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7 min read

What is a FICO Score and How is it Calculated?

Your FICO score is a crucial financial metric that affects many aspects of your financial life, from securing loans to determining credit card terms and even insurance rates. Developed by the Fair Isaac Corporation in 1989, the FICO score is used by over 90% of top lenders to assess credit risk and determine borrowing terms. The score, ranging from 300 to 850, reflects your creditworthiness based on factors like payment history, amounts owed, and credit utilization.

Understanding your FICO score is essential because it directly impacts your ability to qualify for loans and the interest rates you’ll receive. A higher score can save you thousands of dollars in interest over the lifetime of a mortgage or car loan. Additionally, landlords and even some employers may use your score to evaluate your reliability.

In this article, we’ll break down how FICO scores are calculated, how they’re used in different industries, and practical steps you can take to improve your score over time.

What are Score Ranges?

Your FICO score falls within a range of 300 to 850, with higher scores indicating better creditworthiness. This range helps lenders assess the risk of lending to an individual. Understanding where your score fits in this range can provide insight into how lenders view your credit profile and what kind of loan terms you might receive.

  • 300-579: Very Poor
    • Individuals in this range may have difficulty getting approved for credit or loans without a cosigner. Interest rates are typically much higher, and credit options are limited. According to a report from Experian, 12.6% of consumers are in this category.
  • 580-669: Fair
    • Borrowers in this range may still face higher interest rates, but there are more opportunities to qualify for credit, including loans and credit cards. There are 15.8% of consumers in this category.
  • 670-739: Good
    • This range is considered a good score and offers more favorable terms. Most lenders view borrowers with scores in this range as low risk. There are 21.6% of consumers in this category.
  • 740-799: Very Good
    • A score in this range often results in even better interest rates and terms. Borrowers here are considered very low risk by lenders. At the highest percentage, 28.1% of consumers are in this category.
  • 800-850: Exceptional
    • The highest range signals excellent credit management. Borrowers in this range typically get the best loan terms and lowest interest rates. There are 21.9% of consumers in this category.

The FICO score range plays a significant role in determining your access to credit and the terms you’ll receive. For instance, having a good or very good score can mean securing lower interest rates on loans, which could save you thousands over time. On the other hand, those with lower scores may face difficulty securing loans or may only qualify for higher interest rates​.

How is it Calculated?

Your FICO score is based on five key factors, each weighted differently to give a comprehensive picture of your creditworthiness. While the exact formula is proprietary, understanding these factors can help you manage your score more effectively.

Payment History (35%)

This is the most important factor in calculating your FICO score. Lenders want to see a record of timely payments, as it indicates a low likelihood of default. Late payments, bankruptcies, and delinquencies can significantly hurt your score, with recent issues carrying more weight​.

Credit Utilization (30%)

Credit utilization refers to the percentage of your available credit that you’re currently using. A lower utilization rate indicates responsible credit management. It’s generally recommended to keep this ratio under 30%, as high utilization can signal that you’re over-relying on credit.

Length of Credit History (15%)

This factor takes into account how long your credit accounts have been open. Lenders prefer to see a longer credit history because it provides more data on your borrowing behavior. Keeping older accounts open, even if they’re not frequently used, can help improve this aspect of your score.

New Credit Inquiries (10%)

When you apply for new credit, a hard inquiry is placed on your credit report, which can temporarily lower your score. Multiple inquiries within a short period can signal financial trouble and impact your score negatively.

Credit Mix (10%)

This refers to the variety of credit accounts you have, such as credit cards, mortgages, and loans. Having a healthy mix of different types of credit demonstrates to lenders that you can manage a range of financial obligations.

How are FICO Scores used?

FICO scores are widely utilized by lenders and other entities to evaluate your creditworthiness. This three-digit number can impact everything from your ability to get approved for loans to the interest rates and terms you’ll be offered.

Assessing Creditworthiness

When you apply for a loan, mortgage, or credit card, lenders request your FICO score from one or more of the major credit bureaus (Equifax, Experian, and TransUnion). This score gives lenders an immediate snapshot of your creditworthiness, with higher scores indicating responsible credit management and lower risk​.

Establishing Loan Terms

In addition to determining whether you’re approved for a loan, your FICO score also plays a critical role in setting the terms of your loan. Borrowers with higher scores may qualify for lower interest rates, smaller down payments, and better overall loan terms, while those with lower scores might face higher interest rates and stricter loan conditions.

Rental Applications and Job Screening

Your FICO score can also be used outside of traditional lending. Landlords often use FICO scores when reviewing rental applications to assess whether a potential tenant is likely to pay rent on time. In some cases, employers—especially for financial positions—may check your FICO score as part of the hiring process, though this requires your consent.

Insurance Rates

Insurance companies may use a variation of your FICO score, known as an insurance score, to determine your premium rates. A higher insurance score can lead to lower premiums, as it signals to the insurer that you’re less likely to file claims.

FICO Score vs. VantageScore

While FICO is the most widely used credit score, VantageScore has gained popularity in recent years. Both scoring models use similar credit factors, but there are some key differences to consider..

Creation and Adoption

FICO was developed by the Fair Isaac Corporation in 1989 and remains the standard for more than 90% of lending decisions in the U.S. VantageScore, created in 2006 by the three major credit bureaus (Equifax, Experian, and TransUnion), was designed to provide credit scores for individuals with limited credit histories​.

Key Differences in Scoring Factors

While both models consider payment history, credit utilization, length of credit history, and recent credit inquiries, there are slight variations in how these factors are weighted. For example:

  • FICO assigns 35% of your score to payment history and 30% to credit utilization.
  • VantageScore also focuses heavily on payment history but doesn’t disclose exact percentages for each factor. It does, however, give extra weight to available credit, which is not directly factored into FICO scores.

Scoring Ranges and Versions

Both FICO and VantageScore 3.0 use a range of 300 to 850, but earlier versions of VantageScore used a different range (501 to 990). In terms of industry adoption, FICO continues to dominate in the lending space, though VantageScore is closing the gap as more lenders adopt its inclusive methodology, which is often better suited for individuals with thin credit files​.

How FICO Scores Vary by Industry

Understanding how FICO scores vary by industry is crucial because different scoring models can impact the loan terms you receive. Whether you’re applying for a mortgage, auto loan, or credit card, knowing which FICO model is being used can help you anticipate what lenders will focus on, such as past auto loans for car financing or revolving credit history for credit cards. Being aware of these variations allows you to better prepare for applications and improve your chances of securing favorable terms.

Auto Loans

When applying for an auto loan, lenders often use the FICO Auto Score, which places more emphasis on your history of auto loans. This score ranges from 250 to 900, unlike the typical 300-850 range, and provides lenders with insights into how likely you are to make timely car payments.

Mortgages

Mortgage lenders tend to use older FICO scoring models, like FICO Score 2, 4, and 5, which are considered more conservative. These versions place significant weight on long-term credit history, making it important for borrowers to have a solid track record when applying for a mortgage​.

Credit Cards

For credit card applications, issuers often use the FICO Bankcard Score, which focuses more heavily on your past credit card usage and ranges from 250 to 900. Lenders can see how you’ve managed your revolving credit, helping them determine your risk level for additional cards​.

How Do You Improve Your FICO Score?

First and foremost, understanding the factors that contribute to your FICO score is crucial. Your credit score is determined by your financial actions, which are reported to credit bureaus and analyzed based on five significant factors.

Pay Bills on Time

Payment history is the most significant factor in your FICO score, accounting for 35% of the calculation. To improve or maintain a good score, make sure to pay all your bills—credit cards, loans, and utilities—by their due date. Even one missed payment can negatively impact your score​.

Keep Credit Utilization Low

Credit utilization, or the amount of your available credit that you’re using, should ideally stay below 30%. Keeping your balances low relative to your credit limit shows lenders that you’re managing your credit responsibly.

Lengthen Your Credit History

The length of your credit history accounts for 15% of your FICO score. Keeping older accounts open, even if you’re not using them regularly, can help improve this factor. Avoid closing long-standing accounts unless absolutely necessary​.

Minimize New Credit Inquiries

Every time you apply for new credit, a hard inquiry is made, which can slightly lower your score. Try to limit applications for new credit, especially within a short time frame, to avoid multiple inquiries impacting your score.

Diversify Your Credit Mix

Having a diverse credit portfolio—like a mix of credit cards, mortgages, and installment loans—can improve your credit score. Lenders prefer to see that you can manage different types of credit responsibly.

How Do You Check Your FICO Score?

Knowing your FICO score is the first step in managing your credit. Fortunately, there are several ways to check your score without impacting your credit.

Credit Card Issuers and Banks

Many credit card companies and banks now provide free FICO score access to their customers as part of their online banking services. Check with your provider to see if they offer this feature, as it allows you to monitor your score regularly without a hard inquiry.

MyFICO Website

You can purchase your FICO score directly from the MyFICO website. This option provides a detailed breakdown of your score, including access to multiple versions of your FICO score used in different industries, such as auto loans and mortgages.

Credit Monitoring Services

Services like Credit Karma and Experian also offer credit score monitoring, although they may provide a VantageScore rather than a FICO score. Be sure to verify whether you’re seeing your FICO score or a different model​.

What Are Some Common Myths About FICO Scores?

When it comes to understanding credit scores, there are many common misconceptions. Let’s clear up some of the most persistent myths about FICO scores.

Myth 1: Checking Your Own FICO Score Will Hurt Your Credit

Many people believe that checking their credit score will lower it, but this is only true when a lender checks your score as part of a credit application (a hard inquiry). Checking your own score is a soft inquiry and doesn’t affect your score at all.

Myth 2: Closing Unused Credit Cards Helps Your Score

Closing an unused credit card might seem like a good idea, but it can actually hurt your score by reducing your available credit. This can increase your credit utilization rate, which accounts for 30% of your FICO score​.

Myth 3: You Need to Carry a Balance to Improve Your Score

There’s a misconception that carrying a balance on your credit cards will boost your score. In reality, paying off your balances in full each month is the best way to maintain a healthy credit score.

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