What is a FICO score? (2024)

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• FICO is the most widely used credit scoring model, developed by the Fair Isaac Corporation in 1989.
• The higher your FICO score is, on a scale of 300-850, the more trustworthy you are as a borrower.
• FICO scores are calculated using information on your credit report, such as payment history and credit utilization.

If a lender is looking at your credit score, chances are, they're looking at your FICO score. The FICO credit scoring system was created by the Fair Isaac Corporation in 1989.

As a three-decade-old credit scoring model, FICO is the most widely used scoring model 0n the market. FICO estimates that about 90% of lenders use its scores to make credit decisions.With such an influence on your life, it's important to understand what a FICO score is and how it's calculated. Here's everything you need to know.

What is a FICO score?

FICO is a credit scoring model, which reflects information on your credit report and condenses it into a single three-digit number. FICO scores range from 300 to 850. The higher your score, the better your credit.

Much of your financial life depends on your credit score. Financial institutions and lenders use FICO scores to determine your creditworthiness and set interest rates or loan terms that correspond to your score.

Your FICO score may be different at each bureau as each agency may have slightly different information about your credit history, though it should be fairly similar. If you notice a big discrepancy between credit reports, call the bureau to find out what's going on. You may have to dispute information on your credit report.

While you have separate FICO scores from each bureau, you also have different FICO scores depending on the generation of FICO, from FICO 1-10 (though there is no FICO 6 or 7). For example, The most commonly used versions for general lending are still FICO 8 and 9 despite FICO 10 coming out in 2020.

Different industries also use different FICO scores tailored to their respective industries. For example, FICO Bankcard and FICO Auto are used in credit card and auto lending decisions, respectively. Mortgage lenders generally use earlier generations of FICO, known as classic FICO. These include FICO 2, 3, and 5 depending on the credit bureau.

Trended credit data and FICO 10T

The newest FICO score is FICO 10, released in 2020. FICO also released FICO 10T. This credit scoring model looks at your monthly credit balances from the past 24 months as an indicator of future performance, also known as trended data. To keep your FICO 10T score up, you'll need to carefully monitor your credit card balances from month to month.

FICO also released a FICO 10, which doesn't use trended data. However, the Federal Housing Finance Agency announced in October of 2022 that Freddie Mac and Fannie Mae will require the use of FICO 10T, which will take several years to implement.

What are FICO score ranges?

FICO divides its 300-850 range into five risk categories. In ascending order these are poor, fair, good, very good, and excellent. A good FICO score falls between 670 and 739. FICO risk categories and their corresponding score ranges can be found below:

While FICO has an official "good" category, that doesn't necessarily mean that you'll be able to qualify for great rates. For example, super prime customers in the auto lending industry must have at least a 780 for the best interest rates.

The average FICO score for a US credit holder is currently at an all-time high of 714. Consumers are becoming more aware of the dynamics of holding and building credit, making fewer delinquency mistakes, and making smarter decisions for their financial health.

The best way to make those decisions is to understand the factors that contribute to your FICO score. Let's take a look at those components, what they could mean for your credit, and how you can intentionally work to improve your credit score.

How is your FICO score calculated?

The exact algorithm used to condense your credit report into a FICO score is a closely guarded secret, but we have a general layout of how your credit score is calculated.

Payment history (35%)

Payment history is the greatest factor contributing to your FICO score. This is perhaps the most obvious — if you consistently pay your bills, you will have a good credit score. If you miss a payment, your credit score will drop. This part of your score is based on your late and on-time payments, as well as any bankruptcies on your credit history.

Credit balance (30%)

Your balances owed account are another significant portion of your FICO score. While using credit wisely (e.g. paying off your credit card balance in full every month and not charging more than you can afford) can help to build your credit score, a high debt-to-credit ratio can hurt your FICO score.

The term debt-to-credit ratio, or credit utilization ratio, refers to the amount of money you owe compared to the amount of credit your lenders have extended to you (your credit limit); your debt-to-credit ratio should never exceed 30% to keep your FICO score in good shape, though staying below 10% is best.

Other factors considered here are what percentage of your mortgage or car loan you've paid off, and how many of your accounts have balances.

Length of credit history (15%)

If you are a new borrower, don't expect to start with a perfect 850 credit score. On the contrary — without any prior credit history, you're basically starting from scratch. Lenders will assume you're untrustworthy until you can prove your creditworthiness. As you establish your accounts and make payments on time, your credit score will improve and creditors will be more willing to approve your credit applications..

Whether you're new to the credit game (a young person, for example, or a new immigrant) or have a long credit history, it can be a good idea to hold on to healthy old credit accounts even if you aren't planning to use them anymore to help avoid sudden changes in your credit score. Closing accounts that have established and upheld your FICO score can end up lowering your score.

Types of credit (10%)

There are two main types of credit: revolving credit and installment credit. Installment credit is essentially a loan that is no longer available once it is paid off. For instance, if you take out a loan from the bank, that loan does not replenish itself once you have paid it in full; this is installment credit.

The second type, revolving credit, is credit that does become available again once it is repaid. For example, credit cards are a form of revolving credit because you can use them immediately after you pay them off.

Diversifying your credit is a healthy strategy for credit improvement as long as you can keep track of payments and interest rates, and this can be done through mortgages, retail accounts, credit cards, and more.

New credit (10%)

The amount of times a hard inquiry is ordered on your account affects your credit score, as well as the number of new credit lines you open.

Opening a new account before getting a handle on old accounts can adversely affect your credit score because it increases the amount you've borrowed, even if it hasn't been spent yet. On the flip side, opening credit lines is necessary to establish credit in the first place. So it is good practice to open a new line of credit only if that line offers benefits that outweigh the adverse effects, you are on schedule with payments, and you will be able to stay on schedule with the new line.

How to improve FICO score

Because you need a good credit score to qualify for a line of credit, it can be difficult to know where to start when improving your credit score.

Credit-builder loans are available to consumers regardless of their prior credit history. They're a great way to build credit from scratch as long as you can keep up with minimum payments. You can find our picks for the best credit-builder accounts here.

Once you have established a credit history, improving your credit score is a matter of patience and consistency. You should be making your payments on time, avoiding delinquency at all costs.

Most banks and lenders now have automatic, paperless payment options that allow consumers to set up payment plans in just a few minutes. Take advantage of those options if you tend to be a bit on the forgetful side, because missed payments can become huge blows to your credit score and even prevent you from being approved for credit lines in the future.

You should also keep your credit utilization ratio as low as possible. This will help improve your credit score and keep your interest payments low.

It is good to eventually diversify your credit to build creditworthiness across the board, but begin with just one or two lines to get established. It is easy to get sucked into the credit card game because of the potential to earn great rewards, but you don't want to lose control.

FICO score frequently asked questions