How Is a FICO Score Calculated?
According to the Fair Isaac Corporation (FICO), your score is calculated using five key factors from your credit report. Each factor carries a different weight in the final calculation.
- Payment History (35%): This is the most significant factor. It tracks whether you have paid past credit accounts on time. A history of on-time payments helps your score, while late payments, collections, or bankruptcies will lower it.
- Amounts Owed (30%): This category considers your total debt and your credit utilization ratio—the percentage of your available credit that you are currently using. Keeping your credit utilization below 30% is recommended.
- Length of Credit History (15%): A longer credit history generally improves your score. This factor considers the age of your oldest account, your newest account, and the average age of all your accounts.
- New Credit (10%): This looks at recent credit applications. Opening several new credit accounts in a short time can represent greater risk. Each application can trigger a hard inquiry, which may temporarily lower your score.
- Credit Mix (10%): Lenders like to see that you can manage different types of credit, such as revolving credit (credit cards) and installment loans (mortgages, auto loans).
What Are the FICO Score Ranges?
FICO Scores help lenders quickly assess credit risk. While each lender has its own standards, scores generally fall into these categories:
- Exceptional: 800-850
- Very Good: 740-799
- Good: 670-739
- Fair: 580-669
- Poor: 300-579
A score in the “Good” range or higher will typically qualify you for better interest rates and more financing options, potentially saving you thousands of dollars over the life of a loan.
How to Improve Your FICO Score
Improving your FICO Score is a marathon, not a sprint. Consistent, positive habits are the key to building a strong score over time.
- Pay every bill on time. Your payment history is the single biggest factor, so make it a priority.
- Keep credit card balances low. Aim to keep your credit utilization ratio below 30%.
- Avoid opening unnecessary accounts. Only apply for credit when you genuinely need it to limit hard inquiries.
- Do not close old credit accounts. Keeping older accounts open, even with a zero balance, helps lengthen your credit history and keeps your credit utilization down.
- Regularly check your credit reports. You can get free copies of your reports from all three bureaus—Equifax, Experian, and TransUnion—by visiting AnnualCreditReport.com. Dispute any errors you find, as they can unfairly lower your score.
Common FICO Score Myths
- Myth: Checking your own score hurts it.
Fact: When you check your own score, it’s a “soft inquiry” and has no impact. A “hard inquiry” only occurs when a lender checks your credit after you apply for a loan or credit card. - Myth: Closing old cards improves your score.
Fact: Closing an old account can actually harm your score by reducing your total available credit (increasing your utilization ratio) and shortening your credit history. - Myth: You only have one FICO Score.
Fact: You have FICO Scores from each of the three major credit bureaus. Additionally, FICO has multiple scoring models (e.g., FICO 8, FICO 10) and industry-specific scores (for auto loans or mortgages), so the score you see may vary depending on the source.
By understanding these components and practicing good credit habits, you can build and maintain a strong FICO Score that opens doors to better financial opportunities.