Credit Score History - Where Your Score Comes From

Reader Question: Where does my credit score history come from and how is it calculated?

I'm glad you asked, because this is a topic that confuses a lot of people. In fact, many people don't even realize there's a difference between a credit report and score. Hopefully, the following credit score history explanation and diagram will clear some things up.

In the left side of the image below, you can see that your credit history begins with your financial activity. In most cases, this early activity will come in the form of (A) the first credit card you use, (B) the first unsecured loan you obtain, or (B) a combination of these things. From that point forward, you have a credit score history that will follow you.



So let's say you turn 18 and you apply for your first credit card. You begin using that card for minor purchases. Certain aspects of this financial activity will be reported to the three credit reporting companies shown in the diagram above -- Equifax, Experian and TransUnion.

The information reported will often include the number of credit accounts you have, the available limit, current balances, and any history of late payments you might have. This information is used to establish your credit score history, and you continue to build on it for the rest of your life.

The three credit reporting agencies will then use a scoring model such as FICO to convert this raw data into a numerical score. The FICO score is the one most commonly used by lenders when you apply for new credit. It's a number between 300 and 850 (higher is better).

Now let's say you're applying for a car loan, or maybe even a mortgage loan. The lender you approach will want to know your credit score history, because it says a lot about how you've managed your finances in the past. A low score will make the lender nervous, and they will view you as a high risk. A high score, on the other hand, will portray you as a low risk -- and this makes the lender happy.

Another important point on the subject of credit score history is the rule of three. As illustrated above, there are three different companies who maintain financial data on U.S. consumers. Because the information they is proprietary (and because they all use the credit score model in different ways), you actually have three different credit scores. Not only that, but you may find that all of your scores are different. Lenders will typically look at the middle score, or maybe an average of two out of the three.

So to sum up our explanation:

Your credit score history is based on your financial activity, and it typically starts when you begin applying for credit cards, loans, etc. This information is maintained by three different companies, and these companies will run the data through a scoring model to produce a credit score for you. Lenders will review these scores (among other things) when considering you for a loan.

Related Q&A sessions:

• How do I start building a credit history?
• What does three credit reporting mean?

I hope this explanation makes things a little clearer for you.