The FICO score is one of the most important numbers in your financial life. This three-digit credit score can determine whether you qualify for credit cards, loans, mortgages, utilities, and more. But what exactly is the FICO score, how is it calculated, and why does it matter so much? Keep reading to learn everything you need to know about this influential credit score.
What is the FICO Score?
The FICO score is a credit score that predicts your credit risk. It ranges from 300 to 850 – the higher the score, the lower the perceived risk. FICO stands for Fair Isaac Corporation, the company that created the formula used to calculate the FICO score.
FICO introduced the first version of the FICO score in 1989. Since then it has become the most widely used credit scoring system in the US. According to FICO 90% of top lenders use the FICO score to make lending decisions.
The score is calculated based on information in your credit reports from the three major credit bureaus – Experian, Equifax and TransUnion. It summarizes your credit history into a single three-digit number lenders can use to quickly assess your creditworthiness.
How is the FICO Score Calculated?
The FICO scoring formula takes into account five main categories of information from your credit reports:
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Payment history (35%) – Tracks your history of paying bills and debts on time. Late payments will lower your score.
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Amounts owed (30%) – Considers how much you currently owe compared to your credit limits on revolving credit accounts like credit cards. High balances relative to your limits hurt your score.
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Length of credit history (15%) – Favors a longer credit history. New credit won’t hurt much, but a short history does.
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Credit mix (10%) – Having different types of credit (credit cards, installment loans, mortgage) helps your score.
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New credit (10%) – Opening multiple new credit accounts in a short period can lower your score.
As you can see, your payment history and how much you owe (credit utilization) are weighted heavily and have the biggest impact on your score. By paying on time and keeping credit card balances low, you can boost your FICO score over time.
The FICO formula considers both positive and negative information in your credit history. It looks at details like collection accounts, bankruptcies, foreclosures, loan defaults, civil judgments, tax liens, and more. Major negative events like bankruptcies can lower your FICO score significantly and for years.
FICO Score Ranges
FICO scores fall into the following ranges:
- 800-850: Exceptional
- 740-799: Very Good
- 670-739: Good
- 580-669: Fair
- 300-579: Very Poor
In general, scores above 700 are considered good to excellent credit, and scores above 750 will qualify you for the best rates and terms. Scores below 600 indicate bad credit and will make it hard to get approved or will result in higher interest rates if you do qualify.
Each lender sets their own minimum credit score requirements based on the perceived risk. For mortgages, many lenders look for a minimum FICO score of 620-640. The average approved FICO score for a credit card is 716.
Why Your FICO Score Matters
The FICO score gives lenders a quick snapshot of your credit risk. The higher your score, the lower the risk you pose. This allows lenders to make fast, data-driven decisions.
With a higher FICO score, you are more likely to:
- Get approved for credit cards and loans
- Qualify for lower interest rates, saving you money
- Access larger credit limits
- Avoid deposits for utilities and cell phone service
- Rent an apartment and skip extra fees or deposits
- Qualify for the best deals on insurance
A higher FICO score signals to lenders that you reliably make payments and manage debt responsibly. This saves them risk and money, so they reward you with better rates and terms.
On the other hand, a low FICO score indicates higher risk. You may get denied for credit or pay thousands more in interest due to higher rates. Improve your credit, and your FICO score will rise over time, unlocking better financing options. Monitoring your score is key to managing your financial health.
How to Improve Your FICO Score
Here are the most effective ways to build your FICO score:
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Pay all bills on time. Set up autopay or reminders to avoid missed payments. Even one 30-day late can drop your score.
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Keep credit card balances low. Shoot for less than 30% of the card limit. High balances hurt scores.
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Limit hard inquiries. Each credit application causes a hard inquiry that may ding your score a few points. Comparison shop for a mortgage or auto loan within a short period to minimize hits.
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Build credit history. Your score favors a longer history, so keep your oldest card open. Become an authorized user on someone else’s card to benefit from their history.
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Monitor your credit. Review reports regularly and dispute any errors with the bureaus to keep your history accurate.
Improving your credit takes time and diligent financial habits, but the payoff of better FICO scores and access to affordable credit is well worth the effort.
FICO vs VantageScore
The main alternative to the FICO score is the VantageScore, which uses a different formula and scoring range of 300-850. It was developed jointly by the three major credit bureaus in 2006.
The VantageScore considers the same general credit data as the FICO score but attaches different importance (weighting) to each factor in its formula. Despite the similarities, your VantageScore will often differ somewhat from your FICO score since the underlying algorithms are unique.
The key advantage of the FICO score is its widespread usage and adoption by lenders. According to FICO, 90% of top lenders use the FICO score as part of credit decisions. It remains the most influential credit score that can save or cost you money through better or worse loan terms.
FICO Score Versions
There are actually many versions of the FICO score that have been released over the years as the formula evolved:
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FICO Score 8 – Most commonly used today and available since 2009. Scores range from 300-850.
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FICO Score 9 – Released in 2014. More forgiving of past credit issues. Scores range from 300-850.
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FICO Score 10 – Newest version released in 2020. Uses alternative credit data and trended credit data. Scores range from 150-950.
Each new version aims to improve predictive accuracy. However, lenders choose if and when to adopt the updated scoring models. Most lenders still rely on FICO Score 8 for most credit decisions.
The type of FICO score used also depends on the credit product. Auto loans may use FICO Auto Score versions, for example. If you are applying for a mortgage, the lender will likely pull one or more of the FICO Score 2, 4, or 5 mortgage-specific models.
Check Your FICO Scores
The only way to know your true FICO score is to buy it straight from myFICO.com, the consumer division of FICO. You can purchase your FICO Score 8 based on data from each of the three credit bureaus – Equifax, TransUnion, and Experian.
Checking your scores from all three bureaus is recommended since there may be differences due to unique information in each credit report. Some lenders use FICO scores from just one or two bureaus while others average scores from all three.
There are also several free credit score sources like Credit Karma and credit cards. The scores from these free sites are real, but they use a different formula than FICO scores so they will differ (sometimes significantly) from your true FICO scores. Think of free scores as an estimate of your creditworthiness.
The Bottom Line
Your FICO score is one of the most influential numbers in your financial life, impacting your ability to access credit and how much you will pay. By understanding what goes into your score and taking steps to boost it over time, you can unlock better interest rates and terms that save you money. Keeping tabs on your FICO score is an integral part of managing your financial health and securing your financial future.
FICO® Scores are used by the top 90 US lenders for their credit risk assessment needs.
The FICO® Score is used by lenders to help make accurate, reliable, and fast credit risk decisions across the customer lifecycle. The credit score rank-orders consumers by how likely they are to pay their credit obligations as agreed. The most widely-used broad-based credit score, the FICO Score plays a critical role in billions of decisions each year across the credit ecosystem.
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What is a FICO® Score? — FICO Credit Education Series
FAQ
Is A FICO score the same as a credit score?
What is a good FICO score?
Why is my FICO score higher than my credit score?
And so specifically, the most likely explanation for having different FICO scores reported is because you’ve been continuing to use your credit cards. If you stop using all of your credit cards, then the FICO scores reported to you by different credit card issuers will be much more consistent.
How rare is a 700 credit score?
Why is a FICO score important?
For over 25 years, a FICO score has been the industry standard in assessing and educating consumer credit risk. It assists in identifying and separating reliable borrowers from those likely to become delinquent. FICO scores have been crucial during significant events like the mortgage crisis and Great Recession, which significantly changed the credit profile of many consumers.
How many different FICO scores are there?
FICO Score versions might share one name, such as the FICO Score 9, but there are technically three different FICO Score 9s—one for each credit bureau. FICO and VantageScore models also use different weighting and rules when determining your credit scores.
What does a FICO score mean?
A FICO score is the score lenders use to evaluate your creditworthiness. This is calculated by Fair Isaac & Co. and ranges from 350-850. What is a Vantage Score? A Vantage Score is the credit score you’ll see when you check your score on consumer-facing credit check websites. Your Vantage Score can vary from your FICO score.