FICO Scores are made up of five components – payment history, amounts owed, length of credit history, credit mix and new credit. In this guide, you’ll discover what FICO scores are and why they matter. You’ll also learn more about credit score ranges and what you can do to improve your overall credit health.
What is a FICO Score?
A FICO Score is a type of credit score created by the Fair Issac Corporation (FICO). It’s generated from data in credit reports and predicts the likelihood of a consumer repaying their debt on time. Individuals with higher credit scores are more creditworthy in the eyes of lenders.
How is a FICO Score Different from a Credit Score?
Despite its popularity, the FICO score is one of many credit scores. It’s used by 90 percent of top lenders, creditors and banks to make lending decisions. VantageScore is another commonly used score and serves as the main competitor to the FICO score.
Why Your FICO Score Matters
Your FICO score affects many areas of your life. Here’s a closer look at why it matters:
- Access to credit: Individuals with lower credit scores have fewer credit options to choose from.
- Interest rates and fees: The lowest interest rates and most attractive loan terms are generally reserved for borrowers with good or excellent credit.
- Auto insurance premiums: Many states allow providers to use credit-based insurance scores to calculate rates.
- Employment opportunities: Select employers, particularly those in the financial services industry, and review credit reports during the hiring process.
- Housing options: Some landlords also consider credit history when reviewing your application for housing and deciding how big of a security deposit to collect.
FICO Score Range
FICO scores range between 300 and 850 – the higher, the better. Below is a breakdown of what your credit score means:
- 800-850 (Exceptional): A FICO score within this range is well above the average of U.S. consumers. It communicates to creditors and lenders that you’ve responsibly managed debt obligations in the past.
- 740-799: (Very Good): A FICO score within this range is above the average of U.S. consumers. It also demonstrates your dependability as a borrower, and you’ll generally have access to competitive credit opportunities.
- 670-739 (Good): A FICO score within this range is close to the average of U.S. consumers. Still, it’s deemed a good credit score and many lenders, and most creditors and lenders, will consider doing business with you.
- 580-669 (Fair): A FICO score within this range is below the average of U.S. consumers. You could get approved for credit but with less favorable terms.
- 300-580 (Poor): A FICO score within this range is below the average of U.S. consumers. It can be more challenging to access credit as you’re perceived as riskier in the eyes of lenders and creditors.
It’s not uncommon for FICO scores to vary between credit bureaus. Oftentimes, differences exist in the data reported to the major credit bureaus – Experian, TransUnion and Equifax. Or not all information furnishers report to all three credit reporting agencies, hence the variation in your FICO scores across the board.
What is a Good FICO Score?
As mentioned above, a good FICO score is any score between 670 and 739. With a score in this range, you’ll likely qualify for lower interest rates, other terms, loans, and credit cards. Your borrowing costs will also be lower than you’d get with a fair or poor credit score.
To illustrate, assume you take out a 3-year $8,000 personal loan. Here’s what monthly payments and borrowing costs could look like based on credit ratings:
|Credit rating||Interest rate||Monthly payment||Interest paid||Total cost of the loan|
How Is FICO Score Calculated?
There are five components to your FICO score:
- Payment history (35 percent)
- Amount of debt (30 percent)
- Length of credit history (15 percent)
- Credit mix (10 percent)
- New credit applications (10 percent)
Do you pay your credit accounts on time? Lenders want reassurance that they’ll get paid on time if they extend credit to you. But if your accounts become delinquent, late payments could be added to your credit report and ding your credit score significantly. However, past-due accounts aren’t reported until they are at least 30 days delinquent. So, you have time to sort things out with your creditors or lenders and make arrangements to avoid adverse credit reporting.
Amount of Debt
How much do you owe creditors? This component of your FICO score considers your credit utilization rate or the percentage of your credit limit in use. Ideally, a utilization rate of 30 percent or lower on your credit cards is ideal and demonstrates to lenders and creditors you can responsibly manage your accounts. Otherwise, you may be overextended.
Length of Credit History
A lengthy credit history also helps boost your FICO score. It lets financial institutions know how long ago you established credit, the length of time each account has been open and when the account was last used.
A mix of revolving (i.e., credit cards and home equity lines of credit or HELOCs) and installment accounts (i.e., personal loans, home loans, auto loans, and student loans) is also good for your FICO score. It demonstrates to lenders you can handle different types of debt and that you’re less likely to default on a credit account if they lend you money.
New Credit Applications
Each application for credit generates a hard credit inquiry that could dip your credit score by a few points. The impact is temporary, but too many hits in a small period of time could mean bad news for your credit score. It also makes you a greater credit risk to financial institutions.
Factors That Don’t Affect Your FICO Score
These factors aren’t used to calculate your FICO score:
- Your race, age and gender
- Your nationality and marital status
- Your place of residence
- Your job title, salary, hiring date and employment history
- Your child support and alimony obligations
- Your interest rates on credit accounts
- Your status as a recipient or client of credit counseling services (if applicable)
How to Monitor and Improve Your FICO Score
If you’ve checked your FICO score and it isn’t quite where you want it to be, here are some tips to improve it:
- Pay all your bills on time.
- Bring any past-due accounts current.
- Reduce your credit card balances.
- Don’t close old credit accounts in good standing.
- Only apply for credit as needed.
- Dispute inaccurate credit report data.
Also, consider using Experian Boost to improve your credit score. It’s a free tool you can use to improve your FICO score instantly by getting credit for bills you already pay. In short, Experian adds alternative payment information from service providers, like AT&T, Disney+, HBO, Hulu, Netflix, Spectrum and Verizon, to boost your payment history and improve your credit score.
Experian Boost is offered with a free CreditWorks Basic membership that also includes the following:
- Experian credit-report monitoring
- Monthly Experian credit report and FICO score updates
- Experian FICO score tracking
- Experian FICO score alerts
Or you can upgrade to a CreditWorks Premium membership for just $24.99 per month following a 7-day trial and get:
- Three credit–bureau credit monitoring
- Daily Experian credit report updates
- Monthly three credit-bureau report and FICO score updates
- Access to industry-specific FICO scores (i.e., bankcard, auto and home)
- Experian FICO score tracking
- Experian FICO score alerts
- Access to the FICO Score Simulator
- Experian CreditLock
- Identity theft monitoring and alerts
- Lost wallet assistance
- Dark web surveillance and identity theft insurance of up to $1,00,0000
If you’re building credit from scratch, Experian Go is another valuable tool worth considering. It’s free and will equip you with the knowledge and resources to jumpstart your credit journey the right way. Plus, you’ll take the first steps towards generating a FICO Score and building a positive credit history.
Visit the website today to learn more about Experian and their products and sign up for a free account. You can also access your FICO score based on Experian data free of charge.