How Is a Credit Score Calculated? | How It Works

What is the short answer?

When a person borrows money, the lender usually reports how they repay. A credit bureau gathers those reports into a file on each person. A company then runs a scoring model, a mathematical formula, over the file and produces one number.

Lenders read that number as a quick guide to risk. It helps them decide whether to lend, how much and at what rate. FICO, a widely used US score, says payment history counts for the largest share, about 35%.

Definition: A credit report is a bureau's record of a person's credit accounts and repayment history. A credit score is a number calculated from that report to predict how likely the person is to repay as agreed.

What is a credit report, and who keeps it?

Banks, card companies and other creditors send updates on customers' accounts to credit bureaus. Firms that send this data are called furnishers. In the United Kingdom, bureaus are called credit reference agencies.

In the United States, the Consumer Financial Protection Bureau (CFPB) lists what a report holds: personal details such as name, address and date of birth; each account's type, limit, balance and payment history; collections and bankruptcies; and inquiries, the companies that have looked at the file.

The three nationwide US bureaus are Equifax, Experian and TransUnion. Creditors do not have to report to all of them, so one person's reports can differ.

The same three firms run credit reference agencies in the United Kingdom, a market the Financial Conduct Authority (FCA) has called very highly concentrated. In India, credit information companies work under rules set by the Reserve Bank of India (RBI).

How does a scoring model turn a report into a number?

The model weighs facts in the report, such as late payments and balances, and combines them into one figure: what the CFPB calls a prediction of credit behaviour. Nobody has just one score: results vary with the model, the bureau's data and the date.

Table: FICO's published guide to its score categories

These shares are FICO's own general guide, not an exact formula. FICO says their importance may vary from one person to another. Base FICO Scores run from 300 to 850, and FICO says they leave out race, religion, sex, marital status, age, salary and employer.

VantageScore, set up in 2006 by the three bureaus, also runs from 300 to 850 in its recent models. It mainly ranks factors by influence rather than percentages, and treats payment history as the most influential.

In the United Kingdom, Experian's score runs from 0 to 1,250 and Equifax's from 0 to 1,000. Equifax notes that the country has no universal score: each agency or lender has its own model.

How do utilisation, inquiries and old debts move a score?

Credit utilisation is the share of available credit a person is using on revolving accounts, such as credit cards. FICO says a high share can suggest a person is overextended and can lower scores. It adds that having debt does not by itself make someone high-risk.

A hard inquiry happens when a lender checks a report after a credit application, and most models count it. A soft inquiry, such as a person checking their own report, does not affect scores. FICO says one extra hard inquiry takes less than five points off most people's scores.

Hard inquiries stay on a report for up to two years but affect FICO Scores for one year. When people shop for a mortgage, car loan or student loan, FICO groups hard inquiries made within 14 to 45 days, depending on the score version, into one.

In the United States, a bureau can generally report most negative information for seven years, and a bankruptcy for up to ten.

How do lenders use a credit score?

The CFPB says lenders use scores to decide whether to offer a mortgage, credit card or car loan, and to set the interest rate and credit limit. A score is one input: FICO notes that lenders may also weigh income and employment.

Setting terms by risk is risk-based pricing, which the Federal Trade Commission (FTC) defines as offering different interest rates and loan terms to borrowers based on their creditworthiness.

US lenders must send a risk-based pricing notice when a credit report leads to terms materially less favourable than the best terms offered to a substantial share of consumers. If a report leads a lender to turn someone down, an adverse action notice must name the bureau, give any score used, explain the rights to a free report and to dispute errors, and say the bureau did not decide.

What rights do people have over their reports?

United States. The Fair Credit Reporting Act (FCRA) requires the three nationwide bureaus to give each person a free report every 12 months on request. The FTC says they have permanently extended free weekly reports, through AnnualCreditReport.com, the only authorised site.

The CFPB says a person can dispute an error with the bureau and with the furnisher. Furnishers generally must investigate within 30 days and, if the data is wrong, correct it and tell each bureau it reported to.

United Kingdom. Experian says every credit reference agency must produce a statutory credit report by law, and it offers a free copy.

India. Under a 2016 RBI circular, from 1 January 2017 each credit information company must give an individual, on request, a free full credit report, including the credit score, once a calendar year.

Under an RBI framework of 26 October 2023, if a complaint about credit information is not resolved within 30 calendar days, the complainant is owed ₹100 for each day of delay. The lender has 21 days and the company the remaining nine.

What happens to people with thin files?

A thin file holds too little history for a model to score. In 2015, the CFPB estimated that 26 million American adults were credit invisible, with no file at a nationwide bureau, and that 19 million more had files that could not be scored. A June 2025 CFPB correction roughly halved the credit invisible estimate and raised the unscored one by almost as much.

One proposed answer is alternative data, such as rent, phone bills and bank account activity. UltraFICO, for example, can add bank account data that the consumer agrees to share. A 2017 CFPB inquiry set out both sides.

It listed possible benefits: people outside the system could build a history, and some could borrow at lower cost. It also listed risks: data could be inaccurate or hard to correct, could be correlated with race, ethnicity or gender, and could expose sensitive information.

On fairness, defenders of scores note that FICO leaves out race and sex. Others point to the CFPB's 2015 finding that Black and Hispanic consumers were more likely to be credit invisible or unscored.

What happened when credit reporting went wrong?

The Equifax breach. In September 2017, Equifax announced a breach that exposed the personal information of about 147 million people.

In July 2019, Equifax agreed to pay at least $575 million, and potentially up to $700 million, to settle with the FTC, the CFPB and US states. From January 2020, it had to give six free reports a year for seven years.

Medical debt. The three bureaus made their own changes. From 1 July 2022, paid medical collection debt no longer appeared on US reports, and unpaid medical collections waited one year, not six months, before appearing. In April 2023, the bureaus removed medical collections with an initial balance under $500.

In January 2025, the CFPB issued a rule to stop lenders using medical debt information and to bar bureaus from reporting it. Its start date was delayed, and it never took effect. On 11 July 2025, a federal court in Texas vacated the rule, at the joint request of the CFPB and the plaintiffs, finding it went beyond the CFPB's powers under the FCRA.

The United Kingdom's market study. In December 2023, the FCA found poor data coverage, quality and consistency, and low public understanding of credit information. In February 2026, it proposed that a lender sharing data with one designated agency must share it with all of them.

How does this work with real numbers?

Both examples use illustrative numbers.

What share of the available credit is in use?

One person holds three credit cards.

Table: Illustrative balances and limits across three cards

Overall utilisation = total balances ÷ total limits = $1,300 ÷ $10,000 = 13%. If Card C's $5,000 limit disappeared, the same $1,300 would sit against $5,000, doubling the ratio to 26%. The debt is unchanged; only the measure moves.

How does a higher rate change the cost of the same loan?

Two borrowers each take a $20,000 loan, repaid monthly over five years, so n = 60 payments. Borrower A is offered 6% a year and Borrower B 12%. The monthly rate r is the yearly rate ÷ 12: 0.005 for A and 0.01 for B.

The standard amortisation formula gives the monthly payment: M = P × r ÷ [1 − (1 + r)^(−n)], where P is the amount borrowed. Total paid is 60 × M, and interest is the total minus $20,000.

Table: Illustrative cost of a $20,000 loan over 60 months

Borrower B pays $3,493.80 more interest, slightly more than double A's. Totals use the rounded payment.

Where can the student go deeper in World 101?

This page follows one mechanism: how repayment records become a file, then a score, then a price for borrowing. The World 101 subject Personal Finance and Money Skills places credit inside the wider set of everyday money decisions that people make, from earning and spending to borrowing over a lifetime.

Three related subjects go further. Money, Banking and Credit explains how banks create and price loans across an economy. Statistics and Data covers the prediction methods that sit behind a scoring model. Data Privacy Law looks at who may collect and share personal records, the question raised by the Equifax breach.

Sources

• CFPB, answers on credit scores, credit reports, disputes and negative information (reviewed 2 September to 29 October 2026) and on credit inquiries (reviewed 5 September 2025).
• myFICO, "What's in my FICO Scores?" (updated October 2026), "What is a FICO Score?" and pages on inquiries and amounts owed, read 8 November 2026.
• Experian, "What is a VantageScore credit score?" (created 2006), 9 February 2026.
• FTC, "Free credit reports", June 2026; guidance on adverse action and risk-based pricing notices, edited January 2025.
• FTC press release on the Equifax settlement (2017 breach; free reports from 2020), 22 July 2019.
• Equifax, Experian and TransUnion, release on medical collections (changes from 1 July 2022), 11 April 2023.
• CFPB, medical information rule, issued 7 January 2025, vacated 11 July 2025 (Cornerstone Credit Union League v. CFPB).
• CFPB press releases on credit invisibles, 5 May 2015, and alternative data, 16 February 2017; correction to the credit invisibles estimate, 23 June 2025.
• FCA, credit information market study page (final report 5 December 2023) and press release on credit files, both 25 February 2026; Interim Working Group page, 12 September 2025.
• Experian UK, "Is Experian free?", and Equifax UK, "Check your free credit score", read 8 November 2026.
• Reserve Bank of India, "Free Annual Credit Report to Individuals", 1 September 2016 (effective 1 January 2017); compensation framework, 26 October 2023.

Common errors and misconceptions

• Misconception: Each person has one credit score. Correct: Scores differ with the model, the bureau's data and the date.
• Misconception: Credit bureaus decide who gets a loan. Correct: Lenders decide; a US adverse action notice must say the bureau did not make the decision.
• Misconception: Checking one's own credit report lowers the score. Correct: That is a soft inquiry, which does not affect scores; hard inquiries after credit applications can.
• Misconception: FICO's percentages are the exact formula. Correct: They are FICO's general guide, and the importance of each category varies from person to person.
• Misconception: A higher salary raises a credit score. Correct: FICO Scores leave out salary and employer, though a lender may weigh income separately.

Key takeaways

• Lenders report how people repay to credit bureaus, which keep a report on each person; reports can differ between bureaus.
• A scoring model turns the report into one number that predicts how likely the person is to repay as agreed.
• FICO's guide weights payment history at 35%, amounts owed at 30%, history length at 15%, and new credit and credit mix at 10% each.
• Base FICO Scores and recent VantageScore models run from 300 to 850, while UK agencies use their own scales, such as Experian's 0 to 1,250.
• Lenders use scores to approve credit and set rates and limits; under risk-based pricing, a borrower with a riskier file can pay more for the same loan.
• The United States, the United Kingdom and India give people free access to their reports, and US and Indian rules set ways to fix errors.

Test yourself

What is the difference between a credit report and a credit score?

A report is the bureau's record of a person's accounts and repayments; a score is a number a model calculates from that report.

Why was the illustrative utilisation 13%?

Balances of $1,300 across the three cards, divided by total limits of $10,000, give 13%.

In the loan example, why did Borrower B pay $3,493.80 more interest?

Because B's 12% rate raises the payment to $444.89 and total interest to $6,693.40, against $386.66 and $3,199.60 at A's 6%.

How long can most negative information stay on a US credit report?

Generally seven years; a bankruptcy can stay up to ten years.

What did the court decide about the CFPB's 2025 medical debt rule?

On 11 July 2025, a federal court in Texas vacated it, finding that it went beyond the CFPB's powers under the FCRA.

What does India's RBI require credit information companies to give each year?

A free full credit report, including the credit score, once a calendar year to individuals who ask.