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How Credit Scoring Actually, Really, Truly Works


How Credit Scoring Actually, Really, Truly Works

Credit scoring is a complex process, a process driven by secretive software systems that are designed to evaluate the information contained in your credit reports and assign your credit scores based upon that data. If the information on your credit reports shows that you pose a higher risk to lenders then a credit scoring model will assign you lower credit scores. It probably will not come as a shock to you that higher credit scores can benefit you tremendously while lower credit scores can ultimately cost you a lot of money and cause a lot of unnecessary stress.

The unfortunate truth is that if you consistently struggle with poor credit scores then you could easily pay hundreds of thousands of extra dollars in interest over the course of your lifetime for your mortgages, auto loans, credit cards, and personal loans. For this reason, among others, it is a wise idea to learn everything you can about how credit scores are calculated and then use that knowledge to earn the best credit scores possible for yourself.

Credit Scoring by Category

Your FICO credit scores, the scores which are most commonly used by lenders, can potentially range from a low of 300 points to a high of 850 points. Altogether that means that you have up to 550 points up for grabs whenever a FICO scoring model calculates your credit scores. These 550 potential points are broken down into 5 separate scoring categories.

1.      Payment History - 35% (or up to 192 available points)

2.      Amounts Owed - 30% (or up to 165 available points)

3.      Credit History - 15% (or up to 82 available points)

4.      Mix of Credit - 10% (or up to 55 available points)

5.      New Credit - 10% (or up to 55 available points)

*The points above are given for example purposes and are not exact.

For more information about these 5 credit scoring categories check out our previous article, Where Do Your Credit Scores Come From?

How You Earn Credit Score Points

Most consumers have a completely inaccurate view of how credit scoring works. For example, one of the most common questions I receive as a credit expert goes along the lines of "Michelle, how many points will "X" lower my credit scores?" or "How many points will I lose because of "X" action?" However, the idea that any action or item on your credit reports will lower your credit scores is actually incorrect due to the fact that credit scores are always built from the bottom up.

When analyzing the data on your credit reports credit scoring models like FICO will ask a series of questions (aka characteristics) about your credit report and the answers to these questions (aka variables) will ultimately determine the credit score you are assigned. Here is a hypothetical look at how the process works in reality:

The Question (aka Characteristic)
What is the age of the oldest account on the credit report?
The Answer (aka Variable)

·        Less than 1 year old: 40 available points

·        1-2 years old: 50 available points

·        3-5 years old: 60 available points

·        5-10 years old: 70 available points

·        Greater than 10 years old: 82 available points

*Hypothetical variables and point values were used in the scoring sample above.

There are quite a few other factors considered within the "Credit History" category of your credit reports as well, so the example above is really an oversimplification. However, it does serve to give you a better idea of how the credit scoring calculation process operates.  

This question (characteristic) and answer (variable) exercise is repeated over and over again by the credit scoring model until all of the factors considered from your credit report have been completely analyzed. Next the points you earned above (based upon the variable which applied to your credit report) would be added to the points earned from the other credit categories and finally totaled together to come up with your overall credit score.

·        Payment History Category = 150 points earned

·        Amounts Owed Category = 120 points earned

·        Credit History Category = 60 points earned

·        Mix of Credit Category  = 30 points earned

·        New Credit Category = 40 points earned

·        Overall Credit Score = 700 (Remember, your scores begin at 300, not 0)

The Story Continues - Scorecards

Now that you have seen a hypothetical example of how a FICO credit score might be calculated, it is time to complicate the story even more. Credit scoring models also have another component known as "Scorecards." Scorecards make up the framework or skeleton of any scoring model. They separate consumers into like or homogenous groups and each group is scored a little bit differently than the other. Therefore, if your credit reports are being scored by a scorecard designed for consumers who have filed bankruptcy you would not be eligible to earn as many points in each category as you would be eligible to earn if your reports were being scored by a scorecard designed for consumers with no derogatory information (aka clean files). For more information about scorecards, click here.    

Feeling Overwhelmed?

As mentioned above, credit scoring truly is a very complex process. However, what is simple to understand is that credit scores are generated solely based upon the information contained within your credit reports. Therefore, if you maintain credit reports which are free from negative information, keep your payments on time, and keep your credit card balances paid off monthly then you will be well on your way to credit score success. Understanding how credit scoring works is important, but as long as you focus on developing healthy credit management habits you can achieve and maintain the good credit rating you desire.   

Need help overcoming past credit problems? CLICK HERE to schedule a professional credit analysis with a HOPE4USA credit expert today.


Michelle Black is an author and leading credit expert with nearly a decade and a half of experience, a recognized credit expert on talk shows and podcasts nationwide, and a regularly featured speaker at seminars across the country. She is an expert on improving credit scores, budgeting, and identity theft. You can connect with Michelle on the HOPE4USA Facebook page by clicking here. 


Scorecards: Why It Might Be Impossible for You to Earn an 850 Credit Score


Scorecards: Why It Might Be Impossible for You to Earn an 850 Credit Score

Credit scores run the world. Okay, maybe that is an overstatement, but the truth is that your credit scores will have a massive influence over your life. In fact, your credit scores exert nearly as much control over the financial quality of your life as does your income.

If you are wise then you already know that learning what it takes to keep your credit reports and scores in stellar shape is a very important goal - one of the most important wealth building goals you can make for yourself. Yet if you are a natural born overachiever and are shooting for the stars with your credit scores you might find yourself a bit disappointed. Achieving the ever elusive perfect credit score of 850 might actually be downright impossible for you right now thanks to a not-so-well known component of credit scoring models - the scorecard.    

What Is a Credit Scorecard?

Behind the scenes of every credit scoring model there are multiple scorecards at work. Scorecards evaluate the information on your credit reports and turn that information into credit score points which are added up and delivered to a lender in the form of a credit score. The way that scorecards evaluate the information on your credit reports is by asking questions - questions such as "Are there any late payments present?" The answers to these questions are known as "characteristics." If the answer to the previous question about the presence of late payments was "yes" then you would earn less points to be added to your overall credit score than those which you would earn if the answer to the question was "no."

Scorecards are the nuts and bolts of a credit scoring system. They set the rules for how your credit scores are calculated. Without scorecards it would be impossible for a lender to ever get a copy of your credit scores.

How Different Scorecards Impact You

As mentioned above, every major credit scoring model features multiple scorecards. Depending upon the information contained in your credit reports you are assigned a specific scorecard each time your credit scores are calculated. When FICO releases a new credit scoring model, such as the most recently released FICO 9, what most consumers and even financial professionals do not realize is that - thanks to the existence of scorecards inside of the scoring model - all consumers credit reports are not graded according to the exact same scale. Instead, scorecards will separate consumers into like or homogenous groups and those groups will have their credit reports scored differently.

For example, there are separate scorecards for consumers who have filed bankruptcy or those who have delinquencies (late payments) present on their reports. There are scorecards for consumers with thin or young credit files (not many accounts) and files for consumers without delinquencies as well. While FICO and VantageScore do not disclose the actual types or numbers of scorecards working behind the scenes of their credit scoring models, it would not be unusual for there to be 10 or more scorecards in existence for a single credit scoring model.

The most common credit scoring range for consumers, especially for the most popular FICO and VantageScore scoring models, is 300 - 850. Therefore, if you ask were to ask most credit experts what is the highest credit score you could possibly earn you would probably receive "850" as an answer. Not so fast. 850 may be the highest credit score available, but that does not necessarily mean that an 850 is available to you, at least not at immediately. If you have a bankruptcy on your credit reports, for example, then you would find yourself being scored by a bankruptcy scorecard.

Scorecards designed for those with derogatory information do not have the same maximum credit score possibility, 850, as those scorecards without any derogatory information would have. As a result, if you did have a past bankruptcy on your credit reports then achieving an 850 credit score would be impossible for you until the bankruptcy (and any other derogatory information) was removed and your report was able to be scored by a scorecard which actually included an 850 maximum credit score as an option.

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Michelle Black is an author and leading credit expert with over 13 years of experience, the credit blogger at, a recognized credit expert on talk shows and podcasts nationwide, and a regularly featured speaker at seminars up and down the East Coast. She is an expert on improving credit scores, budgeting, and identity theft. You can connect with Michelle on the HOPE4USA Facebook page by clicking here.