccurate information.
5. If a credit score was used, the score itself and the key factors that hurt it (often up to four or five reason statements).

Those "key factors" are gold. They are not a lecture. They are the scoring model telling you, in coded language, where you lost the most points.

Action step: Find every denial or "risk-based pricing" letter you received in the last year (the dealer, the card issuer, the apartment screening company). If you threw them away, call or log in and ask for a copy of the adverse action notice. Write down the score, the bureau and every reason code listed. You will use this list in Chapter 2.

Decoding the reason statements

Reason statements sound vague, but each maps to a specific factor. Here is how to translate the common ones.

What the letter says	What it usually means	Where it is covered
"Proportion of balances to credit limits is too high"	Your credit card utilization is high	Chapter 4
"Serious delinquency" or "Delinquency on accounts"	Late payments, collections or charge offs	Chapter 3
"Too many inquiries in the last 12 months"	Recent hard pulls from applications	Section 1.3
"Length of time accounts have been established"	Your credit history is young	Section 1.3
"Too few accounts currently paid as agreed"	Not enough positive accounts	Chapter 5
"Lack of recent revolving account information"	No active credit card reporting	Chapter 5
"Number of accounts with delinquency"	Several accounts carry late marks	Chapter 3
"Amount owed on accounts is too high"	Total debt is heavy relative to limits or original loan amounts	Chapter 4

If your letter lists high balances first, you are probably closer to a fast jump than you think, because utilization is the factor that changes most quickly. If it lists serious delinquency first, your path is longer but still very workable, and Chapter 3 is where your biggest wins live.

You do not have one credit score. You have dozens.

One of the most confusing parts of credit for people who are rebuilding is that the number on your banking app does not match the number the dealer quoted. Nobody lied to you. You simply have many scores.

There are two main scoring companies:

• FICO, which produces the scores most lenders have used for decades.
• VantageScore, created jointly by the three bureaus, which many free apps display.

Each company has several versions in use at the same time. FICO Score 8 is widely used for credit cards and general lending. FICO Score 9 and FICO 10 exist and some lenders use them. Auto lenders often use FICO Auto Scores, and card issuers sometimes use FICO Bankcard Scores. These "industry" versions run from 250 to 900 instead of 300 to 850 and weigh your history with that type of loan more heavily. Mortgage lending has historically relied on older FICO versions (often called FICO 2, 4 and 5), and that market is in the middle of a shift toward allowing newer models, so ask your loan officer which score they pull.

On top of that, each version is calculated separately on each bureau's report. Since your three reports rarely contain identical information, you can easily have a 590 on one and a 640 on another.

Score type	Range	Where you see it	Who uses it
FICO 8	300 to 850	Many card issuers, some banks, some free services	Card issuers, personal lenders
FICO Auto Score (8 or 9)	250 to 900	Rarely shown free; ask the dealer or buy it	Auto lenders
FICO Bankcard Score	250 to 900	Paid FICO products	Card issuers
Older mortgage FICO (2, 4, 5)	300 to 850	Mortgage lender or paid products	Mortgage lenders
VantageScore 3.0 or 4.0	300 to 850	Many free apps and websites	Some lenders, landlords, apps

Pro tip: Do not panic when two scores disagree, and do not celebrate too early when one jumps. Track the same score from the same source each month. The trend is what matters. When you are close to applying for something specific, find out which score that lender uses and check that version.

Why the scores agree more than they disagree

Here is the reassuring part. Although the versions differ in the details, they all reward and punish the same core behaviors. Every major model:

• Rewards on time payments and punishes late ones, collections and public records.
• Rewards low credit card balances relative to limits.
• Rewards older accounts and a longer history.
• Mildly rewards having different types of credit.
• Mildly penalizes lots of recent applications.

So if you fix the inputs, every score moves in the same direction, even if not by the same amount. You do not need to game any particular model. You need to clean up your reports and build good data.

The five factors and their published weights

FICO publishes the general importance of each category for the general population. These are not exact rules for your file (the weights shift depending on what is in your report), but they are a reliable map.

Factor	Approximate weight (FICO)	Speed of change	What you control
Payment history	About 35%	Slow to repair, fast to damage	Paying on time, disputing errors, goodwill requests
Amounts owed (utilization)	About 30%	Fast, often within one billing cycle	Balances reported on cards
Length of credit history	About 15%	Slow	Keeping old accounts open, authorized user accounts
Credit mix	About 10%	Medium	Adding an installment loan or a card if you lack one
New credit (inquiries, new accounts)	About 10%	Medium, fades within a year	Applying strategically

VantageScore uses similar categories with different labels and weights, and it describes payment history and credit usage as highly influential as well.

Look at the "speed of change" column. That column is the secret behind every honest "raise your score fast" result you have ever heard about. The people who gained 50 or 100 points in a month or two almost always did it through a combination of three things:

1. Reported credit card balances dropping sharply (utilization).
2. Inaccurate negative items being corrected or deleted (disputes).
3. Getting their first positive revolving or installment account reporting, or being added as an authorized user to a strong account.

Anyone who promises a 100 point jump in two weeks without knowing which of those levers you have available is guessing or selling something.

Who you are in the scoring system

Scoring models do not treat everyone the same. FICO and VantageScore sort files into groups (sometimes called scorecards) based on features like whether you have a serious delinquency, how thin your file is, or how young it is. Your file is then compared to similar files.

You do not need the technical details, but you do need the practical consequence: the same action can be worth very different amounts of points for different people. Paying a card from 90% to 5% utilization might give one person 25 points and another person 70. Adding a secured card to a file with zero open accounts can be dramatic. Adding the same card to a file with eight open cards barely registers.

Most readers of this guide fall into one of four profiles. Find yours.

Profile	What the report looks like	Biggest likely levers
The Maxed Out	Few or no late payments, but cards near their limits	Utilization (Chapter 4). Fastest gains of anyone.
The Bruised	One to several late payments, maybe a collection, cards partly used	Disputes, goodwill letters, utilization
The Rebuilder	Charge offs, collections, possibly a bankruptcy, few open accounts	New positive accounts, collections strategy, patience
The Thin File	Very little history, maybe one account or a student loan	Secured card, credit builder loan, authorized user

Example: Dana has a 612 FICO 8. She has never been late, but her two cards have $4,200 owed on $5,000 of total limits. She is The Maxed Out. Marcus has a 588 with two 30 day late payments from a rough stretch two years ago, a $700 medical collection and one card at 60%. He is The Bruised. Their plans look completely different, and this guide treats them differently.

What your score is not

Clearing up a few myths now saves you time and money later.

• Your score is not your income. Income is not on your credit report. Lenders ask for it separately.
• Checking your own score does not hurt it. Looking at your own credit is a soft inquiry. You can check daily if you like.
• Carrying a balance does not help. You do not need to pay interest to build credit. A card can report a balance and then be paid in full by the due date, which costs you nothing.
• Closing a paid off card does not erase its history immediately. But it can raise your utilization right away by removing its limit. More on that in Section 1.3.
• Paying off a collection does not automatically delete it. Under some newer score versions a paid collection is ignored, under FICO 8 it often still counts. Chapter 3 explains how to decide what to do.
• Your debit card does nothing for your credit. Debit transactions are not reported to the bureaus.

What this guide will have you do

Here is the route, so you know where you are headed:

• Chapter 1 (where you are now): Understand the mechanics and set a realistic target.
• Chapter 2: Pull all three reports, read them line by line and build a prioritized problem list.
• Chapter 3: Dispute errors with letter templates, deal with collections, and request goodwill adjustments.
• Chapter 4: Drop your utilization fast using statement date timing and smart paydown order.
• Chapter 5: Add positive accounts, with or without a credit card.
• Chapter 6: Run a 30/60/90 day plan, avoid credit repair scams, and reapply at the right moment.

Warning: This guide is education, not legal or financial advice. If you are facing a lawsuit from a debt collector, wage garnishment, possible bankruptcy, or identity theft involving large amounts, talk to a consumer attorney, a legal aid office or a nonprofit credit counselor. Many consumer attorneys handle FCRA and debt collection cases with no upfront fee because the laws allow them to recover fees from violators.

A quick self check before you move on

Answer these honestly in a notebook or notes app. You will refer back to them.

1. What score did the lender report, and from which bureau?
2. What were the top reason codes?
3. Which of the four profiles describes you best?
4. What do you want to apply for next, and when? (A car in 60 days is a very different plan from an apartment in six months.)
5. How much cash could you realistically put toward card balances over the next 30 days? Even $0 is a valid answer, and this guide has a path for it.

Write the answers down now. In the next section you will learn exactly how payment history and utilization are scored, which are the two factors responsible for most of the movement you are hoping for.

The sample ends here.