Loading the player...

What is a 'FICO Score'

A FICO score is a type of credit score created by the Fair Isaac Corporation. Lenders use borrowers' FICO scores along with other details on borrowers' credit reports to assess credit risk and determine whether to extend credit. FICO scores take into account various factors in five areas to determine credit worthiness: payment history, current level of indebtedness, types of credit used, length of credit history and new credit accounts.

BREAKING DOWN 'FICO Score'

FICO scores range between 300 and 850. In general, scores above 650 indicate a very good credit history. In contrast, individuals with scores below 620 often find it difficult to obtain financing at favorable rates. To determine credit worthiness, lenders take a borrower's FICO score into account but also consider other details such as income, how long the borrower has been at his job and type of credit requested.

Calculating FICO Scores

To determine credit scores, the Fair Isaac Corporation weighs each category differently for each individual. However, in general, payment history is 35% of the score, accounts owed is 30%, length of credit history is 15%, new credit is 10% and credit mix is 10%.

Payment History

Payment history refers to whether an individual pays his credit accounts on time. Credit reports show the payments submitted for each line of credit, and the reports indicate if the payments were received 30, 60, 90, 120 or more days late.

Accounts Owed

Accounts owed refers to the amount of money an individual owes. Having a lot of debt does not necessarily equate to low credit scores. Rather, FICO considers the ratio of money owed to the amount of credit available. To illustrate, an individual who owes $10,000 but has all of his lines of credit fully extended and all of his credit cards maxed out may have a lower credit score than an individual who owes $100,000 but is not close to the limit on any of his accounts.

Length of Credit History

As a general rule of thumb, the longer an individual has had credit, the better his score. However, with favorable scores in the other categories, even someone with a short credit history can have a good score. FICO scores take into account how long the oldest account has been open, the age of the newest account and the overall average.

Credit Mix

Credit mix is the variety of accounts. To obtain high credit scores, individuals need a strong mix of retail accounts, credit cards, installment loans such as signature loans or vehicle loans, and mortgages.

New Credit

New credit refers to recently opened accounts. If the borrower has opened a bunch of new accounts in a short period of time, that indicates risk and lowers his score.

RELATED TERMS
  1. Credit Mix

    The different categories of debt within a consumer's credit history ...
  2. Credit Scoring

    Credit scoring ranks a small business or individual's credit ...
  3. Trade Line

    A trade line is a record of activity for any type of credit extended ...
  4. Credit Limit

    Credit limit is the amount of credit that a financial institution ...
  5. Credit Rating

    A credit rating is an assessment of the creditworthiness of a ...
  6. Credit Reporting Agency

    A credit reporting agency is a business that maintains historical ...
Related Articles
  1. Personal Finance

    Common Things That Improve And Lower Credit Scores

    Credit scores are used by lenders to estimate credit risk. Find out how you can better earn the trust of lenders and reap the benefits.
  2. Personal Finance

    Credit score ranges: What do they mean?

    Take a closer look at what credit scores in each range mean for your financial future. Learn how to improve your credit score and how it affects your interest and ability to borrow money.
  3. Personal Finance

    Top Places To Get A Free Credit Score Or Report

    When's the last time you checked your credit report? With all the hacking out there, don't wait for the car dealer to find problems when you need a loan.
  4. Personal Finance

    Getting Your Credit Score from a Bank

    That all-important, once-secret number is now easy to obtain from financial institutions and credit card companies.
  5. Managing Wealth

    Can You Hit The Highest Credit Score?

    Yes – getting the maximum credit score is doable. But the real question is, does it matter?
  6. Financial Advisor

    How to Build a Credit Report for Your Adult Child

    They may not be true adults yet, but you can start building a credit history for your young adult children now.
  7. Personal Finance

    What Lenders Look at on Your Credit Report

    What do lenders consider when they look at your credit report? Well, a lot of things.
  8. Personal Finance

    Credit Score vs. Credit Report: Which Is Better?

    They sound alike, but can serve very different ends.
  9. Personal Finance

    How to Read Your Consumer Credit Report

    Learning how to read your consumer credit report is vital, as it includes important information about your credit history.
  10. Personal Finance

    Credit Scores And Your Mortgage Payment: It Matters

    Your credit score can have a huge impact on your mortgage payments. Here are some reasons why.
RELATED FAQS
  1. How does the number of credit card accounts I have affect my credit score?

    Your credit score, which is also referred to as your FICO score, is a measure that creditors use to assess your potential ... Read Answer >>
  2. How is my credit score calculated?

    Wonder how your credit is calculated? Learn the criteria that go into determining your FICO credit score – the measure that ... Read Answer >>
Trading Center