So much in life depends on your credit score. It determines whether anyone is willing to extend credit to you, and if so, how much interest you’ll pay on the loan. Providers of cellphone or internet services often want to know your score, and it can even influence how much you’ll pay in the way of auto insurance premiums. FICO is the most well-known scoring system in the U.S. It’s used by about 90 percent of lenders.
What Is a FICO Score?
Your FICO score is thumbnail encapsulation of your creditworthiness. It condenses your credit history into a single three-digit number.
It’s based on a “model,” a method of calculation that was created by the Fair Isaac Corporation, a predictive analytics company, in 1989. FICO scores measure information that’s included on your credit reports with each of the three major credit reporting agencies – TransUnion®, Equifax® and Experian®. A high score means you're likely to pay your debts off and make payments on time. FICO was the first company to come up with a reliable way of computing this likelihood.
How Is a FICO Score Calculated?
You must have at least some credit history to have a FICO score. The calculation can’t be made in a vacuum. At a bare minimum, you should have one credit account that’s at least six months old and has reported to at least one of the credit agencies.
Your FICO score is based on five components: your payment history, how much debt you’re carrying compared to how much credit is available to you, how long you’ve been borrowing, how many accounts you’ve opened or applied for recently, and the different sorts of credit accounts you have. Your payment history is the most important factor – 35 percent of your FICO score depends on this – followed by the amount of your debt at 30 percent. How long you've been borrowing weighs in at 15 percent and the last two factors contribute 10 percent each.
Your FICO score is fluid. It goes up or possibly down over time. Your creditors report to the credit agencies on an ongoing basis and your scores are adjusted each time they do to include this new, recent information.
Is FICO Your Credit Score?
FICO is just one of your credit scores, although it's the most widely used. The others, including VantageScore, use different calculation methods and scales.
You can have more than one FICO score. Remember, the score is calculated from information in each of your credit reports with the different agencies. If a certain creditor reports to Experian but not to TransUnion, that information would not be included in your TransUnion score. Experian's score would be at least marginally different because it possesses information that TransUnion doesn’t have.
And FICO itself has different models – 19 of them in all – tweaked and weighted for different purposes. A credit card company might be looking for a different type of evaluation than a bank that’s considering offering you an auto loan that’s going to be secured by the vehicle.
What Is a Good or Bad FICO Score?
A good FICO score is a high score. FICO scores range from a low of about 300 to 850, and 850 is very good indeed.
But in the end, your FICO score is still just a number. It’s FICO’s indication of how likely you are to pay off the debt you’re applying for. It becomes subjective when it’s in the hands of a lender. One lender might be willing to accept a 650 score while another might demand scores in excess of 700 before it will do business with you.
A FICO score of 650 is actually considered below average and the best interest rates are typically reserved for those with FICO scores in excess of 760. Scores in the 670 to 740 range are average, and below 580 is poor.
Tips for Improving Your Score
There’s no magic wand for improving your score overnight, and FICO warns against trusting any credit repair company that says it can do so. But you can begin the process by getting a copy of your own credit report and reviewing it for accuracy. There might be information on there that’s incorrect. You have a right to dispute it with the credit reporting agency to try to get it removed.
Make it a point to pay all your bills on time, not just credit accounts that report to the agencies. It will hurt your FICO score significantly if any delinquent accounts are turned over to a collection agency for non-payment. That information will remain on your credit report and impact your FICO score for seven long years, even after you pay it off.
Don’t let the balances owed on your credit cards inch up too close to the max. The amount of your debt is calculated by your credit utilization ratio. It’s measured by how much of your available credit you’ve used up. A consumer with just $5,000 in debt would not automatically have a higher FICO score than someone with $25,000 in debt.
If you have a single credit card with a $4,000 limit and a $3,000 balance, you’ve used up 75 percent of your available credit – not good. Someone else might have several cards with a total of $10,000 available to him and he also owes $3,000 when all the balances are combined. His credit utilization ratio is only 30 percent – much better than 75 percent but this is still on the outside edge of being acceptable.
You don’t want to close out credit cards for the same reason, particularly those with zero balances. If you owe $0 on a card with a $4,000 limit, that card will help pull down your credit utilization ratio when all your revolving accounts are added together. either. Closing an account won’t remove it from your credit report, at least not for an extended period of time, so there’s really no benefit in shutting it down.
- myFICO: What Is a Credit Score?
- Bankrate: What Is a FICO Score?
- Consumer Financial Protection Bureau: What Is a FICO Score?
- Bankrate: What Is a Good Fico Score?
- myFICO: How to Repair My Credit and Improve My FICO Scores
- Experian. "What Are the Different Credit Scoring Ranges?" Accessed Sep. 20, 2020.
- myFICO. "What is a FICO Score?" Accessed Sep. 20, 2020.
Beverly Bird has been writing professionally for over 30 years. She is also a paralegal, specializing in areas of personal finance, bankruptcy and estate law. She writes as the tax expert for The Balance.