How Are Credit Scores Calculated?

Many of us have a somewhat clear idea on what our credit scores are, but we are totally in the dark when it comes to understanding how they are calculated. This is mainly due to the fact that many lenders keep their scoring formulas under very tight wraps, however the basic principles are the same no matter who is doing the scoring.

Most Lenders simply want to know whether you're a good risk for their money. To find out this information, they simply look at how many debts you have, what the totals are and the way in which you have actually paid your debts in the past.

Basically, a credit score is merely your credit history boiled down to a number according the Fair Isaac Corporation which is the company which was responsible for instituting the first credit scoring system in the United States about 20 years ago. If you've had an established credit history for at least six months then you should have a credit score.

The calculation of your credit score is really straightforward and when most people talk about their credit score, they should actually say credit scores because in all likelihood you probably have more than one.

Most Banks and financial institutions have developed their own formulas for evaluating a consumer's credit worthiness and some Lenders and retailers may do the same or they may opt to have a company devise or calculate scores for them based on criteria they view as important to them. Many lenders may use more than one model to make their decision.

But while you have to divulge your information to get credit, lenders are by no means obligated to share your scores with you nor the rules that they use to calculate them. The only exception to this is if you are applying for a Mortgage Loan. Other than this one exception, Lenders are hesitant to share the formulas that they use in the decision making process.

But help is on the horizon and the situation is getting better for consumers. They now have the ability to view or purchase their FICO scores and the formula for what goes into the equation is open to the public because there is a lot more transparency today than there was 5 - 10 years ago.

While the basic standards are the same, lenders will throw in different factors such as your yearly salary, career field or job stability, while others don't care. Some will give you additional points if you have lived in your home for a certain number of years while others will actually penalize you if have lived there too long.

What is a FICO score?

When most people talk about credit scores what they are actually referring to is their FICO score which is something similar that uses a FICO-type numbering system. The FICO score is probably the most well known scoring system and is used by the majority of lenders in the United States. Most scores typically run from 300 - to 850 with a score of 300 being the worst and 850 being the best.