What is a credit score and how is it calculated?

Credit scores are published by one entity for credit, home loans, and auto financing. This entity is the Fair Isaac Company or FICO. Major banks, lenders, and credit companies only use FICO scores to determine your credit risk. 

There are three major credit bureaus; Experian, Trans Union, and Equifax. Creditors such as Banks, Credit Card Companies, Merchant (Store) Cards, and Mortgage Companies report to one or more of the three major credit bureaus. In addition they will also use one or in many times all three of the credit Bureaus reports to look at your credit activity. They are able to see how long you have had an account, what the current balance, high balance, and credit limit, how many times you have been late more than 30 days for a payment or

While they provide your credit data to creditors, insurance, companies, and even your employer, they do not provide credit scores to these entities. If you buy a credit score from one of these companies, it is NOT used by banks when determining your credit risk. It is a was of your time and money to buy your credit score from them.

These companies are trying to entice you in to buy their credit scores along with their other products. Did you know that their credit scores are NOT used by lenders?

Credit scores are derived from mathematical calculations that use the data from your credit reports to produce a score ranging from 300 to 850. This credit score measures your level of credit risk by predicting the chance that you will pay back credit obligations in a timely manner. Anyone can build a credit scoring model; but the industry standard is the “FICO” credit score. It is named after the company that invented it, the Fair Isaac Corporation. Everyone who has a significant credit report has three FICO credit scores, one from each credit bureau report.

Each of the three credit reporting agencies have the proprietary FICO credit scoring system installed on in their offices as part of the reporting system to sell to creditors as requested. Creditors then use these scores to determine your credit worthiness. The creditors pay for the FICO score not the score that these credit agencies sell to consumers since they are not the same scoring system. The score you might buy from a credit agency is typically NOT a FICO score.

Since some creditors do not report information to all three credit agencies and also have different reporting schedules; your FICO scores will be different from each. Many lenders review all three of your FICO scores so it is a good idea to verify the information on all three credit reports.

Who influences your credit scores?

As part of our credit education we want you to underestand that you have the ultimate control over your credit scores. Your actions determine your credit score with the exception of errors. By making your payments on time and keeping your credit card utilization low, your score will be high. By making a mortgage payment, applying for a department store credit card and opening a new line of credit will all trigger changes in your credit report and, as such, a change in your credit score. A late payments and/or closing a credit card account will also have a negative impact to your credit score.

The following categories drive your FICO credit score:

• Your payment performance history (35%)
• Your current level of credit utilization or how much you owe (30%)
• The age of your credit history (15%)
• Your pursuit of new credit (10%)
• The type of accounts in your credit report (10%)

Not too surprising, the top two categories (credit history and how much you owe) accounts for 65% of your overall FICO score. The other three have a lower impact on your score but are still very important.

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