Credit Repair

What Is a FICO Score?

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You might have heard the term FICO Score — whether in a credit card commercial, on an account statement or when applying for credit — and wondered about it.

So what is a FICO Score? Knowing the answer can help you build credit so that you can get access to loans and credit cards when you need them. Here’s what you should know about your FICO Score.

What is a FICO Score?

A FICO Score is one of many types of credit scores, which are three-digit numbers that summarize your credit history, management and behavior. Your FICO Score is the credit score generated by Fair Isaac Corp. (FICO), a leading financial analytics company. FICO Scores range from 300 to 850.

Here’s how credit scores, including FICO Scores, are generated and used:

  1. Credit reporting agencies collect your credit data. Banks, lenders and other financial service providers report your borrowing and repayment behavior to credit reporting agencies: for example, when you take out a loan and whether you make on-time payments. The big three credit bureaus are Experian, Equifax and TransUnion, which track and compile your credit history into your credit report.
  2. Information on your credit report is scored. The data on your credit reports are run through a credit score formula that analyzes and scores your credit history. These credit scoring models estimate the risk of lending to you, or how likely you are to repay a debt on time (or fail to do so).
  3. Lenders will access your credit reports and scores. They will then use this information to decide whether to approve you for a product. Many lenders will also use your credit score to set costs, reserving their best rates or lowest fees for consumers with higher scores.

Why does my FICO Score matter?

A FICO Score isn’t your only credit score — consumers can have many different scores from different scoring companies, models and reports. Two of the credit reporting agencies, TransUnion and Equifax, have their own credit scoring models. The other major bureau, Experian, uses the VantageScore model.

Your FICO Scores are used the most. Although there are many different credit scores out there, FICO Scores are the most popular. They are used by 90% of lenders, according to FICO’s site. If you’re applying for a loan, it’s likely (but not guaranteed) that the credit score the lender will rely on will be a FICO Score.

You don’t have just one FICO Score, either. FICO has built several versions of its credit scoring model. FICO Score 8 is the most commonly used model, but there are more recent versions including FICO Score 9 and UltraFICO. FICO also has several other credit score models designed for specific products, including scores specifically for credit card, auto and mortgage lending.

For each FICO model, you’ll have three scores. That is, one score for each credit report as compiled by the three major credit bureaus. So your FICO Score 8 for your Experian report, for example, could be a different number than how the FICO Score 8 would score your Equifax report. If there is a discrepancy, that could be a sign that the information listed in one report differs from what’s in another.

How is my FICO Score determined?

Your FICO Scores do matter, especially if you’re planning to open a new credit account in the coming months. Fortunately, each of your FICO Scores is based on the same general blueprint. What improves one FICO Score is likely to improve your others, too.

Here’s a breakdown of how your credit report information is weighted by the FICO Score model, from myFICO:

Payment history: 35%

The biggest factor in determining your FICO Score is your payment history on all credit accounts listed on your report. Specifically, it will view on-time payments positively.

Late payments, delinquencies, overdue accounts or accounts sold to collection agencies will be viewed negatively.

Amounts owed: 30%

High debt balances aren’t inherently negative, and some types of debt will affect this more than others. While amounts owed on installment loans are considered, your score might be affected more by your use of revolving credit, like credit cards or other lines of credit.

Borrowing high balances relative to your credit limits on these accounts can negatively affect your FICO Score, while keeping balances and credit utilization ratios low can have a positive effect.

Length of credit history: 15%

When scoring the length of your credit history, FICO considers the age of your oldest and newest credit accounts, the average age of all accounts and how recently you’ve used those accounts.

FICO Scores will favor credit reports that have longer histories of credit accounts on them, so try to establish and maintain your credit accounts over a long period.

Credit mix: 10%

One factor that FICO considers, but gives the least weight to, is your credit mix, or the number and types of accounts listed on your credit reports. Types of credit considered include credit cards, installment loans, retail accounts and mortgages, though you don’t need to have all these account types to score well.

Opening and positively maintaining credit cards is important, and having an installment loan listed can also help. But you should avoid borrowing just to improve your credit mix.

New credit: 10%

FICO considers new credit by looking at the most recent activity on your credit reports. Specifically, it will consider recent hard credit inquiries or newly opened accounts, especially if you opened several in a short period.

To score well on new credit, consider how opening accounts can affect your score. Try to avoid hard inquiries when possible, and limit the effect of new accounts by opening one at a time.

How can I see my FICO Score?

If you want to see your FICO Score, the most reliable way to do so is to pay for it. Several credit bureaus offer credit monitoring services that include access to your FICO Score, including Experian and FICO itself. However, these monitoring services can come with a hefty monthly fee upward of $30.

There are other ways to check your FICO Score for free. To start, see if any of your credit accounts provide access to your FICO Score, either listed on your monthly statement or when you view your account online. You can also try Discover’s Credit Scorecard — it can show you your free FICO Score, even if you’re not a Discover customer.

Don’t overlook checking other credit scores, too. Having more information will give you a complete picture of your credit. Sign up for MyLendingTree, for example, and you’ll get your free credit score using the VantageScore 3 model.

Does everyone have a FICO Score?

Consumers who have a short credit history or few accounts (four or less) on their credit reports might have a “thin credit file.” This is a term for consumers who don’t have enough information on their credit reports to generate a credit score, including with the FICO model.

Over 60 million Americans have thin credit files, according to Experian. If you’re among that group, you could end up with a poor credit score or unable to be scored by FICO. It will also make it difficult to get approved for new credit, whether it’s a credit card or home loan. And if you are approved, your thin credit file makes it more likely that you’ll get stuck with high interest rates that will make borrowing more expensive.

How can I improve my FICO Score?

Once you know your FICO Score, you can see if you have a good credit score and start learning how to improve it. If you’re new to credit, figure out how to start building a good credit score from scratch. Work on developing habits that will build credit, such as paying on time every month and keeping revolving balances low.

You can also request and review free copies of your credit reports. Check for any errors or mistaken information, and consider disputing credit report errors. You could even consider enlisting a credit repair service to help correct such credit errors.

It can take time to see a positive impact on your FICO Score, but the effort can be worth the payoff when you next need credit.

 

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