How is Credit Score Calculated?

By Tiffany Sorensen

Truth be told, there is no definitive answer to this question. Each credit bureau uses a slightly different formula to calculate people’s credit scores. However, in most cases, the same basic factors are taken into account.

What is a Credit Score, Anyway?

Before explaining how credit score is calculated, it’s necessary to understand what a credit score is. In layman’s terms, it is a three-digit number that is meant to reflect one’s credit history. Credit scores fall on a scale between 300 and 850, where 850 is the highest score you can achieve. This score is assessed by creditors when they must decide whether or not to lend you money. A high score signals that you’re responsible about paying back what you owe.

When people say “credit score,” they’re usually referring to their FICO score. FICO stands for Fair Isaac Corporation, the company that invented the concept of credit score in the 1980s. Although FICO acts as the standard scoring model, in reality, we all have multiple credit scores.

Who Calculates Credit Scores?

Credit scores are calculated by credit-reporting agencies known as credit bureaus. In the United States, the three major credit bureaus are Equifax, Experian, and Transunion. These bureaus are privately owned businesses. Since Equifax, Experian, and Transunion are competitors, they do not share consumers’ information with one another. To compute consumers’ credit scores, each bureau uses a unique algorithm. For these reasons, your credit score is likely to vary between credit bureaus.

Which Factors are Considered?

Credit bureaus like to keep their credit score formulas under lock and key. Therefore, it is not always possible to know exactly how they compute your credit score. What is clear is that credit bureaus look at several factors, and each of those factors accounts for a certain percentage of your final credit score. Typically, they evaluate your payment history (35%), the amount you owe (30%), the length of your credit history (15%), your recent credit (10%), and the type of credit you’ve used (10%). These percentages may vary, though.

So what does all this mean? A person with a high credit score is most likely someone who: (1) always pays his/her bills on time, (2) does not owe an astronomical amount, (3) has a long credit history, (4) does not apply for credit often, and (5) has a small number of credit accounts.

Race, gender, religion, or marital status do not have a bearing on one’s credit score. Certain institutions can factor age into the equation, though they must prove this information will not be used for discriminatory purposes. Lenders may investigate your income, career field, and job stability if you apply for a loan or credit card, but these factors do not affect your numerical credit score.

Learning how credit score is calculated can help you to make more informed financial decisions. Now that you know what credit scores are made of, you’re one step closer to reaching that 850.