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What is a FICO credit score?
Your FICO score is a three-digit score that’s calculated based on the information in your credit reports. It helps creditors determine your creditworthiness, or how likely you are to repay loans and other debts.
Lenders and creditors look at your FICO score when considering whether or not to extend loans or lines of credit to you.
They also use your FICO score to decide:
- How much money you can borrow (i.e., your credit limit, or the size of your loan)
- The interest rate on your loan or credit account
- How many months you have to settle your debt (your loan term)
- Whether you’re eligible for credit cards with rewards
Other uses for your FICO score
Sometimes other people and organizations will check your credit score, including:
- Landlords: To check how responsible you’d be as a tenant and decide whether or not to rent to you. 1
- Employers: As part of a background check before hiring or promoting you (or giving you a security clearance). 2
- Insurance companies: To determine how much to charge you for an insurance policy. (People with low credit scores are statistically more likely to file insurance claims, which makes them more expensive to insure.) 3 4
- Utility companies: To check whether you’re likely to pay your utility bills on time. If you have a low credit score, you may be required to pay a security deposit before your water, electricity or phone company will provide their services to you.
What does FICO stand for?
FICO stands for Fair Isaac Corporation, although it was originally named Fair, Isaac and Company. FICO is named after its founders, Bill Fair and Earl Isaac.
Types of FICO scores
FICO has developed multiple scoring models because many lenders want to assess your credit behavior in different ways based on the type of credit you’re after.
For instance, your credit card issuer will be particularly interested to see if you’ve repaid the balance on your credit cards in the past, whereas an auto lender will want to know more about your auto payments.
FICO scores broadly fall into two categories:
Base FICO Scores
“Base FICO scores” are general-purpose scores that indicate how likely you are to repay debts of all kinds. If you check your own FICO score by logging into your bank’s online portal or by requesting your free credit report from AnnualCreditReport.com, this is the type of score you’ll probably see.
Industry-specific FICO Scores
Industry-specific FICO Scores are similar to base FICO scores, but they’re designed to assess the likelihood that you’ll repay a particular type of credit obligation. 5
For example, you have a score specifically meant for auto lenders called your FICO Auto score. Similarly, you have a FICO Bankcard score for use by credit card issuers.
What are the FICO score ranges?
In the base FICO model, credit scores range from the lowest possible score of 300 to the highest possible score of 850. Industry-specific FICO Scores range from 250 to 900.
What is a good FICO score?
A high FICO score is better than a low one. Broadly speaking, a good credit score is one that falls between 670–739. Scores of 740 and above are considered very good. However, there isn’t a universal industry standard, so different creditors may have different ideas of what constitutes a good score.
FICO breaks their scores down into the following ranges: 6
- 300 to 579: Poor
- 580 to 669: Fair
- 670 to 739: Good
- 740 to 799: Very Good
- 800 to 850: Exceptional
Is your FICO score important?
Yes, your FICO score is important. There are a lot of benefits of having good credit; it’s easier to get loans and new lines of credit, and when you do, your credit will have more favorable terms (such as lower interest rates).
In particular, when taking out large loans like mortgages, having a higher credit score can save you hundreds of dollars per month, which translates to tens of thousands of dollars over the lifetime of the loan. 7
As mentioned, your FICO score affects your life in other ways, too. If you have a bad credit score, it can be harder to rent (many landlords have a minimum credit score required to rent an apartment or house), pass a background check for a job, or buy services like insurance and basic utilities.
While FICO is the most important and most widely used, you should know that your FICO score isn’t your only credit score. Other companies like VantageScore also provide you, or prospective lenders, with credit scores calculated by their own models.
What determines your FICO score?
Your FICO score is determined by several factors, including: 8
- Payment history: Whether you have a history of missing payments or you tend to pay your creditors back on time. This determines 35% of your score.
- Amounts owed and credit utilization: Your current active balances on your credit accounts and how much of your available credit you’re currently using. This determines 30% of your score.
- Length of credit history: How long you’ve been using credit. This determines 15% of your score.
- Credit mix: The variety of credit accounts that you have. This determines 10% of your score.
- Pursuit of new credit and hard inquiries: The number of new accounts you’ve recently opened and the number of hard inquiries you have on your credit reports. This determines 10% of your score.
We’ll cover those factors and break down how your FICO score is calculated in more detail below.
Payment history (35%)
Your payment history has the largest effect on your FICO score. Your credit score will go up if you consistently pay your bills on time, but it will fall if you incur any “negative marks,” which will happen if you miss payments (or pay your bills more than 30 days late).
You’ll also incur a negative mark in other circumstances. For instance, you’ll get one if you file for bankruptcy, if your car is repossessed, or if any of your accounts become so seriously delinquent that your creditor charges them off and passes them to a debt collection agency, in which case something called a collection account will show up on your report.
Amounts owed / credit utilization rate (30%)
This category measures your current outstanding balances—in other words, how much debt you owe across all of your loans and credit accounts. In particular, it measures something called your credit utilization rate.
Your utilization rate is the amount of available revolving credit that you’re actively using. For instance, if your total credit limit on all of your credit accounts is $10,000, and you have an active balance of $2,000 on one (and only one) of your cards, your utilization rate is 20%. ($2,000 is 20% of $10,000.)
FICO rewards a low credit utilization rate. Many experts recommend keeping your utilization below 30%, and FICO goes even farther, recommending that you keep it as low as you can (although they note that a very low but nonzero rate is sometimes better than a 0% rate). 9 10
According to FICO, consumers with very high FICO scores have an average utilization rate of just 6%. 11
Length of credit history (15%)
The longer you’ve been using credit, the better your FICO score will be.
There are several factors that make up this aspect of your score, but one of the most important is the average age of all of your credit accounts. This means that opening a new credit account can temporarily lower your score (because it lowers your average account age). However, your score will recover as time passes and your new account gets older.
It’s also worth noting that opening new accounts can affect your score in other ways—for instance, they increase your available credit, which has the potential to lower your credit utilization and by extension increase your score.
Credit mix (10%)
Lenders like to see that you can balance different types of credit accounts. A diverse mix will benefit your score.
There are three types of credit accounts:
- Installment accounts: Single loans that are repaid over a fixed period, usually with interest. Examples of installment loans include mortgages, auto loans, and student loans.
- Revolving accounts: Credit accounts that you can withdraw from repeatedly as long as you repay your debt on time. Examples include credit cards and home equity lines of credit (HELOCs).
- Open accounts: This is a type of credit where a company provides a service in advance and agrees to take payment in the future. Examples include utility and phone contracts.
To have a good credit mix, you want to have both installment and revolving credit on your credit report—at least one account for each type of credit.
Open accounts don’t usually show up on your credit report (unless you fail to pay them, in which case you’ll incur a negative mark). This means that they don’t contribute to your credit mix, either positively or negatively.
Pursuit of new credit / hard inquiries (10%)
Opening a new credit account has a relatively minor effect on your FICO score, but you should still be aware of it.
When you apply for credit, your prospective lender conducts something called a hard inquiry, or a hard pull. This is a type of credit check that shows up on your credit report.
Hard inquiries affect your credit score, temporarily lowering it by a few points. In most cases, a single hard inquiry will take a maximum of five points off your total score. 12 Hard inquiries lower your score because seeking new credit can sometimes suggest financial instability.
Hard inquiries remain on your credit report for up to 2 years, although your score will usually recover in several months to one year. 13
Because hard inquiries have such a minor impact, you don’t need to worry about them unless you do something to incur a lot of them in a short period of time. This is difficult to do, because FICO’s model features a 45-day grace period during which hard inquiries for the same type of credit account are treated as one for the purpose of your score. 14
In other words, if you shop around for an auto loan and receive 10 hard inquiries from 10 different lenders, your score will only drop by around five points, the same as if you’d incurred a single hard inquiry. On the other hand, if you receive hard inquiries for a mortgage, an auto loan, and a personal loan, those will be treated as three separate inquiries, and your score will drop more substantially.
This grace period doesn’t apply to all types of credit applications. In FICO’s latest models, it applies to:
- Auto loans
- Mortgages
- Student loans
How to raise your FICO score
Improving your credit is fairly simple as long as you understand how your FICO score works.
To build your credit, you should:
- Always pay all of your bills on time
- Try to use a relatively small proportion of your available credit
- Open new credit accounts infrequently, and only when you actually need them
- Have a healthy mix of revolving and installment credit (if you don’t have any installment loans, consider opening a credit-builder loan
