There are many people who have been wanting to understand what creates a credit score, but they do not really know where to begin. Well, in order to begin to understand what creates a credit score, you have to learn to understand your credit report. The credit score simply comes from a formula that generates a number, and the information from your credit report, which is compared to millions of other people, is used in the formula or algorithm. A highly accurate number (credit score) in predicting the probability that you will pay your bills is the result.

There is not one general formula that is used to compute your credit score. Different lenders use different models to calculate whether you should be given credit, how much, and at what interest rate. One of the most popular scoring models used is the FICO score, which has a scale that runs from 300 to 850. Most of the population falls somewhere between 600 and 800, and any score at 720 or above will get you the best mortgage loan rates in the real estate market. This information is made available by a California-based company named the Fair Isaac Corp., which first developed the credit and FICO scores.

If you are wondering whether everyone uses the FICO scoring model, the three major credit bureaus use their version of it, with TransUnion using the EMPIRICA score, Experian using the Experian/Fair Isaac Risk Model, and Equifax using Equifax. There is a possibility that this could change since the three major credit reporting agencies collaborated in creating a new scoring model called the VantageScore. In any event, there are different algorithms being used right now which often result in three different scores.

Regardless of the model used, what you really need to take care of is what is included in your credit report because that is where the information for the formula lies. Fair Isaac Corp. reports that more than 20 factors in five categories are considered in their scoring model, including:


  • 35% for the way in which you pay your bills, with special emphasis going to how you have paid your bills in the past.

  • 30% for the amount of money that you owe and how much credit you have available.

  • 15% for the length of your credit history, with emphasis and more points added the longer you have had credit.

  • 10% for the mix of credit, both installment and revolving, that you have.

  • 10% for new credit applications, with special emphasis on whether you have had recent credit problems and you decide to go credit shopping.


The information in your credit report is vital, and you should know whether it is accurate because inaccuracies will hurt your score. You need to get a credit report at least once a year, and it makes no difference whether you are going to apply for credit. If you are going to apply for credit, then you should get your credit report at least six months before you apply. This way you will have enough time to try to get any inaccuracies you find, correct and fix your credit score before you go and apply for your loan.

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