What Is a FICO Score and How Is It Calculated?

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  • Developed by the Fair Isaac Corporation, FICO is the oldest and most widely used credit scoring model.
  • Your payment history and accounts owed are the most important factors in calculating your credit score.
  • FICO 10T, the latest generation of the credit scoring model, takes into account your monthly credit balances over the last 24 months.

If a lender is looking at your credit score, chances are, they’re looking at your FICO score. This helps financial institutions and lenders determine your creditworthiness and set interest rates or loan terms that correspond to your score. Credit scores range from 300 (extremely poor, very limited credit opportunities) to 850 (excellent credit opportunities) and fluctuate based on a variety of things, such as late payments, debt-to-credit ratio, accounts in collections, the age of your credit accounts, and more.

The three credit bureaus — Experian, TransUnion, and Equifax — each establish a credit score for consumers based on your purchase and payment history, and those scores use the FICO scoring system.

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. It’s named after Fair Isaac Corporation, the company that first created the numeric credit-scoring system in 1989. Though the data analytics company renamed the company to FICO in 2009.

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 help decide how much credit to extend to consumers and how much to charge them for it. 

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, call the bureau to find out what’s going on) and you can have more than one FICO score at one agency depending on what type of loan you’ve applied for. 

While you have separate FICO scores from each bureau, you also have different FICO scores depending on the generation of FICO. There are 10 iterations of FICO, named FICO 1-10. The most commonly used versions for general lending are still FICO 8 and 9 despite FICO 10 coming out in 2020.

Credit card companies and auto lenders also use FICO 8 and 9, but have versions tailored to their respective industries: FICO Bankcard and FICO Auto. 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

When FICO released FICO 10 in 2020, it 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.

You won’t have to worry about this for a little while as FICO 10T hasn’t been widely adopted yet. Additionally, FICO also released a FICO 10, which doesn’t use trended data. However, the Federal Housing Finance Agency just 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 is a good FICO score?

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 is between 670 and 739, according to the official range. Each risk category 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

Since April of 2021, the average FICO score for a US credit holder hit an all-time high of 716, where it has remained as of April 2022. Consumers are becoming more aware of the dynamics of holding and building credit, are making fewer delinquency mistakes, and are making smarter decisions for their financial health.

The best way to make those decisions is to understand what goes into your credit score in the first place. Let’s take a look at those components, and what they could mean for your credit. Here is a little bit of information about what kinds of things contribute to your credit score, what might account for a sudden drop, and how you can intentionally work to improve your credit over time.

How is a FICO score calculated?

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

Payment history

FICO heavily factors your payment history into your overall score. This is perhaps the most obvious — if you are consistently delinquent in your payments, your credit will suffer. This part of your score is based on your late and on-time payments, as well as any bankruptcies on your credit history. 

Amounts owed

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 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 credit score in good shape, though hovering around 1 to 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

If you are a new borrower, don’t expect to start with a perfect 850 credit score. On the contrary — it is your responsibility to prove your creditworthiness, and you’re basically starting from scratch. As you establish your accounts and make payments on time, your credit score will improve.

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.

Credit cards closed in good standing will stay on your credit report for 10 years. That said, the account is paid in full, leaving it alone without closing it can keep your credit score healthy (so long as you’re not paying an annual fee just to keep your account open).

Types of credit

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. Credit cards are revolving credit because you can pay them off then use them again immediately.

Diversifying your credit is a healthy strategy 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

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

First and foremost, avoid payment delinquency at all costs. Pretty much everyone misses a payment at some point; the average resident in a large US metro area has an average of six missed payments on their credit history. 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.

Pay attention to interest rates and any potential annual fees, and avoid paying too much interest on your loans by carrying a balance of 30% or less. 

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.

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