How Credit Scores Are Computed

Credit scores can control whether or not you get a loan and a credit card, but even the biggest experts in the field of credit scoring don't always agree on the value of the specific variables in the major credit scoring equation. If anyone knew the credit scoring formula, competitors could steal the FICO formula and make their own scoring system. Fortunately, we have a pretty good idea of how scores are computed.

Identification

The FICO score system is the most widely used in the consumer credit rating world, so the Fair Isaac Corporation keeps it secret to keep competitors from figuring out the secret to its accuracy and consistency. FICO does share the importance of certain categories. Debt levels, for example, counts for 35 percent of your score, while payment history accounts for 30 percent. However, there are several factors, such as the time since your last negative item, that give the FICO score its uniqueness.

Credit Scoring Software

Almost all creditors calculate a credit score using software from FICO that pulls your report and then runs the hard calculation. Thus, it is the responsibility of the lender to update its software to get the most current formula for calculating a score. As of 2011, the latest edition is FICO 8, which has important changes, such as ignoring collections worth less than $100 and taking it easy on the occasional missed payment.

Where Does the Information Come From?

You will probably get a different score from each credit reporting agency, because information gathering is more of an art form. The U.S. has three major bureaus that collect data from lenders and public databases, but even they often miss items, even important ones like a collection account. However, the bureaus tend to have the most complete information, so lenders usually pull a report from them and let the software use that data for the variables in the equation.

Tip

Although the FICO score is king, there are dozens of other formulas out there. Also, the FICO has modified formulas for certain demographic groups. For example, the FICO has a special formula that compares the borrower to other people with a bankruptcy, or consumers with a short credit history. Thus, it is better to pay bills when due and keep as little debt as possible rather than worry about any particular formula or score.