Your FICO score represents a big part of your financial health, affecting your ability to be approved for loans and influencing the interest rates you're offered. Understanding how your score is calculated and how to keep it healthy is a must.

We’ll walk you through what a FICO score is, why it’s important and how it’s calculated – plus give you practical tips for improving and monitoring your score.

Definition of FICO Score

Your FICO score is a three-digit number, ranging from roughly 300 to 850, used to evaluate your credit risk. The FICO score was developed by the Fair Isaac Corporation (also known as Fair Isaac Corp or FICO), which uses complex credit scoring formulas to compile consumer credit reports.

Your score basically summarizes what’s in your full credit report and gives mortgage lenders, auto lenders and credit card issuers a quick snapshot of how likely you are to repay borrowed money. Lenders then use this score in their lending decisions to set interest rates and loan eligibility.

The Importance of FICO Scores

FICO scores are crucial because they impact your ability to manage credit and access funds for things like a car loan, mortgage loan or credit cards. A good FICO score opens doors to better financial opportunities, including lower interest rates, while a low score can make borrowing more expensive. Many lenders, including top lenders like Fannie Mae, use FICO scores to evaluate potential borrowers.

FICO Score Range and Categories

FICO scores range from approximately 300 to 850, and they fall into the following categories:

  • Excellent credit (800-850): Borrowers in this FICO score range are seen as extremely low-risk and are often eligible for the best loan rates and terms.
  • Good credit (740-799): Lenders view this range as dependable, and you’re likely to receive favorable loan terms. A good score helps with securing loans like auto loans or mortgages at lower rates.
  • Fair credit (670-739): This is a fairly common credit score range, and most lenders will approve loans at this level, though rates may not be as favorable.
  • Poor credit (580-669): In this range, you may still qualify for credit, but lenders might assign higher interest rates because of higher risk involved.
  • Very poor credit (300-579): This range indicates significant credit risk, making it difficult for you to qualify for loans without steep interest rates.

Components of a FICO Score

Several factors contribute to how your fico score is calculated, all derived from data in your credit report. Here’s a quick summary:

  • Payment history (35%): This quantifies whether you’ve paid your credit accounts on time. A late payment or missed payments can negatively impact your score.
  • Credit utilization (30%): Also known as amounts owed, this is how much of your available credit you’re currently using. Keeping your credit utilization below 30 percent is key for a strong score.
  • ·Length of credit history (15%): The average age of your accounts is important. The longer your accounts have been open, the better it is for your score.
  • Types of credit used (10%): Lenders like to see a healthy credit mix – like installment loans and revolving credit – which indicates that you can responsibly handle different types of debt.
  • New credit (10%): Frequently applying for new credit within a short period can lower your score, as it signals potential risk. Remember that each time you apply for credit, a hard inquiry shows up on your credit report.

How FICO Scores Are Calculated

While each credit monitoring service has its unique approach, the major credit bureaus – Equifax, Experian and TransUnion – use some common inputs, as outlined below:

  • Weighting factors: Each component, such as payment history or credit utilization, is weighted differently. These factors contribute to your overall FICO credit score.
  • Impact of negative information: Negative factors like late payments or high utilization can dramatically lower your score. However, their impact decreases over time with responsible credit behavior.
  • Scoring models: Different FICO scoring models exist. FICO Score 8 is the most commonly used, but models like FICO Score 9 or the Auto Score and Bankcard score are also used for industry-specific scores. Trending data in newer models, such as FICO 10T, also provide a deeper look at your credit behavior over time.

Where to Find Your FICO Score

You can access your free FICO score through various sources – here are some of the most common:

  • Your credit card statements: Many credit card issuers include a free FICO score as part of your monthly statements.
  • Online banking platforms: Many banks provide customers with free FICO scores via their online platforms and/or mobile apps.
  • Credit monitoring services: Services like Experian and Credit Karma offer regular updates on your score, using data from the three main credit bureaus.
  • FICO score services: You can purchase your official FICO score directly from FICO’s website.

Examples of FICO Score Impact on Interest Rates

Your FICO credit scores can directly influence the interest rate you're offered on various types of loans. Below are a few examples:

  • Mortgages: A borrower with a high credit score or good FICO score will often get a lower rate on a mortgage loan compared to someone with a lower credit score.
  • Auto loans: Auto lenders typically offer lower interest rates to those with good credit scores, while car loans for those with lower scores come with higher rates.
  • Credit cards: Applicants with the highest FICO scores usually qualify for premium credit cards with lower rates and a variety of perks, while those with lower scores may face higher interest rates or denials. If you’re concerned about your ability to be approved for a credit card, you might consider a product like the Juzt Digital Credit Card, which is designed to help those with no or low credit boost their credit history.

Tips for Improving Your FICO Score

If your credit score isn’t where you want it to be, there are some simple ways to improve it. Here are a few ways to get started:

  • Paying your bills on time is the most important factor. Make sure you can keep up with due dates or set automated payments where possible to guarantee you never have a late or missed payment.
  • Keep your credit utilization below 30 percent of your total credit limit.
  • Avoid applying for too much new credit in a short period.
  • Maintain a mix of different types of credit, including credit cards and installment loans.
  • Regularly check your credit reports from the three major credit bureaus – Equifax, Experian and TransUnion – to make sure there are no errors.

Common Myths and Misconceptions About FICO Scores

As you make good decisions about using credit responsibly, it’s important to avoid buying into several myths about your FICO scores. Here are some of the most common:

  • Myth one: Checking your credit hurts your score. This is false. In reality, a personal credit check is considered a "soft inquiry" and does not affect your score.
  • Myth two: Closing unused credit accounts boosts your score. In fact, closing accounts can reduce your available credit and negatively impact your length of credit history, which can lower your credit score.
  • Myth three: You only have a single credit score. The truth is that you have multiple FICO scores, since many lenders use different scoring models or even industry-specific scores.

Monitoring Your FICO Score Over Time

It’s important to regularly review your score to stay on top of your financial health. You can often do so through services and tools that the major consumer credit bureaus and FICO's main competitor, VantageScore, make available to help you monitor changes in your credit.

Key Takeaways

Understanding how your FICO score is calculated – including key factors like payment history, credit mix and credit utilization – empowers you to make better decisions about your financial health. And when you consistently pay bills on time, keep a low credit utilization rate and manage a diverse set of credit accounts, you can steadily improve your FICO score over time. Being proactive about your credit ensures that you’re well-positioned for long-term success in achieving your financial goals.

 This article provides general information and does not constitute financial advice. For guidance specific to your situation, consider consulting a financial advisor or credit counselor.