- FICO is the most widely used credit scoring model, developed by the Fair Isaac Corporation in 1989.
- The higher your FICO score is, on a scale of 300-850, the more trustworthy you are as a borrower.
- FICO scores are calculated using information on your credit report, such as payment history and credit utilization.
If a lender is looking at your credit score, chances are, they're looking at your FICO score. The FICO credit scoring system was created by the Fair Isaac Corporation in 1989.
As a three-decade-old credit scoring model, FICO is the most widely used scoring model 0n the market. FICO estimates that about 90% of lenders use its scores to make credit decisions. With such an influence on your life, it's important to understand what a FICO score is and how it's calculated. Here's everything you need to know.
What is a FICO score?
FICO is a credit scoring model, which reflects information on your credit report and condenses it into a single three-digit number. FICO scores range from 300 to 850. The higher your score, the better your credit.
Much of your financial life depends on your credit score. Financial institutions and lenders use FICO scores to determine your creditworthiness and set interest rates or loan terms that correspond to your score.
Your FICO score may be different at each of the three credit bureaus (Experian, Equifax, and TransUnion) as each agency may have slightly different information about your credit history, though it should be fairly similar. If you notice a big discrepancy between credit reports, call the bureau to find out why that is. You may have to dispute information on your credit report.
While every credit bureau uses the FICO system, not every credit score is a FICO score — other scoring systems exist, such as VantageScore.
You have separate FICO scores from each bureau and different scores depending on the generation of FICO, from FICO 1-10 (though there is no FICO 6 or 7). For example, the most commonly used versions for general lending are still FICO 8 and 9 despite FICO 10 coming out in 2020.
Different industries also use different FICO scores tailored to their respective industries. For example, FICO Bankcard and FICO Auto are used in credit card and auto lending decisions, respectively. Mortgage lenders generally use earlier generations of FICO, known as classic FICO. These include FICO 2, 3, and 5 depending on the credit bureau.
Trended credit data and FICO 10T
The newest FICO score is FICO 10, released in 2020. FICO also released FICO 10T. This credit scoring model looks at your monthly credit balances from the past 24 months as an indicator of future performance, also known as trended data. To keep your FICO 10T score up, you'll need to carefully monitor your credit card balances from month to month.
FICO also released a FICO 10, which doesn't use trended data. However, the Federal Housing Finance Agency announced in October of 2022 that Freddie Mac and Fannie Mae will require the use of FICO 10T, which will take several years to implement.
How FICO scores are calculated
The exact algorithm used to condense your credit report into a FICO score is a closely guarded secret, but we have a general layout of how your credit score is calculated.
Payment history (35%)
Payment history is the greatest factor contributing to your FICO score. This is perhaps the most obvious — if you consistently pay your bills, you will have a good credit score. If you miss a payment, your credit score will drop. This part of your score is based on your late and on-time payments, as well as any bankruptcies on your credit history.
Missed payments, Chapter 13 bankruptcies, and delinquencies fall off your credit report after seven years. It will take 10 years for a Chapter 7 bankruptcy to fall off your credit report.
Credit balance (30%)
Your balances owed are another significant portion of your FICO score. While using credit wisely (paying off your credit card balance in full every month and not charging more than you can afford) can help to build your credit score, a high debt-to-credit ratio can hurt your FICO score.
The term debt-to-credit ratio, or credit utilization ratio, refers to the amount of money you owe compared to the amount of credit your lenders have extended to you (your credit limit); your debt-to-credit ratio should never exceed 30% to keep your FICO score in good shape, though staying below 10% is best.
Other factors considered here are the percentage of your mortgage or car loan you've paid off and how many of your accounts have balances.
Length of credit history (15%)
If you are a new borrower, don't expect to start with a perfect 850 credit score. On the contrary — without any prior credit history, you're basically starting from scratch. Lenders will assume you're untrustworthy until you can prove your creditworthiness. As you establish your accounts and make payments on time, your credit score will improve and creditors will be more willing to approve your credit applications..
Whether you're new to the credit game (a young person, for example) or have a long credit history, it can be a good idea to hold on to healthy old credit accounts even if you aren't planning to use them anymore to help avoid sudden changes in your credit score. Closing accounts that have established and upheld your FICO score can end up lowering your score.
Types of credit (10%)
There are two main types of credit: revolving credit and installment credit. Installment credit is essentially a loan that is no longer available once it is paid off. For instance, if you take out a loan from the bank, that loan does not replenish itself once you have paid it in full; this is installment credit.
The second type, revolving credit, is credit that does become available again once it is repaid. For example, credit cards are a form of revolving credit because you can use them immediately after you pay them off.
Diversifying your credit is a healthy strategy for improving your credit, as long as you can keep track of payments and interest rates. This can be done through products like mortgages, retail accounts, and credit cards.
New credit (10%)
The amount of times a hard inquiry is ordered on your account affects your credit score, as well as the number of new credit lines you open. Hard inquiries no longer factor into your FICO score after one year. After two years, a hard inquiry falls off your credit report.
Opening a new account before getting a handle on old accounts can adversely affect your credit score because it increases the amount you've borrowed, even if it hasn't been spent yet. On the flip side, opening credit lines is necessary to establish credit in the first place. It is good practice to open a new line of credit only if that line offers benefits that outweigh the adverse effects, you are on schedule with payments, and you will be able to stay on schedule with the new line.
FICO score ranges
FICO divides its 300-850 range into five risk categories. In ascending order, these are poor, fair, good, very good, and excellent. A good FICO score falls between 670 and 739. FICO risk categories and their corresponding score ranges can be found below:
| Risk category | Credit score |
| Poor | 300-579 |
| Fair | 580-669 |
| Good | 670-739 |
| Very good | 740-799 |
| Excellent | 800-850 |
While FICO has an official "good" category, that doesn't necessarily mean that you'll be able to qualify for great rates. For example, super prime customers in the auto lending industry must have at least a 780 for the best interest rates.
The average FICO score for a U.S. credit holder is currently at an all-time high of 714. Consumers are becoming more aware of the dynamics of holding and building credit, making fewer delinquency mistakes, and making smarter decisions for their financial health.
Why FICO scores matter
FICO scores are used to determine credit risk and creditworthiness. A higher FICO score leads to easier credit approvals, lower interest rates, and better loan terms. FICO scores are even used to calculate insurance premiums, determine apartment rental decisions, and may factor into background checks during the employment screening process.
How to improve your FICO score
Because you need a good credit score to qualify for a line of credit, it can be difficult to know where to start when improving your credit score.
Consider credit-builder loans
The best credit-builder loans are available to consumers regardless of their prior credit history. They're a great way to build credit from scratch as long as you can keep up with minimum payments.
Make payments on time
Once you have established a credit history, improving your credit score is a matter of patience and consistency. You should make your payments on time every time and avoid delinquency at all costs.
Most banks and lenders now have automatic, paperless payment options that allow consumers to set up payment plans in just a few minutes. Take advantage of those options if you tend to be forgetful, because missed payments can become huge blows to your credit score and even prevent you from being approved for credit lines in the future.
Watch your credit utilization ratio
You should also keep your credit utilization ratio as low as possible. Aim to keep your credit utilization below 30%. This will help improve your credit score and keep your interest payments low.
Limit new lines of credit
It makes sense to eventually diversify your credit to build creditworthiness across the board, but begin with just one or two lines to get established. It is easy to get sucked into the credit card game because of the potential to earn great rewards, but you don't want to lose control.
Check your credit report
It's also important to monitor your credit reports so that you can catch errors and dispute inaccuracies if necessary. You can get your free weekly credit reports at AnnualCreditReport.com.
Frequently asked questions about FICO scores
What is the difference between FICO and VantageScore?
The difference between FICO and VantageScore is algorithmic. VantageScore is a credit scoring algorithm created by the three credit bureaus. It functions very similarly to FICO, but varies slightly in its calculations. For one, VantageScore takes payment history into greater consideration than FICO.
How can I check my FICO score?
You can check your FICO score in several ways, including going to the myfico.com website to get your FICO score and Equifax credit report for free. There are some banks that may offer your FICO score through their online banking portals, and some credit card companies will allow you to see your FICO score for free on your monthly statements.
What is a good FICO score?
A good FICO score is anything above 670, though this won't qualify you for the best rates. Excellent credit scores, which qualify you for the best interest rates and credit products, start at 720.
