How do credit scores work? How are they calculated?
Credit scores are a quick, easy way for lenders and other credit issuers to measure your credit history.
The 3 major credit bureaus -- TransUnion, Equifax, and Experian -- use the information in your credit report to calculate a three-digit "score" that shows how responsible you've been in paying off credit cards, mortgages, car loans, and other lines of credit.
Credit reports provide the information the bureaus use to calculate your credit score. They list, among other things, your reported on-time, delinquent, and missed payments.
The chart on the left shows what factors go into your credit score calculation.
What Is a Credit Score Simulator?
A credit score simulator is an educated attempt to shed a little light on how your credit scores can be affected by your financial behavior. The exact formulas used to calculate your credit scores are closely guarded by each of the three major credit bureaus (TransUnion, Experian, and Equifax), which means you don't know for sure how much a particular action will influence your score. Credit score estimators help you take some of the guesswork out of the equation, relying on data available in the public realm to create models that can estimate credit score changes resulting from fairly specific events.
It's well known, for instance, that too many credit inquiries in a short period of time can harm your scores, as can late or missed payments, foreclosures, and other credit-related misbehavior. A credit score estimator, such as the FreeScore Credit Score Predictor(SM), assigns certain weights to such events, based on detailed analyses of their patterns of effect on real-life credit scores.
A credit score simulator also takes your current score into account. For example, when you have a high credit score, you're likely to suffer greater damage to your score if you let a credit card account go into delinquency than you would if your score was already low, and a reliable credit score predictor will reflect that.
How Does a Credit Score Simulator Work?
A credit score simulator allows you to select specific actions that credit bureaus use to determine credit scores and apply them to your current credit score to approximate the effect those actions would have on your score. With advanced credit score estimator models, you can choose one particular activity or a combination of activities to estimate your "new" credit score.
For instance, you might choose to calculate the effect on your credit score if you take one or more of the following actions:
- Open a new credit card account with a specific credit limit
- Increase your credit limit on an existing credit card account
- Take out a dollar-specific mortgage loan
- Pay off an existing credit card balance
- Leave a credit account unpaid (i.e., let it go into delinquency)
- Keep your payments current on all of your credit accounts
- Include a tax lien in your credit history
Once you've chosen the actions you want to simulate — and entered dollar figures or other data into any required fields — you simply click on the "Simulate Credit Score" button to estimate the effect your selected action(s) would have on your current credit score. And one of the beauties of credit score estimators like the FreeScore Credit Score Predictor is that you can test different actions (and/or combinations of actions) whenever and as often as you'd like.
During times of economic uncertainty, it's critical that you make informed decisions about your personal finances. While credit score simulators should never be used as the sole or even primary basis for any important financial decision you face, a good credit score estimator can help you better understand how certain actions can influence your credit score and potentially affect the perceptions of lenders and other credit-related institutions.
What is a good credit score?
Along with your free credit scores, FreeScore offers you an analysis of where your scores are relative to others. FreeScore's Credit Grade feature measures your scores against those of the general population and assigns you a grade — A, B, C, etc. — according to where you stand in comparison to others. The Credit Grade is free for FreeScore members.
When lenders talk about "your score," they usually mean the FICO® score developed by Fair Isaac Corporation. It is today's most commonly used scoring system. FICO scores range from 300-850, and most people score in the 600s and 700s (higher FICO scores are better). Lenders buy your FICO score from three national credit reporting agencies (also called credit bureaus): Equifax, Experian and TransUnion.
Generally speaking, a credit score of 700 or higher is considered good. That is, lenders will consider you a lower risk of defaulting on a line of credit. While the cut-off line for "good" scores is subject to change, the higher your score is, the better your chances are to secure a loan or other line of credit at a desirable interest rate.
In the eyes of most lenders, FICO credit scores above 700 are very good and a sign of good financial health. FICO scores below 600 indicate a higher risk to lenders and may lead lenders to charge you much higher rates or even turn down your credit application.
How can I get a free credit score?
AnnualCreditReport.com is the government-mandated website through which you can order a free credit report from each of the three credit bureaus once every 12 months. Through AnnualCreditReport.com, you can order a credit report from each bureau at the same time, or you can stagger your requests throughout the year. When you get your credit report this way, it doesn't come with your credit score. To check your credit score, you can purchase it individually from all 3 major credit bureaus. Or, services like FreeScore can offer you free trial access to all of your credit scores.
What's a FICO®, credit score? Are there other credit scores?
A FICO credit score is a measurement of an individual's creditworthiness without requiring access to income history or employment status. Originally developed by the Fair Isaac Corporation, the FICO score is now widely used. Even though Equifax call its credit score a BEACON® score, and TransUnion calls its score EMPIRICA®, all three bureaus base their calculations on the methods developed by Fair Isaac.
Recently there has been a lot of discussion surrounding a type of credit score called Vantage Score. VantageScore was developed by the three main credit reporting companies and uses a slightly different formula to calculate a credit score for you. The VantageScore range is 501-990 and is based primarily on the past 24 months of credit activity. One advantage of the VantageScore calculation is that it is able to assign a credit score to consumers, especially young consumers, who may not have sufficient credit information to qualify for a FICO score.
How can I monitor my credit score?
As you have seen, your credit scores and credit reports are closely related. Once a year you can get one copy of each of your three credit reports (Experian, TransUnion, Equifax) at no cost from the government-sponsored website, AnnualCreditReport.com.
However, these reports do not include your credit score from the bureau. There is an extra cost for getting your credit score. And you can only get it once a year from AnnualCreditReport.com.
Therefore, many people turn to services like FreeScore to monitor all 3 credit scores and reports all year long. There is a charge for membership, but many find that the value they get from having unlimited access to their credit scores outweighs the cost. With unlimited access, consumers can graduate from occasionally "checking" their credit scores to fully managing their credit and, in addition, protecting themselves from identity theft.
What are credit score ranges?
The range of credit scores differs from bureau to bureau, but in general, they range from a low in the 300s to a high in the mid-800s. Your scores can also differ from bureau to bureau because credit issuers aren't required to report your credit transactions to all three bureaus; some of them may report your credit activity to only one or two of them. Regardless of the bureau, most people have credit scores between 500 and 800.
Why do I have 3 credit scores?
You have three credit scores because each of the three major credit bureaus — Experian, TransUnion and Equifax — collects information about your financial behavior and calculates a credit score for you. Your credit scores at the three bureaus can differ by 100 points or more. That's because banks, credit card issuers, and other creditors are not required to report credit information to all 3 bureaus, so over time each bureau can develop a different 'picture' of your behavior, resulting in a different credit score.
As a consumer, you need to know all 3 credit scores because when you apply for a loan or other form of credit you never know which of your three credit scores will be checked.
How many times can your credit score change each year?
Your credit score can go up or down every time something positive or negative happens.
It is constantly fluctuating and reflects your current financial health status. Since your credit score is constantly changing, you should constantly be checking it.
To learn more on this subject, watch Carrie Coghill-Kuntz, our Director of Consumer Education discuss this subject.