How Credit Score Works in USA

There are a lot of myth bubbles floating around this topic, so I wanted to clear the air and explain how our credit score is actually created and explicitly pop some of these myth bubbles.

Ok, so for starters, your score is anywhere between 300 – 850 (worst to best).

This is not some ominous number that somehow follows you throughout your life, but instead is a number that is  calculated by “credit bureaus” or “credit reporting agencies”. These are for-profit businesses that collect and file data about your credit usage from other lending businesses (read banks, credit card companies) that report your credit or loan activity.

The 3 major agencies in the U.S. are Equifax, Experian and TransUnion.

Note that the scores that each of these companies have for you will likely vary slightly due to the data they have available or decide to use in the calculation.

You may say, “So where does this FICO score thing come into play?”

FICO is actually another, separate company that specializes in predictive analytics, and has created the algorithms that these credit bureaus use to actually calculate your score based on the data each individual bureau has.

What comes out on the other side of this algorithm is your 3-digit “FICO” score. While there are other companies that provide different algorithms to calculate your score, the one most used by the bureaus is the FICO.

Ok then, so what “data” goes into this calculation that all of the bureaus use to track my score?

Remember, the basis of this calculation is the data that banks, credit card companies and lenders provide to the bureaus based on their transactions with you.

After the data is handed over to the bureaus, the FICO algorithm categorizes and prioritizes your data as follows:

◾35% payment history (e.g. number of late payments)

◾30% amounts owed/utilization

◾15% length of credit history

◾10% new credit applications

◾10% types of current credit (e.g. credit card vs. mortgage)

It is actually pretty intuitive if you think about it……the biggest factor that will determine a higher credit score, or a higher likelihood that you will pay back borrowed money, is whether or not you’ve consistently made on-time payments back on the money you owe.

Now, for some of the popular myth bubbles floating around out there right now, one that I hear a lot is:

Your rent payments can help or hurt your credit score when leasing a house


Paying utilities for your home can help your credit score……..

Neither of these are true.

Like we discussed, credit bureaus only use the data that they have been given by other companies that lend money, and, 99% of leasing and utility companies don’t have a reason to report on-time payments to help your credit score

(Where they do come in, however, is if you DON’T pay your rent or your utility bill. In this case, if it gets escalated high enough to a collection agency, then the agency will report this to the credit bureau, which will ding your score…… This is the same scenario for most other bills as well like your cell phone, internet and cable, and so on).

Some of the other popular myth bubbles of things that affect your credit score are:


Marital status


Checking your own credit score (non-applications)

and closing credit cards……….

None of which do diddly squat to your credit score.

At the end of the day, just remember that:

If it doesn’t fall into one of the 5 main credit factors I mentioned above, and it doesn’t deal with a collection agency, then it will not touch your credit score.

I’d be interested to hear some of the other credit-score-affecting myths you all have heard. Feel free to comment below and I’ll try to address them.






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