What is a FICO Score and how is it calculated?
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Published 10:42 a.m. UTC July 26, 2023
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When a company reviews your application for a new loan, credit card or line of credit, it will often request a copy of one of your credit reports. The information in the credit report can help the company understand the risk associated with lending you money. However, there’s a lot of information to weed through.
FICO was one of the first companies to develop credit risk scoring models — an algorithm that can analyze a credit report and give lenders an easy-to-read number. Lenders can use FICO scores to quickly assess risk and decide whether to approve a credit application and the rates and terms to offer.
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FICO Score vs. credit score — what’s the difference?
Although FICO was one of the first companies to create risk scores based on credit reports, what we generally call credit scores, it’s not the only company that builds credit scores today. You might consider it a well-known brand of credit score — the Kleenex to your facial tissue. It’s also one of the most popular credit scores, and 90% of top lenders use FICO scores.
However, the big three consumer credit bureaus, Equifax, Experian and TransUnion, also develop credit scores based on their credit reports. And in 2006, the bureaus formed VantageScore, the company that creates VantageScore credit scores — many personal finance websites offer users a free VantageScore credit score.
Creditors can also create their own custom credit scoring models rather than buying and using one of the “generic” models from FICO, VantageScore or the bureaus. And FICO works with companies to help them create these scores. A custom score might be better because it’s tailored to the company’s products and target customers, but it can also be expensive to develop and maintain.
Why do you have a different credit score number between different companies? Here’s the difference between a FICO Score and a VantageScore.
What are the FICO Score ranges?
FICO creates different types of FICO scores, and it periodically releases new versions of its scores. There are base models, such as FICO Score 8, 9 and 10, which range from 300 to 850. Additionally, FICO has industry specific credit scores for auto lenders and card issuers that range from 250 to 900.
With both the base FICO Score and the industry specific scores, a higher FICO Score is better because it indicates someone is less likely to fall 90 days behind on a bill. As a result, creditors may be more likely to approve your application or offer you favorable terms if you have a higher FICO Score.
What is a good FICO Score?
Lenders can set their own definitions for what they consider to be a bad or good FICO Score. However, FICO shares some general ranges for what lenders might use:
- 300 to 579: Poor
- 580 to 669: Fair
- 670 to 739: Good
- 740 to 799: Very Good
- 800 to 850: Exceptional
Lenders will consider many factors when evaluating your credit applications, and there may be a minimum credit score requirement. Typically if you want to get approved for the best offers, you may need a very good or exceptional credit score.
How your FICO Score is calculated
Each FICO Score uses slightly different weighting and criteria to determine your score, but FICO scores are based entirely on the information from one of your credit reports.
All the scores consider positive and negative data points to calculate your score, and FICO breaks the scoring factors into five categories. It also shares the relative importance of each category.
- Payment history — 35%. Your payment history is the most important scoring category. It includes your on-time and missed payments with various credit accounts, and payment-related information, such as whether you filed for bankruptcy or had an account sent to collections.
- Amounts owed — 30%. The amounts owed category is also very important. How much you owe overall, how much you owe on different types of credit accounts, how many credit accounts you have with balances and how much debt you have left on your loans are all factors. Your credit utilization ratio on revolving credit accounts — the portion of your credit limits that you’re using — is an especially important part of this category and one of the few scoring factors that you can quickly change.
- Length of credit history — 15%. The age of the opened and closed accounts that are in your credit report can also affect your FICO Score. The ages of your oldest and newest accounts, along with the average age of all your accounts, can affect your scores. Higher ages and averages can be best, as it shows you’ve managed credit for a long time.
- Credit mix — 10%. Having open installment and revolving credit accounts can improve your FICO Scores, although this isn’t a major scoring category. Installment accounts can include loans, such as a personal, student, auto or home loan. Revolving accounts, like credit cards and personal lines of credit, have a line of credit without a predetermined repayment period.
- New credit — 10%. When you apply for a new credit account, a record of the corresponding credit check called a hard inquiry may be added to your credit reports. These hard inquiries can hurt your FICO scores a little, as can opening new credit accounts. But this is also a relatively minor scoring factor.
You’ll often see these percentage breakdowns, but they aren’t set in stone. FICO even says that they don’t represent what goes into your credit score — they’re more of a general guide.
FICO scores are based on complex calculations, and the importance of one scoring factor can depend on the other information in your credit report. For example, the breakdown could be different for someone who is brand new to credit than someone who has used credit for years. Or for someone who has filed for bankruptcy versus someone who hasn’t.
How do companies use FICO Scores?
Although your FICO Score can be especially important when you apply for a new credit card or loan, it can also affect you at other times. Here are some of the most common ways companies use FICO Scores.
- To evaluate credit applications: Creditors may use a FICO Score to determine which applications to approve or deny. Your credit score can also impact your interest rate, loan fees, credit limit or total approved loan amount.
- To evaluate tenant applications: Landlords and property management companies may also request your credit report and FICO Score. Your credit might impact your rental options and security deposit requirements.
- To manage credit customers: Creditors will also periodically check current customers’ FICO scores to help them manage accounts. For example, credit card companies might raise your credit limit if your FICO Score improves, or lower your limit if your score drops.
- To create marketing lists and send credit offers: Creditors also use FICO scores to prescreen people for credit offers. For instance, a card issuer might want to mail people invitations to apply for a new premium credit card, but it only wants to send the invitation to people who meet the card’s minimum score requirements. The card issuer can work with a credit bureau to generate a list of consumers who have high enough FICO scores and meet any of the card issuer’s other requirements.
You might hear about other ways that your credit can impact your finances or life. For example, some employers might review your credit report when you apply for a job or promotion. But employers receive a version that only contains some of your information and they don’t receive a credit score with the report.
In some states, insurance companies can use credit-based insurance scores to help set your insurance premiums. FICO creates some of these insurance scores, and they’re also based on your credit reports. However, insurance scores and risk scores don’t measure the same risk or use the same calculations.
Frequently asked questions (FAQs)
You may be able to get a free FICO Score from your bank, credit union, credit card issuer, lender or a credit counseling agency through FICO’s Open Access program. You can check the FICO website for a list of participating organizations. Experian also offers a FICO Score for free based on your Experian credit report.
Your FICO Score doesn’t get updated. Instead, a new FICO Score is calculated every time you — or someone else — request a credit report with a FICO Score. New information could be added to your credit report at any time, which is one reason you might see your FICO Score change.
FICO and VantageScore both create credit scores based on information in your credit report that range from 300 to 850. However, the two companies aren’t the same. They compete to create and sell these credit scores, and their credit scores use different criteria, which is why your scores can vary depending on which credit score you check.
FICO creates many different FICO scores, and there are other scoring companies, such as VantageScore, that also build credit scores. Additionally, your credit reports from Equifax, Experian and TransUnion may be different. The score you see will depend on the exact scoring model (FICO or otherwise) and which credit report it analyzes.
Blueprint is an independent publisher and comparison service, not an investment advisor. The information provided is for educational purposes only and we encourage you to seek personalized advice from qualified professionals regarding specific financial decisions. Past performance is not indicative of future results.
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