When applying for any type of credit, a lender needs to know how likely the person is to repay it. Using a credit score, like the FICO score model, is a main way lenders determine risk.
A FICO® score is...
A FICO score is a type of credit score that shows a person’s likelihood of repaying debts.
FICO scores were originally introduced by the Fair Isaac Corporation more than 25 years ago. Since then, FICO Scoring is one of the most widely used methods today.
What is a FICO® score used for?
A FICO score is used to determine whether a person is likely to repay their debts. They are used by financial institutions such as banks, auto lenders and mortgage providers. These scores are used to determine risk, approvals, terms, and interest rates.
FICO scores are used by 90% of top lenders in the U.S. before making credit approvals. This means if you have ever taken out a credit card or mortgage, the lender has likely looked at your FICO score.
How is a FICO® score calculated?
FICO scores work in the same way as other credit scoring methods and assess several different financial aspects while calculating a score.
However, there is no one-size-fits-all when it comes to FICO scores. As FICO scores come from one of the three main credit bureaus (Equifax®, Experian® and TransUnion®), you could have slightly different scores.
FICO also has different variations of its basic scoring model which are tailored for specific types of lenders. For example, you could have a tailored score for mortgage providers or auto loans. This means that you could even have different FICO scores when using the same credit bureau.
How is a FICO® score different from a VantageScore®?
FICO and VantageScore both provide widely-used credit reports to determine risk for lenders. However, they differ in the way they calculate these scores. FICO offers a bureau-specific score from either TransUnion, Experian or Equifax. This means each one could produce a separate score.
VantageScore uses a single tri-bureau model which combines reports from each of the three credit bureaus. VantageScore was jointly developed by the credit bureaus themselves so all the data is combined for one score.
What factors affect a FICO score?
FICO breaks the score down into five categories and assigns each a percentage. The percentage shows how important each category is in determining the FICO score.
- Payment history (35%): FICO looks at whether you have paid debts on time as late payments can lower your score. This is the most important factor in a FICO score as it’s the closest indication of payment behavior in the future.
- Amounts owed (30%): The second most important aspect is how much you owe in existing debt. Having some debt already isn’t necessarily a bad thing, but FICO still looks at how much available credit you’re using. A high credit utilization rate could mean you are over-reliant on credit and are struggling to pay it off.
- Length of credit history (15%): FICO scores also look at how long you have had credit accounts, including the age of your oldest account. Having a longer credit history generally helps to increase your FICO score. However, you won’t necessarily have a low score if you’re new to credit.
- Credit mix (10%): FICO scores look at whether you have a mix of different credit types. For example, having a mix of credit cards, personal loans, mortgages or auto loans can help your score.
- New credit (10%): If you have opened several new credit accounts in a short space of time, this can ring alarm bells for lenders. This means that your FICO score could show you are at greater risk of defaulting. Having too much new credit (especially if you don’t have much credit history) appears risky to lenders.
What makes a good FICO score?
The FICO model provides a score between 300 and 850. Anything between 800-850 is considered Exceptional. Scores between 740 and 799 are Very Good, those between 670 and 739 are Good and 580-669 is Fair. Anything under that is considered Very Poor.
According to Experian, 67% of Americans have a Good FICO score or better.
Some banks provide a free FICO score on your credit card statement. For example, Citibank and Bank of America both do this monthly.
Alternatively, you can also pay for a FICO score if you can’t get a free one or want a different type of score. For a one-time report, you can head to the myFICO website and get a 1 bureau credit report for $19.95. To see your report at all three credit bureaus, it’s $59.85.
myFICO also offers monthly subscription models for those who wish to keep a close eye on the credit report.