What Is a FICO Score?
A FICO score is a credit score created by the Fair Isaac Corporation (FICO). 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 data in five areas to determine credit worthiness: payment history, the current level of indebtedness, types of credit used, length of credit history, and new credit accounts.
- FICO credit scores are a method of quantifying and evaluating an individual’s creditworthiness.
- FICO scores are used in 90% of mortgage application decisions in the United States.
- You can improve your FICO score by paying bills on time, using less than 30% of your available credit, and having a mix of different types of credit.
- Scores range from 300 to 850, with scores in the 670 to 739 range considered to be “good” credit scores.
- The FICO scoring methodology is updated from time to time, with the most recent version now being FICO Score 10 Suite, which was announced in 2020.
Understanding FICO Scores
FICO is a major analytics software company that provides products and services to both businesses and consumers. The company is best known for producing the most widely used consumer credit scores that financial institutions use in deciding whether to lend money or issue credit.
FICO scores are used in more than 90% of the credit decisions made in the U.S. Although borrowers can explain negative items in their credit report, the fact remains that having a low FICO score is a deal breaker with numerous lenders.
Many lenders maintain hard-and-fast FICO minimums for approval, particularly in the mortgage industry. One point below this threshold results in a denial. Therefore, a strong argument exists that borrowers should prioritize FICO above all bureaus when trying to build or improve credit.
FICO Score Ranges
The overall FICO score range is between 300 and 850. In general, scores in the 670 to 739 range indicate a “good” credit history and most lenders will consider this score favorable. In contrast, borrowers in the 580 to 669 range may find it difficult to obtain financing at attractive rates.
To determine creditworthiness, lenders take a borrower’s FICO score into account, but they also consider other details, such as income, how long the borrower has been at their job, and the type of credit requested.
How to Improve Your FICO Score
Achieving a high FICO score requires having a mix of credit accounts and maintaining an excellent payment history. Borrowers should also show restraint by staying well below their credit limits. According to some experts, the ideal credit utilization ratio should be kept below 30%.
Maxing out credit cards, paying late, and applying for new credit haphazardly are all things that lower FICO scores. Additionally, given the role a good FICO score can play in so many credit decisions, it may also be worth investing in a good credit monitoring service to keep your information safe.
Calculating FICO Scores
To determine credit scores, the FICO 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%.
The approximate percentage of credit decisions made in the U.S. that use FICO scores
The major factors used in a FICO score are:
Payment History (35%)
Payment history refers to whether an individual pays their credit accounts on time. Credit reports show the payments submitted for each line of credit, and the reports detail bankruptcy or collection items along with any late or missed payments.
Accounts Owed (30%)
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 their lines of credit fully extended and all of their 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 their accounts.
Length of Credit History (15%)
As a general rule of thumb, the longer an individual has had credit, the better their 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 (10%)
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 (10%)
New credit refers to recently opened accounts. If a borrower has opened a bunch of new accounts in a short period of time, that indicates risk and lowers their score.
FICO Score vs. VantageScore
The main alternative to the FICO Score is VantageScore, a credit scoring method jointly developed by the three main credit bureaus in 2006. Like FICO Scores, the VantageScore rates an individual's creditworthiness on a scale of 300 to 850, based on factors like payment history, credit mix, and credit utilization.
However, the VantageScore attaches different weights to those factors, so your VantageScore may be slightly different from your FICO Score. They also have different scoring criteria: FICO requires at least one tradeline older than six months in order to calculate a score, and at least one tradeline with activity over the last six months. In contrast, VantageScore requires only one tradeline with no age requirement.
Various versions of FICO exist because the company has periodically updated its calculation methods since introducing its first scoring methodology in 1989. Each new version is made available to lenders, but it is up to them to determine if and when to implement the upgrade.
The most widely used version as of 2021 is still FICO Score 8, even though it has been followed by FICO Score 9 and FICO Score 10 Suite. FICO Score 9 was introduced in 2016, with adjustments to the treatment of medical collection accounts, increased sensitivity to rental history, and a more forgiving approach to fully paid third-party collections. It did not surpass FICO Score 8 in popularity. However, the incorporation of trended credit bureau data in FICO Score 10T (part of FICO Score 10 Suite, announced on Jan. 23, 2020) might cause it to supplant FICO Score 8 in the future.
FICO score 5 is one alternative to FICO score 8 that is still prevalent in auto lending, credit cards, and mortgages.
According to FICO, Score 8 is consistent with previous versions, but there are several specific features that make it a more predictive score than prior versions. Like all prior FICO score systems, FICO Score 8 attempts to convey how responsibly and effectively an individual borrower interacts with debt. Scores tend to be higher for those who pay their bills on time, keep low credit card balances, and only open new accounts for targeted purchases.
Conversely, lower scores are attributed to those who are frequently delinquent, over-leveraged, or frivolous in their credit decisions. It also completely ignores collection accounts in which the original balance is less than $100.
The innovations in FICO Score 8 included increased sensitivity to highly utilized credit cards—meaning that low credit card balances on active cards can more positively influence a borrower’s score. It also treats isolated late payments more judiciously than past versions. FICO Score 8 is more forgiving if a late payment is an isolated event and other accounts are in good standing, and it divides consumers into more categories to provide a better statistical representation of risk. The primary purpose of this change was to keep borrowers with little to no credit history from being graded on the same curve as those with robust credit histories.
How to Get Your FICO Score
Experian offers free credit reports online, including the FICO Score. In addition, many credit cards and banks offer credit scores and similar tools for their customers. AmEx, Citi, Bank of America, and Discover all offer FICO scores as a free perk for their cardholders.
In addition, credit monitoring services frequently include free credit scores and reports, including FICO scores.
What Is a Good FICO Score?
A FICO Score above 670 is better than average, while scores above 740 indicate that the borrower is extremely responsible with credit. A FICO Score above 800 is considered exceptional.
Which FICO Score Do Mortgage Lenders Use?
According to Experian, the most commonly-used FICO Scores in mortgage lending decisions are the FICO Score 2, FICO Score 5, or FICO Score 4. However, the credit score is only part of a mortgage application, and lenders will also pay attention to factors like the borrower's income, assets, and payment history.
How Often Does the FICO Score Update?
This is a complicated issue because every lender has its own schedule for reporting payment information to the credit bureaus. According to CNBC, you should expect your credit score to update at least once a month, but it may change more often depending on how many different loans you have active at one time.
In most cases, these will only be small changes, but a single default or bankruptcy can cause a large drop.
The Bottom Line
The FICO Score is one of the leading tools for measuring the creditworthiness of a borrower. Most lenders in the United States use FICO Scores when making a decision on mortgage applications. While a bad score can be discouraging, you can improve your FICO score by borrowing responsibly and making payments on time.