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What is a FICO score?

What we'll cover

  • What a FICO score is

  • Why a FICO score is important

  • How a FICO score is calculated

When you became an adult, did you have any idea that one three-digit number — your credit score — matters a lot? The truth is that if you want to borrow money to buy a house or car, a credit score can affect your ability to get a loan or a good interest rate.

So, what is FICO score, exactly, and what does FICO mean? FICO scores come from the Fair Isaac Corporation (its namesake). FICO scores are three-digit numbers that sum up how well you handle debt. Some people think the words "FICO score" and "credit score" are one and the same, but you will also come across other types of scores as well.

Let's take a look at why a FICO score is important, the differences between the FICO score and other credit scores, how to build credit, how a FICO score is calculated and what you can consider a good credit score.

In fact, the Fair Isaac Corporation is so well respected in the industry that FICO scores are used in 90% of lending decisions.

Why is a FICO score important?

A FICO score seems innocuous — a three-digit number. Why does it matter so much? The reason it's important is that your credit score remains a large component in a lender's decision-making process. A low credit score might not only limit your access to credit, but it could also cost you a great deal of money because a lender may have no choice but to give you a higher interest rate.

Your FICO score is created based on information from your credit reports — on information provided to the three major credit bureaus (Equifax, TransUnion and Experian) by lenders and other sources. It's based on your past actions and represents your creditworthiness. For example, your credit reports may show how well you've paid your mortgage lender, utility company, student loan lender and other entities to which you have made payments.

Lenders use your FICO score to determine how you successfully you might repay a loan. A higher FICO score tells a lender that you will more likely pay off your debts, while a lower score indicates that you might have trouble paying the lender back. Therefore, your FICO score helps your lender determine the following:

  • How much you can borrow

  • How long you should have to repay your loan

  • The interest rate

Credit scores are not the only piece of information a lender will use to evaluate you. Lenders might also look at your income and your employment. Let’s look at some examples of how credit scores could affect certain situations:

  • Buying a car: John and Susan are both looking to buy a new car. John’s FICO credit score is 750 and Susan’s credit score is 620. Based on John’s FICO score, the car dealer offers him an interest rate of 3.20%, while the dealer only offers Susan 8.98%. Assuming the same loan amount of $10,000, John’s monthly payment will be $181 while Susan’s will be $207. It will cost Susan $312 more per year to own the car, or $1,560 over five years.

  • Buying a home: Let's say that instead of buying a car, John and Susan decide to go home shopping. John’s FICO score of 750 would qualify him for a 30-year mortgage rate of 3.85% while Susan’s FICO score of 620 would qualify her for a 5.45% mortgage rate. On the same home value of $200,000, John would pay $938 per month and Susan would pay $1,129. It would cost Susan $2,292 more per year for her home and $68,760 more over the 30-year mortgage term.

In these two examples, you can see the potential cost difference between two different FICO scores. However, for those with lower FICO scores, access to credit of any kind may be a challenge or may require them to put significant cash down to put the lender at ease to loan funds.

In short, your FICO score matters in a big way and keeping your credit score healthy is an important way to keep your finances in shape.

Each of the credit bureaus generates a credit report based on this information. This data is used to calculate your score. You are entitled to receive one free copy of your credit report from each agency once a year through . It’s a good practice to review these reports to make sure that they are an accurate representation of your activity.

It’s important to note that your FICO Score with each credit bureau could be different based on the information on their file. For example, Experian could have a FICO score of 700 for you while TransUnion shows a 670 FICO score. The biggest reason for the difference is that not all lenders report your information to all of the credit bureaus and not all bureaus update information at the same time.

Difference between FICO score and other credit scores

Many lenders use FICO scores as their go-to scoring model. In fact, the Fair Isaac Corporation is so well respected in the industry that FICO scores are used in 90% of lending decisions. The Fair Isaac Corporation often releases new versions of its score and it also uses complex algorithms that show whether someone will fall 90 days behind on a bill within the next 24 months or not.

A FICO score ranges from 300 to 850 and groups consumers in categories within that range as well. For example, a FICO score of 661 to 780 is considered "good." Each scoring model is different in its scoring calculation.

How is a FICO score calculated?

FICO scores are calculated using pieces of credit data in your credit report. It breaks down several categories, including payment history, amounts owed, length of credit history, credit mix and new credit.

Payment history (35%)

Payment history shows how well you've made payments over the amount of time that you've had and used credit. It represents the largest overall portion of your FICO score.

Amounts owed (30%)

The second-largest portion of your FICO score has to do with the accounts owed. In other words, how much of your available credit are you using? Amounts owed refers to how much you owe each creditor and how much do you owe in total, including for revolving lines of credit like credit cards.

Length of credit history (15%)

The length of your credit history matters. The longer you've been utilizing credit, the better. It's more difficult for a lender to determine how well you'll pay your creditors if you have just graduated from high school and don't have a lot of credit opportunities under your belt!

Credit mix (10%)

What types of credit do you use? Do you have credit cards, a car loan, student loans and/or a mortgage? A wide variety of credit can help establish a more comprehensive profile. A mix of revolving credit (such as credit cards) and installment credit (in the case of loans) can help develop this part of your credit.

New credit (10%)

Your FICO score also takes the new credit you've taken on recently into account. However, research shows that opening several new credit accounts in a short period of time represents a greater risk to your credit profile, particularly if you don't have a long credit history. It's a good idea to be cautious about opening new credit accounts in rapid succession.

What is a good FICO score?

Base FICO scores range from 300 to 850 and are broken down accordingly:

  • 800-850 – Exceptional credit

  • 740-799 – Very good credit

  • 670-739 – Good credit

  • 580-699 – Fair credit

  • 300-579 – Poor credit (commonly called “bad credit”)

A good FICO score ranges from 670-739, but if you can pull your credit score higher, that's always going to give you more opportunities to qualify for the best rates and terms.

Monitoring and building your credit can give you good credit and put you on a good path to meet your financial goals. If you want to boost your credit rating, make efforts toward paying your bills in full and on time, maintain a low credit utilization rate (using less than your available credit), and limit new credit applications.

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