Understanding credit scores and how they are calculated

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Ask a Lender
April 19, 2017 | Updated September 22, 2017


Key Points

How are credit scores calculated?

  • Credit scores quantifies an individual’s ability to repay debt.
  • Scores are calculated from data in a credit report.
  • Three credit bureaus generate credit reports using similar information.
  • Two credit scoring models may be applied to a credit report: the FICO score and the VantageScore.
  • Good credit is typically scored at 665 or higher on a scale of 350 to 850.

Credit scoring is a risk assessment tool to help lenders assess a borrower’s ability to repay debt. It is often the primary factor lenders use to determine an individual’s eligibility for a loan or line of credit.

Before the advent of today’s sophisticated global marketplace, businesses faced considerable risk when providing loans to borrowers with whom they were not personally familiar. To make more informed lending decisions, businesses began to collect and trade information concerning an individual’s debt repayment history, spending habits and even personal lifestyle choices. As markets and lending expanded, demand grew for a more advanced and unbiased risk assessment mechanism, ultimately giving rise to credit bureaus.

Credit Report vs. Credit Score

A credit report is a record of an individual’s loans, repayment history, public records and other financial information derived from data voluntarily provided by lenders, collection agencies and from public records. There are three credit bureaus in the U.S. that generate credit reports: Equifax, Experian and TransUnion.

A credit score, in contrast, is a numerical figure that reflects the strength of one’s credit report. There are two credit scoring models: the FICO credit score, developed by analytics company FICO, and the VantageScore, which is developed between Equifax, Experian and TransUnion. Each scoring model uses different algorithms to analyze a credit report and generate a score.

FICO Credit Score

The FICO credit score is the oldest and most popular credit score in the U.S., used in more than 90 percent of lending decisions. FICO uses a different algorithm to assess each credit bureau, generating a separate FICO score for a credit report from each bureau.

FICO assesses an individual’s credit score based on five factors holding different weight: Payment history accounts for 35 percent of a FICO score, amounts owed accounts for 30 percent, length of credit history accounts for 15 percent and new credit and credit mix account for 10 percent each. A credit score of 800 or more is considered exceptional, followed by very good credit at 740-799, good credit at 670-739, fair credit at 580-669 and poor credit at less than 580.


VantageScore’s credit scoring model analyzes information from all three credit bureaus. Payment history accounts for 40 percent of a VantageScore, depth of credit accounts for 21 percent, credit utilization accounts for 20 percent, balances account for 11 percent, recent credit accounts for 5 percent and available credit accounts for 3 percent of the score. A VantageScore of 781-850 is considered superprime, 661-780 is prime, 601-660 is near prime, 500-600 is subprime and 300-499 is deep subprime.

Which Score Matters?

With three credit bureaus and two scoring models, a single consumer will have at least four different credit scores — a FICO score for each bureau’s credit report and one VantageScore from the three bureaus’ combined data. The scores typically vary, as each credit bureau receives different information at different points in time, and each credit scoring model weighs credit information according to their own process. 

It is up to the lender which credit bureau and credit scoring model to look at when assessing an individual’s loan eligibility. As each inquiry costs money, lenders will typically select only one. Rather than focusing on a specific credit bureau or credit scoring model, borrowers who want to strengthen their credit should look at improving the larger factors that influence all credit scoring, such as making on-time bill payments, reducing overall debt and rectifying any reporting errors.

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