While the term "credit score" is used to describe several different scoring methods, the most popular method is the FICO score. According to myFICO.com, 90 percent of lenders use the FICO scoring method to make billions of lending decisions every year. The term "FICO" comes from the creator of these scores – the Fair Isaac Corporation.
What Is a FICO Score?
In short, your FICO score is a three-digit manifestation of your credit health. FICO scores fall within the 300-850 range, and are calculated using details from your credit report.
Your payment history, how much money you owe, and other recent information are analyzed and compiled to determine how risky you are as a borrower. If you're extremely risky due to default or having minimal credit history, you can expect your score to sit on the low end of the FICO scoring scale. Likewise, a healthy credit history tends to lead to a score on the higher end of the scale.
Each of the three credit reporting agencies – Experian, Equifax, and TransUnion – uses the information in their file to assign you a FICO score. As such, your FICO score can be different with each credit reporting agency.
While a low FICO score may be cause for alarm, it's possible to improve your credit – and your score – over time.
How Is Your FICO Score Determined?
Although each credit reporting agency keeps a separate file on your credit movements, they all use the same set of criteria to determine your individual FICO score:
- Payment History (35 percent): This factor makes up 35 percent of your credit score. Your payment history includes whether you make your monthly payments on time, and any late payments or defaults you have.
- Amounts Owed (30 percent): Making up 30 percent of your FICO score is the amount of money you owe in relation to your credit limits. Also called your credit utilization, this number shows lenders how well you manage credit and debt.
- Length of Credit History (15 percent): The length of your credit history makes up 15 percent of your FICO score. The longer your credit history, the more information lenders have to assess how risky you are.
- New Credit (10 Percent): New credit makes up 10 percent of your FICO score and considers how many new accounts you have opened in the recent past.
- Credit Mix (10 Percent): Lenders look at your credit mix to see how responsible you are with various types of loans. It's better to have different types of loans in your credit history. Those loans can include home loans, car loans, personal loans, and credit card accounts, among other types.
Why Your FICO Score Matters
While your credit score may seem unimportant, this three-digit number plays a huge role in many aspects of adult life. If you've ever tried to borrow money for a house or car, for example, your credit score often dictates the terms of your loan. And if you have poor credit, your ability to rent an apartment or access affordable insurance rates may be limited.
While there are no hard cut-offs for what makes a poor, good, or excellent FICO score, credit reporting agency Experian offers a set of ranges to consider:
- 800+ indicates an exceptional FICO score
- 740 – 799 shows a very good FICO score
- 670 – 739 is a good credit score range and represents the median
- 580 – 669 is below average
- 579 and lower indicates a poor FICO score
According to Experian, consumers with a FICO score over 670 are usually considered "acceptable" borrowers and thus have a better chance at qualifying for a home loan, car loan, or credit card when they apply. Obviously, a FICO score above that range only improves one's chances of qualifying for the loan they need.
On the flip side, consumers with a score below 669 are usually considered subprime borrowers. If they can qualify for a loan, they might need to pay higher interest rates to account for the increased risk. Consumers with a FICO score below 579 may have trouble qualifying for new credit at all.
How to Improve Your FICO Score
If you hope to improve your FICO score over time, the best step to take now is to find out where you stand. By signing up for a free credit score from LendingTree, you can get an estimate of your FICO score.
Once you know your FICO score, you can take steps to improve it over time. If you have poor credit and need to improve it, consider these steps:
- Pay down debt to improve your credit utilization. If you owe a lot of money in relation to your credit limits, the best thing you can do is pay it down. Doing so will improve your credit utilization, which can improve your FICO score.
- Make sure you make all monthly payments on time. Since your payment history is the biggest determinant of your FICO score, it's crucial to make all payments on time or early.
- Don't open new credit. Don't open new credit unless it is entirely necessary.
- Pay off delinquent debts. If you have any delinquent debts, taking steps to pay them off can help improve your FICO score over time.
If your credit profile is too this, consider these steps:
- Apply for an unsecured credit card. If you need to beef up your credit profile, a credit card is a great place to start. By using your card for small purchases and paying off your balance every month, you can begin building the credit history you need.
- Get a secured credit card. If you're having trouble qualifying for an unsecured credit card, applying for a secured credit card can help you get started. These cards require a cash deposit as collateral, but they report your credit movements to the three credit reporting agencies. Over time, you may be able to upgrade your secured card to an unsecured card.