What Exactly Is a FICO Score?
The three-digit number, which affects the likes of your interest rates and insurance premiums, has several versions.
By Ben Luthi, Contributor | Nov. 5, 2018, at 9:00 a.m.
Your FICO credit score is a three-digit number that lenders use to get a snapshot of the health of your credit history. The number is based on the information in your credit report from one of the three national credit bureaus, Experian, Equifax and TransUnion.
How Does Checking Credit Affect Score?
Lenders typically use your FICO score, as well as some other factors, to determine whether to approve your application for credit and what interest rate you’ll pay. “Healthy credit scores can also result in lower insurance rates, and they can also affect how landlords view a potential tenant,” says John Danaher, president of consumer interactive at TransUnion.
FICO, which is short for Fair Isaac Corp., was founded in 1956. Two years later, it started pitching its first credit scoring system to lenders. It wasn’t until 1989, however, that it introduced its general-purpose FICO score, which is similar to the model it uses today.
Fast forward to today: FICO has introduced nine total versions of its base model FICO score, plus industry-specific scores for certain types of credit. With each new scoring model, FICO has changed its algorithm in an effort to provide lenders with a better way to predict the level of risk for each borrower.
In the latest version, for instance, FICO treats medical collections differently from other collection accounts, doesn’t include paid collection accounts in its calculation and considers rent payments reported by a landlord.
FICO Score Ranges and Factors
The FICO score has a range from 300 to 850, with 740 or higher considered very good or exceptional credit and 579 or lower considered poor credit. Since each lender has its own criteria for determining creditworthiness, it’s possible for some lenders to have different ranges from what FICO has published.
- Payment history (35 percent)
- Amounts owed (30 percent)
- Length of credit history (15 percent)
- Credit mix (10 percent)
- New credit (10 percent)
While each of these factors has a percentage tied to it, they’re not hard-and-fast rules. “That percentage can vary depending on the very specific information contained in an individual’s credit bureau file,” says Can Arkali, principal scientist of analytics and scores development at FICO. “If we’re looking at a record of an individual who has never missed a single payment, the importance of that category is not going to be as pronounced.”
Other FICO Credit Scores
But if you’re applying for a credit card, auto loan or mortgage, the lender may choose to pull an industry-specific FICO score to determine your creditworthiness. “The industry-specific models are very much focused on the consumer behavior on that particular product type,” says Arkali.
FICO auto score. This credit score has a range of 250 to 900, and the majority of the auto industry relies on it to make lending decisions, says Arkali. The score includes information used to calculate the base model FICO score but gives more weight to your past experience with auto loans and leases.
Getting access to your FICO auto score isn’t cheap. You’ll need to sign up for one of FICO’s credit monitoring services, which cost between $19.95 and $39.95 per month, depending on which one you choose.
FICO bankcard score. Like the FICO auto score, this one also has a wider range of 250 to 900. And as you would expect, it focuses more on your past experience with credit cards than with other types of credit.
You can also get access to your FICO bankcard score if you sign up for one of FICO’s credit monitoring plans. Alternatively, you can access it for free if you have a credit card with Citi, SunTrust or First National Bank of Omaha.
These models tend to have a more conservative approach to scoring, which may be in a mortgage lender’s best interest considering the size and term of a mortgage loan. You can get access to the versions mortgage lenders use by signing up for one of FICO’s credit monitoring plans.
Non-FICO Credit Scores
Depending on where you go to check your credit score, it may not be a FICO score at all. Each of the three credit bureaus, for instance, has its own proprietary credit score. Plus, several other companies offer their own version of a credit score. Some examples include:
- Credit Xpert
- CE credit score
- Experian PLUS score
- National Equivalency score
- TransUnion New Account Model score
On the surface, this may sound like a problem. But both scoring models consider many of the same factors, which means that your FICO and VantageScore credit scores are usually in the same ballpark. If you’re looking at one of the other scores listed, it may not be as close.
Hard vs. Soft Credit Inquiries
Where to Get Your FICO Score for Free
For example, several major credit card issuers offer free FICO score access to their cardholders as a benefit. Examples include American Express, Bank of America, Barclays, Chase (Chase Slate cardholders only), Citi, Discover and Wells Fargo.
If you don’t have a credit card or your card issuer doesn’t offer FICO score access, another option is Discover Credit Scorecard. This tool, which is available to all consumers, offers access to your FICO score and a breakdown of what’s affecting your score.
How to Improve Your FICO Score
If your FICO score isn’t quite where you want it to be, it’s usually easy to tell what you need to do to improve it. But according to Danaher, it’s far more important to focus on your overall credit health than your score. By developing good credit habits, you can solve the core issues that are affecting your credit score and prevent them from happening again.
To start, get a copy of your credit reports from AnnualCreditReport.com and read through your credit reports to find what may be bringing down your score. You can get one free copy of each bureau’s report once a year.
Specifically, look for errors, late payments or collection accounts and credit cards with high utilization. If there’s nothing wrong and you’re relatively new to credit, it may just mean that you need to continue doing what you’re doing and be patient.
If, however, you do notice something off, address it as quickly as possible to develop good credit habits and get your FICO score back on track. Here are some other best practices to use regardless of what you find on your credit reports:
- Pay your debts on time every time. Remember, your payment history is the most influential factor in your FICO score. Get caught up on past-due payments and set up automatic payments for future payments to avoid missing one. “Circumstances can cause you to fall behind on certain payments,” says Arkali. “But it’s very important to make sure that one or two missed payments don’t start affecting your other credit obligations.”
- Keep your credit card balances low. Some experts recommend keeping your credit utilization below 30 percent, but the lower the better. Keep your utilization low by using your credit card less often or by making multiple payments each month. If your utilization is high one month, however, don’t worry too much. Once you pay it down and the card issuer reports the lower balance, your score should bounce back.
- Avoid unnecessary borrowing. The more you apply for credit, the bigger of an impact your applications can have on your FICO score. So, try to keep borrowing to a minimum and avoid applying for multiple credit accounts in a short period.
- Monitor your credit regularly. While you can check your credit reports for free once a year, that’s not enough to help you spot inaccuracies, potential fraud and other issues, says Danaher, who strongly recommends using a credit monitoring service year-round.
As you follow these tips and address other potential problem items on your credit reports, you should see positive changes over time. And while you won’t see overnight results, developing good credit habits can help you establish a solid credit history and get access to more favorable borrowing options.