Credit Scoring Models in the United States

The credit scores that are used by most banks and lenders in the United States are the ones provided by FICO. This company has a proprietary formula that uses information from the three credit bureaus in the country: Equifax, Experian and TransUnion.

The formula for calculating a credit score

Although the specific formula has not been revealed, FICO has revealed the general weights involved in calculating a credit score. There are five areas that influence a credit score and each of these factors carries a different influence.

Your payment history

This is a category that includes such things as a bankruptcy, foreclosures and various liens on your property. However, the majority of this category, for most people, will reflect the negative marks on a credit report that relate to late payments. Everything together is this category represents 35 percent of a consumer’s FICO score.

Amount of debt

FICO is vague about defining this area of a credit rating calculation. They claim that part of it relates to how much a consumer owes relative to how much credit they have, but they also take into consideration the type of debt that is owed. Credit cards, for example, are given different weights than installment loans that have been paid down over time. The number of open accounts with balances is also factored in. Together, the debt owed by a consumer will affect a credit rating by 30 percent.

The three minor factors

The length of time a consumer has had a credit history is given a weight of 15 percent. The second minor factor is the type of credit that shows on your report. For example, FICO gives different weights to a mortgage versus a credit card. This accounts for 10 percent of the score. Finally, there is the number of recent inquiries into a consumer’s credit report. An inquiry happens when an individual applies for a loan, credit card or other such borrowing. It is only the last two to six weeks that is factored into the formula. It is given a weight of 10 percent. Together, these three factors add up to 35 percent of a consumer’s credit score.

It should be noted that beginning in late 2014, FICO will be changing its formula slightly. The most significant change will be debt from medical bills. Consumers who have outstanding debt from medical bills will have less emphasis placed on them, so it is possible that people with medical debt may see their credit scores increase moving into 2015.