How Does FICO Calculate Your Credit Score?

No, it’s not magic and it’s anything but arbitrary. There is a well-established science behind that 3-digit number that so heavily influences your financial life. And while it would take several hundred pages to fully explain how it all works, we can explore one of the more intriguing aspects of credit scoring systems; scorecards.

What’s a scorecard?

A scorecard is used to convert your credit data into points. And after it converts your credit data into points, it adds them together for delivery to a lender, which includes a list of the top reasons why your score wasn’t higher.

Think of a scorecard within the FICO credit scoring system like a scorecard used by Major League Baseball. There are normally 9 innings in a game, each with a fixed number of runs (points). The game ends with the sum of the runs scored in each inning and then becomes the final score. It’s really not that different with a scorecard used within a credit scoring system except we have to replace runs, hits and errors with characteristics, variables, and weights.

A credit scorecard slices up your credit report into bite-sized evaluations called characteristics. One characteristic, for example, is the number of accounts with a balance greater than $0. If you have none, you’re rewarded with some number of points. If you have several, you’re rewarded, less handsomely, with a lesser number of points.

Just when you thought it made sense….

This process is repeated a dozen or so times, measuring things like your payment history, the number of credit inquiries in the past 12 months, the age of your credit report, your debt, and the type of credit accounts you’ve managed. The bottom line is this: if it’s being considered by FICO, then you can bet the farm it’s predictive of elevated credit risk, or the lack thereof.

Each credit scoring system, not just FICO’s, have several different scorecards within each credit scoring model. Doesn’t make sense? It’s hard to explain by typing, but think of homogenous consumer populations — you have consumers with young credit reports, consumers who have filed bankruptcy, consumers with limited credit file data, consumers with delinquencies, and consumers without delinquencies.

Different player, different rules.

Each of the aforementioned unique groups is scored using its own custom developed scorecard. Why is this done? The answer is, each unique group of consumers poses a risk to lenders differently and, thus, has to be evaluated using a set of rules most applicable to the aspects of that population. Better put, you can’t score a bankrupt consumer using the same scoring model as a consumer who has never missed a payment in their life. Think about it as a different set of rules based on your credit report.

Here’s the rub: you’ll have almost no idea which scorecard has been assigned to score your credit file. The exception is if you have a very young or thin (meaning very few accounts) credit file. Or, if you have delinquencies or a bankruptcy. Most credit scoring models have scorecards designed for those specific groups.

The bottom line.

Should you freak about what scorecard is being used to assign your score? No, it would be a waste of your time. In fact, you have no control over how your score is calculated, other than simply paying your bills on time and staying out of credit card debt. In that case you’re going to have a killer credit score regardless of which scorecard is assigning the number.

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. The opinions expressed in his articles are his and not of Mint.com or Intuit. Follow John on Twitter.