How Is A Credit Score Calculated

What Is a Credit Score?

Credit report scores are not calculated the same way by every organization, but some of the features that may impact all credit report scores are listed below:

1. It is not based on income.

This is one of the few things in determining creditworthiness that is most often included by other systems. However, when a credit score is calculated by the three major credit reporting organizations, income is not considered.

2. Different calculations are used by all three major credit reporting organizations.

The three major credit reporting organizations, Equifax, Experian, and TransUnion, all use different systems to calculate a score. Equifax uses ScorePower created by that organization. Experian uses its own PLUS score. TransUnion created VantageScore that is used by it and is sold by it.

3. It is based on the credit report tendered to each credit reporting organization.

Some of the information about an individual’s credit may not be held by all three of the organizations. What a person’s credit report contains depends on what information is reported to each organization. If a person has a loan with a bank and they have decided to only report progress on that loan to Equifax, for example, Experian’s information and TransUnion’s information may not contain information on that loan. Thus the credit score reported by those two organizations will not reflect how you have paid on that loan.

Freedom Furniture & Electronics helps their customers build credit by reporting your good credit to all three credit bureaus. Financing furniture & electronics with us can be a positive step toward building or repairing your credit.

4. How Is a credit score calculated?

The credit score is a number based on a statistical analysis of the information contained in a person’s credit file. One often discussed method of calculating the score is called FICO and stands for Fair Isaac Corporation. It involves weighing the information in a credit file. That information involves:

  • how long a person has had credit,
  • how many loans a person has whether open or closed,
  • the highest amount of each loan,
  • the number of credit cards and their maximum limit allowed,
  • the maximum amount charged to each credit card,
  • how any loan or credit card was paid,
  • if there is a bankruptcy involved,
  • how many inquiries were made on that file that were for advancing credit,
  • how a mortgage is paid, and how much a mortgage was for.

Once the analysis is made, a three-digit score is created. That score is called a credit score. FICO scores range from 300-850. In 2010, the average American score was 723.

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