How Is the Credit Score Calculated in the US

Credit scores refer to the creditworthiness of an individual. They are the true expression of an individual’s ability to pay loans. When you take any loan or line of credit from a financial institution, your payment pattern is reported to credit bureaus. Again, details about how you use your credit card are also reported to the credit bureaus, who keep the records for future reference. The bureaus combine various kinds of information to come up with your credit scores. But how is the credit score calculated?

I will give you details on how credit scores are calculated to understand how to maximize your scoring. Some people find themselves messed up by the credit cards they take from various card issuers since they do not know how to use them appropriately. If you fall in the category of people who do not understand how people end up with a particular digit of a credit score, then you are in the right place to understand all that happens.

You can either have bad or good credit scores. Generally, credit bureaus classify credit scores as being poor, fair, good, or excellent. If you have poor credit scores, it becomes challenging to get a line of credit or a loan from many financial institutions since they fear that you might not pay. Even though you can find it difficult to get a loan due to bad credit, you can still get a few from various creditors who offer credit cards for bad credit.

Who calculates credit scores in the US?

Many people do not know who is responsible for their score rating. Three main bureaus are responsible for coming up with the credit scores of every individual who gets a line of credit or a loan. These include;

  • Experian
  • Equifax, and
  • TransUnion

All these use the same model to come with what they call FICO scores for borrowers. It is good to remember that the federal government is tasked with its responsibilities, and there is no bias in the way they work. Once they calculate your scores and compile your credit report based on their information, they can then avail to you and to the lenders who make hard inquiries when you apply for a loan from them.

Credit scores range between 300-850. A score rating of 300 shows very poor scores, while 850 shows excellent credit scores. The table below shows various FICO score ranges.

FICO Scores Category
800-850 Exceptional
740-799 Very Good
670-739 Good
580-669 Fair
300-579 Very poor

How is the credit score calculated in the US?

The process of calculating credit scores for borrowers starts with banks and other financial institutions reporting your loan payment behavior to the credit bureaus. The reporting may be harmful or positive. Once the credit bureaus receive the reports for different individuals, they can calculate credit scores. There are various pieces of data that credit bureaus use to come up with your credit scores. They include the payment history, amounts owed, length of credit history, new credit, and credit mix.

The calculation of scores is unique to every individual. Scores for people who have used credit scores for a short time are differently calculated from people who have used their credit for a long time. The credit scores change now and then. The following kinds of information are considered during score calculation.

1) Payment history

Payment history accounts for around 35% of the overall credit score. The first thing a lending company wants to know when you apply for a loan is how long you have been borrowing loans. If you have been borrowing for a long, you are likely to succeed for a loan as you are trustworthy. That is why the payment history accounts for that significant percentage FICO Score.

2) Amounts owed

The amount owed accounts for a whole 30%. The more you are owed, the more your scores reduce. If you have fewer debts, then know that you are going to score big. You can have as many credit cards as possible but using very little of your credit limits.

That shows that you are responsible, and you are likely to pay any loan given to you. However, if you have used much of your credit limit, you show that you are irresponsible, and there are chances that you will default on any loan given to you.

3) Length of credit history

In case you possess a lengthy credit history, your FICO Scores are likely going to be superb. If you have been getting loans and lines of credit for a long time, then it means that you have more scores than someone who has just started utilizing credit cards and loans in the recent past.

However, if you have a long credit history and have been paying loans and using lines of credit badly, then you are likely going to have poor credit scores.

4) Credit mix

The overall FICO Scores have a 10% comprising credit mix. You can mix various kinds of credit such as credit cards, installment loans, retail accounts, finance company accounts, and mortgage loans. I am not implying that you should have all these kinds of loans, but you can try to have two or three of them.

5) New credit

It accounts for 10%. When you apply for new credit history, financial institutions pull hard to credit from the credit bureaus. That usually affects your credit score negatively. The more loans you apply for, the more you negatively interfere with your credit scores.

Also, the credit bureaus use the same information to come up with a credit report.

What does a credit report contain?

how is the credit score calculated

A credit report is broader and contains various details about your loan repayments. You can find personal information, credit inquiries, credit account history, and public records in a credit report. It is from such information that the credit bureaus can come up with your credit scores.

You can find the following information in a credit report.

i) Personally Identifiable Information (PII)

The Personally Identifiable Information (PII) includes your name, Social Security Number, address, date of birth, and employment information. These are details that help to identify you correctly.

ii) Credit Accounts

The report also contains all loans and the lines of credit that you have applied and the date you applied. The bureaus also include your loan amount, credit limit the account balance, and your payment history. Here, you will also get details on whether you have been making your payments on time or not.

iii) Credit Inquiries

The number of inquiries by various institutions will appear here. Every time you apply for a loan or line of credit, it will appear here. Again, some employers also make soft inquiries about your credit standing and all that will be available here.

iv) Public Record and Collections

Public record information from the state and county courts will also appear here. It includes bankruptcies and overdue debts.

Can I dispute a wrongly compiled report?

It is not automatic that a credit report will be excellent. There may be various errors here and there. If you get a faulty one, you can dispute it with the relevant credit bureaus. The following are the kinds of information to look for in a credit report.

  • Whether your name is correctly spelled
  • Whether your address is correctly written
  • If your Social Security Number is correct
  • Check whether all accounts are in good standing. Also, make sure that the account numbers and names are correct.
  • Check whether there are hard inquiries that you have never made. You can see which institution inquired about your credit scores in the credit report.
  • Check whether records about bankruptcy that is over seven years are deleted.

If you find an error in your overall credit report, you should report it to the relevant credit bureau. You can always report online in the concerned credit bureau website for any error displayed in your credit report.

How to get a credit report

You can obtain a credit report for free every year from each of the three credit bureaus. Every American has a right to get a free credit report from each credit bureaus once per year. You can compare the reporting from the three credit bureaus and find any difference.

Since you should have a free single report from every bureau, you can pick them in a scattered manner to ensure that you stay updated throughout the year. You can decide to pick a report from Experian in May, another one from TransUnion in August, and another one from Equifax in December.

What do I do if I have bad credit?

In the event you have bad credit, that does not mean that you are finished. There is a way forward. But what credit card can I get with bad credit? There are two main kinds of credit cards you can get if you have bad credit. You can request a credit card with bad credit or a secured credit card. Some institutions issue you bad credit cards even if you have the poorest scores ever.

However, secured credit cards are the best since they do not charge high-interest rates on the line of credit used. You only need to deposit some amount of money to act as security.

Bottom line

Credit scores refer to the creditworthiness of an individual. They help to determine whether a borrower can pay loans as per the agreements. How is the credit score calculated by the credit bureaus, which get information about borrowers from the lenders.

We have three main credit bureaus in the US, which include Experian, TransUnion, and Equifax. The three use the same credit score calculation model, although they give independent reports. You can always dispute reports with incorrect details with the relevant credit bureaus.