Credit Score How Credit Works

How Your Credit Score Is Actually Calculated

Written by John Ulzheimer

Unfortunately most consumers have a very basic understanding of how credit scoring systems work. Like most of us, your knowledge of credit scoring probably includes what scores used for, what is included in a credit report, and what lenders review.

But, that hardly scratches the surface. In order to truly understand credit scores you have to crack them open and take a look inside.

What Is a Scorecard?

All credit scoring models have at least one thing in common: they all are made up of a series of scorecards.

Scorecards are used to read the information contained in your credit report and to convert that information into points, otherwise known as your credit score. But, since people with different types of credit reports represent different levels of risk, applying one set of rules to everyone doesn’t make sense. That’s the credit bureaus used what is called the multi-scorecard approach.

Let’s not make this more complicated that it already is. Think of a bowling or baseball scorecard; credit scorecards follow pretty much the same concept. You earn points for knocking over pins, crossing home plate, or not missing credit card payments.

[inline-ad]The principle behind credit scorecards is easy enough to understand. If you have filed a bankruptcy in the past then you represent a different risk to future lenders than someone who has never filed bankruptcy. If you have a thin or young credit report (meaning that you are relatively new to the credit game) then your credit practices represent a different risk than people with long histories of borrowing money and paying it back.

So, each of those different looking credit reports will be use a different scorecard that’s designed to evaluate that kind of credit report. The rules aren’t the same for everyone.

Different Credit Score Scales

While the published range of most generally used scoring models is 300-850, that range isn’t really possible for every one. Each scorecard has its own score range, and they’re not always 300 to 850. Some people may not be able to score much higher than 800. Again, the rules aren’t the same for everyone.

Scorecard Hop

Now we’re getting into a more sophisticated aspect of credit scoring models. As the components of your credit reports change you may actually change which scorecard is used to calculate your score.

Using the example above, if you have a bankruptcy on your credit report then your score will be calculated using a scorecard specifically designed for bankrupt consumers.

But, when that bankruptcy falls off of your credit report you’ll no longer be scored by the bankruptcy scorecard. You’ve “hopped” from one scorecard to another. That means you will likely score differently and could earn a higher score that would have been impossible for you to earn before.

The Key

You cannot control or even find out which scorecard is being used to calculate your credit scores. And while credit scorecards may sound confusing, the good news is that you do not actually have to possess a crystal clear understanding of how credit scorecards work in order to earn and maintain great credit scores.

As long as you follow a few basic rules with your credit (pay every bill on time, always keep your credit card balances low, do not apply for too much new credit, etc.) then your credit scores are always going to be strong.

About the author

John Ulzheimer

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