Your FICO Score Guide

By: , Contributor

Published on: Dec 27, 2019

Your credit score is important. Here's what you need to know about it.

Your FICO score isn't just a random number; it's a measure of how credit-worthy you are. A strong FICO score increases your chances of getting approved for a mortgage, as well as for loans or credit cards. In this FICO score guide, we'll review credit score calculations and show you what it takes to end up with a good credit score.

What is a FICO score?

FICO scores were first introduced in 1989 by FICO, then called Fair, Isaac, and Company. Since then, FICO has been the most widely used credit scoring model, with FICO scores coming into play in more than 90% of U.S. lending decisions.

Your FICO score, in a nutshell, is a measure of how credit-worthy you are. The higher your score, the greater your chances of getting approved for a loan, and at a favorable interest rate.

What's considered a good FICO score?

FICO scores range from a low of 300 to a high of 850, which is perfect credit. The higher your credit score, the less risky a borrower you'll seem in the eyes of those you want to borrow from.

Different lenders may set different standards for determining what a good credit score is. But according to FICO, here's a basic breakdown:

Credit Score Range Credit Score Classification
Under 580 Poor
580 - 669 Fair
670 - 739 Good
740 - 799 Very good
800 or above Exceptional

Data Source: myFICO

Now there are a few things you should know about your FICO score. First, you actually have more than one. That's because each of the three major credit bureaus -- Experian, TransUnion, and Equifax -- determines your credit score based on the information it gathers about your credit history. Secondly, the average credit score in the U.S. is 695, which means the typical consumer has good, but not great, credit.

How are FICO scores calculated?

Five factors go into your FICO score, and each one carries a different amount of weight:

  • Payment history.
  • Credit utilization.
  • Length of credit history.
  • New credit accounts.
  • Credit mix.
FICO chart

Click to enlarge

Data source: chart by author

Your payment history speaks to how timely you are with your bills. Paying bills on time consistently will help improve your credit score, while being late will have the opposite effect -- it'll hurt your score. And, it doesn't matter whether you're late paying your mortgage, student loans, or credit card bills -- a single late payment could result in a 90- to 110-point drop for someone with a credit score of 780, even if that's the first late payment that borrower has on record.

Credit utilization, meanwhile, speaks to the amount of available credit you're using at once. A utilization ratio of 30% or less will help your credit score, because it shows that you're not racking up too much debt at once, while a ratio above 30% indicates potentially reckless borrowing.

This means that if you have a total line of credit of $10,000, you shouldn't owe more than $3,000 on it at once. Keep in mind that your utilization ratio is based only on revolving lines of credit, like your credit cards or other lines of credit you may have secured. Your mortgage and student loans, for example, aren't factored into your utilization.

Then there's the length of your credit history, which speaks to how long you've had accounts in good standing. And in case it's not clear, the longer those accounts are active, the better.

New credit accounts, meanwhile, refers to the number of new accounts you open in a short period of time. Opening too many at once can hurt your score, since it could be construed as reckless borrowing.

Finally, your credit mix accounts for the different types of credit accounts you have. A healthy credit mix might include:

  • A mortgage
  • An auto loan
  • Student loans
  • A couple of credit cards

Having all of your debts in credit card form would not indicate a healthy credit mix.

How do my FICO scores differ from my VantageScore?

FICO isn't the only scoring model used to determine consumer credit scores. There's also the VantageScore, which is another widely-used model.

Introduced in 2006, VantageScore was actually developed by the three major credit bureaus mentioned earlier. The VantageScore model uses six criteria when determining your score:

  • Payment history: most important
  • Age and type of credit: very important
  • Percentage of credit limit used: very important
  • Total balances and debt: moderately important
  • Recent credit behavior and inquiries: less important
  • Available credit: less important

As you can see, FICO and VantageScore overlap a bunch in terms of credit score calculations. Meanwhile, the initial two versions of the VantageScore had a different scoring range than FICO: 501 to 990. The latest versions, however -- VantageScore 3.0 and 4.0 -- use the same range as FICO.

One major difference between FICO and VantageScore is that for the former, you must have accounts open for at least six months, and at least one account that's been reported to the major credit bureaus within the past six months, for FICO to even generate a score for you. With VantageScore, you may be able to get a credit score generated even if you're relatively new to borrowing or paying bills -- the VantageScore model will produce a score based on a single month of credit history and just one credit account being reported to the three bureaus within the past two years.

How do I access my FICO score?

Your FICO score is a big part of your personal finance picture, so it's important to know what that number looks like. You can access your score on myFICO.com, but there's a catch -- you may need to pay for it. On the other hand, you may be able to get a free credit score via your credit card company, bank, or auto lender.

But remember, the number you get from one source might differ slightly from the number you get from another. Different lenders may use slightly different versions of FICO scores when determining your credit-worthiness, so the number you get from your credit card company may be a few points higher or lower than what you get from your auto lender.

How can I improve my credit score?

Bad credit won't just make it harder to borrow money when you need to, or cost you more money when you are approved to borrow it. If your credit is poor, you may be denied an apartment lease or even a job (some industries check your credit record if the work at hand requires you to be financially responsible, such as bookkeeping or accounting). If you don't have good credit, here are a few ways to improve your credit score:

Start paying your bills on time

All of them. This is the single most important factor that goes into a FICO score, so don't be late. Keep in mind that if you make your minimum credit card payments by their respective due dates, they'll count as on-time payments, even if you carry the remainder of your bill forward and pay down that balance later.

Pay off a chunk of your existing debt

The more outstanding debt you have, the higher your credit utilization ratio climbs. That's bad news when you're looking to help your credit score. On the other hand, eliminating some of that debt could drive your utilization ratio down into that more favorable 30% or below range.

Increase your credit limit

Asking your credit card companies for a higher credit limit may be easier than paying off a portion of your existing debt, and if you're successful, it'll achieve the same goal -- lowering your utilization.

Imagine you owe $4,000 on a total line of credit worth $10,000. That's 40% utilization, which isn't great. But if you're able to get that line of credit increased to $12,000, your $4,000 balance will only represent 30% of the amount you're entitled to borrow. And if you're an account holder in good standing who's known for timely payments, there's a good chance your credit card companies will increase your limits, especially if you've had the same limits for quite some time.

Don't close old credit cards you don't use

Tempting as it may be to free up space in your wallet, if you have unused credit cards in your name that aren't charging you an annual fee, retaining them will help your credit history, provided those accounts are in good standing.

Avoid applying for too many new credit cards at once

Lenders frown upon the practice of opening too many new credit accounts at once, because it could indicate that you're rapidly racking up debt (or on the road to doing so). Each time you apply for a new credit card, it's considered a hard inquiry on your credit record, which could drive down your score. Space those applications out, and your score will benefit.

Check your credit report for errors

The information that gets reported to the three major credit bureaus isn't always accurate, and when mistakes are listed that work against you, your credit score could take a hit. These mistakes could include having someone else's debt (perhaps with the same name) land on your account, or having a paid-off debt listed as outstanding. You're entitled to a free copy of your credit report once a year from each of the three major bureaus. Request yours online, review it for errors, and report discrepancies to the appropriate bureau at once. It's estimated that 20% of credit reports contain mistakes, and correcting yours could bring up your score quickly.

While it's always good to aim for as high a credit score as possible, don't get too hung up over attaining perfect credit. Once your score is in the 800s, it generally won't matter whether you're applying for a loan with an 820, 830, or that hard-to-get 850. On the other hand, if your score is a 795 and you manage to raise it to 802, you propel yourself into a much more desirable category, so that's worth doing.

Your FICO score matters

A strong FICO score could spell the difference between getting approved for a mortgage, personal loan, or credit card and getting denied. It could also spell the difference between paying more interest on the money you borrow and paying less.

Imagine you're looking to take out a $200,000 mortgage. As of this writing, with a FICO score of 760 to 850, you could score an APR of 3.409%, resulting in a monthly payment of $888. But if your score falls between 680 and 699 -- good, but not great -- you'll be looking at an APR of 3.808%, with an associated monthly payment of $933. That's a difference of $540 annually for the same loan amount.

That's why your credit score really does matter. Now that you know what FICO scores are and what goes into them, you can take steps to boost yours -- and improve your personal financial picture as a whole.

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