How are credit scores created?

Credit scores are based on a consumer’s credit record maintained by the credit reporting agencies. Computers are used to analyze a person’s credit report data in order to generate a statistical number, referred to as a credit score. This number is used as an indicator to the likelihood a person will pay the loan back.

When most of us think of scores, we think of relatively straightforward systems used in sports or in school tests. You get points or subtractions for certain actions, behaviors, or answers, and those are totaled to determine the score.

Credit scoring isn’t nearly as easy as that.  Credit scoring models use multivariate formulas (meaning a ton of variables). To understand how this works, let’s use a noncredit example:

Suppose your friend is late getting over to your house. Where the heck is he? To answer this question you need to review what you know about this person including, are they forgetful, do they often run late for things, have they ever been late to your house before? Are they walking or driving? Did they stop to get gas? Using all these variables you could try to predict where your friend is.

The number of factors of the credit scoring formula evaluates is much greater, so you can see how difficult it can be to predict credit outcomes.

 The massive algorithms and multivariate calculations compare groups of people based on similarities. Due to the grouping aspect of calculations, a credit score is not based on one’s individual credit, it is based on how an individual compares to others in the specified group based on prior statistical data and the statistical data that changes the FICO scoring models could sometimes take years to adapt but, it is important to understand why and how the confusing calculations work.

Credit scoring originally focused on the decision to accept or reject an application for credit. Basically a “pass” or “fail” decision making system.  Over time, it has expanded into other aspects of the lending process, including what interest rates to charge, the review of current account holders, and the solicitation of new loans.

Article provided by and permission to reprint by:

Sal Bonanno
National Account Manager
First Premier Credit Repair
Main: 855.278.3578
Direct: 646.283.2783
Fax: 877.232.3069


Karen Jones is a Licensed Mortgage Loan Officer (NMLS 307015) serving Arizona and California.   As a Banker of over 39 years, she is dedicated in ensuring that her clients are well educated and prepared for their new home purchase.

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