How credit scores work

Do you ever feel like a number? Major corporations try desperately to make you not feel like one. They want you to feel like a person, or at least a name. But as companies consolidate to reach the scale necessary to survive in a competitive marketplace, we are often more digit than human.

We all have numerous numbers, but one number remains mysterious to most people: the famous (or infamous) credit score.

Three companies dominate the credit reporting world: Equifax, Experian and Transunion. I’ll call them “The Big 3.” Banks and finance companies report customer payment data to The Big 3 every month.

Generally, lenders report your name, address, date of birth, Social Security number, current loan balance, payment amount and whether you made your agreed upon payment that month.

The Big 3 also collect information from federal, state and county public records. Overdue taxes, lawsuit judgments, etc.

The Big 3 assemble information on you over time. Whenever lenders want help deciding whether to make you a loan, they turn to one or all of The Big 3 for a history and a score. The Big 3 has your payment history in their files, but they turn to one particularly company for the score. The company is called FICO.

FICO stands for Fair Isaac Corporation. Two mathematicians, Bill Fair and Earl Isaac, started the company in California in the 1950s. Fair and Isaac believed that a systematic review of payment-related data could better inform credit decisions.

Over time, they and their team of quants developed an algorithm that they believed could predict the likelihood that a person will repay a debt.

They pitched their idea to 70 large lenders and finally got a bite in 1972 when they built an automated credit scoring system for Wells Fargo in California. Other lenders began signing on.

By the early 1990s, The Big 3 began using Fair Isaac’s system and “FICO” became a household name. Roughly speaking, here’s how it works.

The system compares a person’s financial situation to hundreds of thousands of other people who were, at some point in time, in a very similar position.

It analyzes how likely those people were to repay their debts and then assigns a rank to the current consumer based on the average performance of the people in a like situation.

Payment history and amounts owed are the predominant factors analyzed, though length of credit history, level of new credit and types of credit used are also considered.

FICO’s score range is 300-850. The Big 3 may add a bell or whistle to the score to make it their own. That’s why your score may be slightly different between agencies or, hopefully, even above 850. (Transunion goes to 900.)

If your score is dramatically different between agencies, a particular lender may be reporting to only one or two of The Big 3. Or, heaven forbid, someone else’s information is on one of your reports.

It can happen more easily than we’d like. If a credit clerk at a lending company somewhere mistypes one digit of a Social Security number, you may have a $1,600 Dodge Viper car payment on your hands. is the best place to do so since it’s free and officially sponsored by The Big 3. Some people check all three reports at once. Others like to stagger their checks in order to monitor their information throughout the year.

Either way, it’s good to keep a close eye on your reports. If you’re going to be a number, might as well be a good one.


Kevin Thompson can be contacted at

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