How Do They Calculate Credit Scores When You Apply for A Loan?

When you apply for a credit card or car loan, how do they figure out your credit score? Do they add 3 of them & divide by 3 or look at each one? My average score
is 680. Is this good or bad?


Ali B

Hey there. Well, you’re right. There are three credit bureaus. However, each credit bureau is its own entity. Plus, there are a gagillion potential clients for each of these bureaus. So, everybody and their mother uses these services to judge your credit. However, it gets complicated when you try to figure out how they come up with your overall credit score.

The Simple Math

Each bureau uses their own version of the FICO rating system (which was designed by a completely different publicly-traded company.)  They calculate your credit risk based on things that get reported to them.  They simply take the information they get and make a judgment.  You’ll find that each score is going to be slightly different even if they all have exactly the same information on you, but that’s not always the case.

It Gets Complicated

Certain companies may only have a relationship with one or two of the big three credit bureaus.  That’s rare, but it does happen.  This explains how each company could have different info on you.  So, you never know where people are getting your credit report from.  This is why you want to have your free credit reports in hand every year.  Then, every time you apply for a loan or put in a credit card application you should ask who they get their reports from–just to be sure.  It’s not a big deal to ask.  They may say just one bureau, two, or all three.

You want to know what they’re getting when they order that report.

It’s Getting More Complicated

Most companies that take all three credit bureaus and use their reports may just add the three together and take an average.  They might take the lowest score, middle score, or the highest score.  You don’t know until you ask.  You see, this is why it’s so important to know what’s on your credit report.  Let’s make an example up so you can see what a big deal this is.

(Keep in mind, I am not casting aspersions on any of the credit bureaus–it’s just a thought experiment.)

Let’s say that you apply for a loan where the bank takes the lowest credit score to judge your credit risk.  Well, what if that lowest score includes erroneous information?  I mean, it’s just flat wrong for some reason.  Now, you had no idea that was on there and you’re trying to explain this mistake to the loan officer (who may or not believe you, but he’s more likely to believe the paper in front of him.)  Now, you’re stuck trying to figure out how to deal with the bureau in question.  How in the world are you going to do that when you need the loan imminently?  You can’t.

This means you need to do two things before you even imagine applying for a loan of any kind:

1.  You must get your free credit report and comb it like you have never combed over anything.  If you see anything that is not right–contact the bureau to dispute it.  Period.  They like to be contacted in writing.  Plus, now you have a paper trail for the dispute in case you are applying for a loan soon.

2.  Ask the bank where you’re applying for the loan how they handle credit scoring.  Point blank.  Just ask.  You have the right to know, and have no reason to not tell you.  This allows you to prepared in case there could be a discrepancy.  You have to be an informed consumer if you’re going to start using your credit for good.

How Do You Uncomplicate Things?

Well, we’ve answered the question.  People do with your credit information as they like depending on their policy.  So, what if there is a problem, or you need a higher score?  Well, sometimes you might think you’re doing well and you’re not.  You mentioned a score of 680.  680 is good.  It’s above the 620 threshold that most people say is the line between approvals for prime credit cards and subprime credit cards.  However, 700 is a threshold that alot of people would consider the “you can almost get about anything you want.”  Of course, there are scores far higher than 700, but when you get to the 700’s, you can get approved for almost anything.

How do you get to 700?  Well, that takes time and good standing.  You need time with good credit.  Parents who set their kids up with credit cards EARLY (and don’t give it to them, just put the card in their name so their credit will be built up) are smart.  It’s gives the kid’s credit report a long-standing line of revolving credit that companies look favorably upon.

If you were not so lucky, you just need more time.  The longer you keep revolving lines of credit in good standing the better.  It’s just that simple.

It also doesn’t hurt to have a couple lines of revolving credit in good standing.  Anyone who sees that you have, say, three credit cards all in good standing will think you’re doing very responsibly by those creditors.  That’s just the way it works.

Again, time may not be on your side, but sometimes you just have to wait for the finer things, but, as before, 680 ain’t too shabby.  In fact, tons of people would kill to have a 680.  However, the top of the mountain is the 700’s where you can get lots of things done for yourself.  Keep an eye on your credit, have a plan, and stick to it.  That’ll have you where you want to be in no time.

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