What is a FICO Credit Score? (And What Impacts it?)

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What is a FICO Credit Score? (And What Impacts it?)

Find out how your FICO score is calculated and how you can improve it.

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What is a FICO Credit Score? (And What Impacts it?)

If you’ve applied for a credit card, auto loan, or other type of financing, you’re probably familiar with your credit score. But you may not know that there are actually two major credit scores out there: your VantageScore and your FICO Score.

Your FICO credit score is a three-digit number between 300 and 850 that’s based on information in your credit reports. FICO scores tend to change over time based on a number of factors like your payment history and total available credit, and represent how much risk you present to lenders. For that reason, a low FICO score can negatively impact your likelihood of getting approved for everything from credit cards to apartment leases and mortgages.

To help you better understand your FICO score—and what it means for your finances—we’ll break down what constitutes a good score and how it’s calculated.

What is a Good FICO Score?

FICO credit scores range from 300 to 850, but the score you’ll need to get approved for a loan or credit card will depend on the specific lender you're dealing with. In general, though, a good FICO score is one that falls between 670 and 739, and the average FICO score in the U.S. is 695. That said, some lenders require even higher scores, and the most competitive interest rates are typically reserved for those with a very good (740 to 799) or exceptional (800+) score.

Why Your FICO Score Matters

Having a strong credit score is important because it can help you get approved for credit cards and other types of financing—and at more competitive interest rates. But your FICO credit score can determine more than that. In general, having a FICO credit score of 690 or above can enable you to:

  • Access higher credit limits and loan amounts
  • Take advantage of more favorable loan terms
  • Pay lower interest rates, reducing the overall cost of a loan
  • Qualify for a lease and save on utility fees
  • Save money on insurance premiums

How FICO Credit Scores are Calculated

FICO credit scores may seem mysterious at first, but they’re actually based on a standard set of factors, each of which accounts for a certain percentage of your score. This is good news because it gives consumers the ability to manage their credit scores in a positive way—if they know what to look for.

To help you get started, here are the five factors that FICO credit scores are based on:

Payment History - 35%

As the most important part of your credit score, payment history accounts for 35% of your FICO credit score. The category includes several elements that, collectively, reflect how responsible you are with bill payments. Considerations that go into your payment history calculation include:

  • Accounts that were paid on time
  • Amounts currently owed
  • Length of delinquencies
  • Bankruptcies, judgments, liens, and other adverse public records

Pro Tip: Increase your FICO credit score by making on-time payments and, where possible, paying more than the minimum amount. Likewise, if you have any delinquencies on your credit reports, address them as soon as possible by catching up on missed payments and working with lenders to create feasible payment plans going forward.

Accounts Owed - 30%

As with payment history, your outstanding debts make up a large portion of your credit score—30% to be exact. Accounts owed considers each account you owe money on, the corresponding type of debt, and the total amount of that debt. This portion of your FICO credit score also includes another important metric you’ve probably heard of—credit utilization rate.

Generally speaking, your credit utilization rate is the amount of revolving credit you’re using divided by your total available revolving credit. So if you have $10,000 in total revolving credit available to you and you have a current balance of $6,000, your credit utilization rate is 60%.

Pro Tip: As with payment history, you can improve the accounts owed portion of your credit score by paying down your outstanding debts. Likewise, you can keep your overall available credit high by keeping old accounts open and taking advantage of opportunities to increase your existing credit limits.

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Length of Credit History - 15%

One of the more frustrating components of a FICO credit score is the length of your credit history, which accounts for 15% of your score. When calculating your score, FICO looks at two factors related to credit history: how long your accounts have been open and how long it has been since each account was active.

If you’re a young adult or recent immigrant, you’re likely to have a very short credit history and, therefore, a lower credit score. This can make it difficult to qualify for new credit, making it even harder to build credit over time—like I said, super frustrating.

Pro Tip: If your FICO score is getting dragged down by a short credit history, the best thing you can do is nurture your current loans while paying special attention to the oldest accounts. Where possible, continue to use and pay off your oldest accounts regularly so they remain active and aren’t at risk of closure by your lender.

Credit Mix - 10%

Your credit mix is the makeup of all the loans in your credit file, including how many installment loans (like an auto loan or mortgage) and revolving loans (like credit cards) you have. While this may not seem like an important element of your finances, how you manage the types of loans you have accounts for 10% of your FICO credit score. For that reason, when managing your credit, it’s important to diversify your accounts by taking out both installment loans and revolving lines of credit.  

Pro Tip: If you don’t have an auto loan, mortgage, or other installment loan, consider taking out a small personal loan to improve your credit mix. Keep in mind, however, that payday loans and title loans are not considered in your credit mix and won’t improve this aspect of your credit score.

New Credit Applications - 10%

You’ve probably heard that it’s best to keep new credit applications to a minimum—especially if you’re preparing to finance a large purchase like a home or new car. This is because new credit applications make up 10% of your FICO credit score.

Not only does each credit card or loan application require a hard credit inquiry, these dings on your credit history signal to lenders that you may be a riskier borrower than someone who has only applied for, say, two credit cards and a car loan within the last seven years.

Pro Tip: If you’re planning to purchase a home, make an effort to avoid unnecessary credit inquiries for at least one year before submitting your mortgage application—two years is ideal. Likewise, if you’re trying to improve your credit score, avoid applying for new credit cards and other loans for as long as possible.

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Types of FICO Scores

The FICO Score model has been updated several times over the years to better address the unique needs of various lenders—and consumers. The most common type is FICO Score 8, which is considered a base score, meaning it applies to any type of loan—rather than being industry specific. This model is more forgiving than previous versions when it comes to isolated late payments—among other modifications.

Alternatively, the newer FICO Score 9 features several additional improvements. For example, rental history is factored into scores and unpaid medical collections have less of a negative impact than with previous score versions. What’s more, there are industry-specific versions of the FICO Score 9—FICO Auto Score 9 and FICO Bankcard Score 9.

Finally, there are several additional industry-specific scores that are tailored to different lending situations. These scores range anywhere from 250 to 900 (a broader range than for base FICO scores), and lenders have the ability to choose which credit score they use when making credit decisions.

Final Thoughts

Depending on the circumstances, applying for a credit card, mortgage, or other loan can be nerve-racking. Luckily, if you understand the factors that FICO considers when calculating credit scores, you can take steps to improve your score before a lender runs a credit check.

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Kiah Treece
Kiah is a lawyer and sustainability expert with a passion for personal finance, real estate investing, and everything FIRE. She lives in NC where she loves to garden, paint, and cook without a recipe.