If you're searching for examples of capitalism sowing the seeds of competition, look no further than your credit score. FICO credit scores, issued by Fair Isaac Corporation, are just one brand of credit score among several clawing for a position as the best predictor of credit risk, although  FICO is the most popular.

No doubt the presence of competition has created confusion for borrowers, so let's take a moment to demystify a few FICO credit score essentials.

A paper copy of a credit report, under a calculator and a pair of glasses.

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1. 90% of lenders use FICO scores

FICO scores have been around since 1989. Its early-mover advantage may explain why 90% of lenders rely on FICO for credit decisions, including to determine if you qualify for a low mortgage rate or a credit card.

2. FICO is the standard, but a few others are still important

Credit scores come in many forms and vary by provider, and you might be surprised by how many credit scores you have, each with its own criteria and associated costs to you. It's worth understanding the main players and connected relationships at play when it comes to credit scores.

FICO analyzes your credit data from the three major credit bureaus -- Experian, Equifax, and TransUnion -- meaning you have three FICO credit scores in total.

Further, in an attempt to dethrone FICO's decades-long dominance, the three credit bureaus teamed up to create VantageScore. Like FICO, it pulls data from credit bureau reports, and you get a VantageScore for each of the credit bureaus.

While each scoring model has its nuances, it's important to understand that they're all directionally accurate, even though the ranges and scores vary.

3. Poor credit scores could cost you hundreds of thousands of dollars

Credit scores make a huge difference to how much you pay on a mortgage. For example, say you're looking for a 30-year fixed mortgage for $200,000. When you look at current rates, you'll find that individuals with a low credit score of between 600 and 619 may end paying $101,735 more over the life of a modest 30-year mortgage, compared with those with excellent credit scores of between 760 and 850. That's college tuition for a child (or two), or, stated differently, $3,391 per year in additional costs. The culprit is a high mortgage rate, which can vary by more than 2 percentage points for excellent versus poor credit.

4. FICO scores range from 300 to 850

FICO scores have a standard range from 300 to 850, with the average American's score sitting at 689, according to MyFICO. FICO scores fall into five categories:

  • Poor: 579 and lower.
  • Fair: 580 to 669.
  • Good: 670 to 739.
  • Very good: 740 to 799.
  • Excellent: 800+.

This range differs from that of VantageScore models, which explains why a 700 FICO score can mean something different from a 700 VantageScore. Again, the important thing to know is both are directionally the same, even if the numbers vary.

5. Five underlying credit factors matter

Specific formulas behind FICO scoring models are shrouded in mystery, but five pillars are well understood and are weighted by importance. Payment history (35%), credit utilization (30%), average credit age (15%), new inquiries (10%), and account mix (10%) all feed into the FICO scoring formula. When looking to boost your credit score above 800, knowing the driving factors is crucial, and the easiest way to get excellent credit is to simply pay every bill on time and keep debt levels low. These two factors combined influence 65% of your credit score.

Nathan Hamilton has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy