How Are Credit Scores Calculated? FICO Scores Explained

November 18, 2021

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What three-digit number can make or break your ability to borrow money? That’s right — it’s your credit score. Applying for financing and housing can all come down to what FICO says about your financial history.

But what is FICO exactly, and how are credit scores calculated? Here’s a primer.

What is a Credit Score?

The three major credit bureaus (TransUnion, Experian, and Equifax) assign people a credit score based on events in their financial history. Lenders reference your credit score when they’re deciding whether or not to let you borrow money.

High scores are good — the higher, the better, actually. Scores above 700 reflect healthy spending and debt repayment. By contrast, lower scores can indicate a checkered financial past: missed payments, too much debt, etc.

What is FICO?

Formerly known as Fair, Isaac and Company, FICO is the company responsible for the industry standard in consumer credit scores. Over 30 years ago, FICO engineered a new scoring model as a solution to historically unfair scoring that put some individuals at a disadvantage based on factors like gender or political affiliation.

Today, FICO scores are used by 90% of top lenders. If you’re comparing your FICO score to a non-FICO score (like Equifax or VantageScore), the two might differ by as much as 100 points because of model differences. Lenders trust FICO as a fair, reliable, and evolving scoring model.

How Scores Are Calculated

Several factors go into your FICO credit score. A mix of negative and positive milestones in your financial history gives lenders the most accurate representation of your identity as a borrower. Here’s the breakdown of what’s weighted in your FICO score:

1. Payment history

This category is the most important, making up 35% of your total score. FICO references your payment history to understand whether you pay your bills on time. Consistent on-time payments boost your score; late or missed payments are a red flag for lenders.

2. How much you owe (debts)

FICO also takes into account how much you owe other lenders, adding up to 30% of your score. This has more to do with the ratio of used to available credit than the fact that you have debt at all. Try to keep your debt to credit ratio under 30% for positive effects on your score.

3. Age of your credit history

How long you’ve had your accounts open amounts to 15% of your score. Lenders like to see a credit mix that includes some long-standing accounts, which is another reason to hold off on closing out old accounts. FICO will measure the age of your newest and oldest accounts to generate an average.

4. New credit lines

Opening too many new lines of credit at once is a red flag for lenders. FICO references how recently you’ve requested new credit and counts their findings as 10% of your total score.

5. Total credit mix

Your total credit mix represents how many types of credit you have. It also accounts for 10% of your FICO score. It’s beneficial to your score to have different types of credit that you’re paying off regularly.

Installment loans, whether for education (student loans), auto, or your home’s mortgage, are a common type of credit where you’re paying off a lump sum. Credit cards are considered revolving credit. Open credit is an example of a sum that differs over a set period of time, like utility bills.

How to Check Your FICO Score

It’s free to check your FICO score at over 200 different institutions. Many credit card companies offer cardholders the option to check their FICO score in their online account portal. It’s also common for banks to offer this service, especially credit unions.

There are paid options available, but it’s worthwhile to check with your financial institutions first. It’s likely that at least one will pull your score for you for free.

Lenders rely on FICO to produce fair, reliable scores to help them make their decisions about borrowers. Knowing your FICO score is just one more way to prepare for your financial future.

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