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Credit Scores and Reports

What is a FICO score? How to improve it?

A FICO score is a three-digit number that allows credit card issuers and lenders to assess your creditworthiness. Here's how it works

Summary

Created by the Fair Isaac Corporation, a FICO score is a way for lenders and other companies you deal with financially to see your past history of repaying your debts, as well as other indicators of financial well-being.

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If you’ve been paying attention to your credit score and finances, you’ve probably heard of FICO scores.

But what are FICO scores? And what should you know about them?

What are FICO scores?

FICO scores are three-digit credit scores created by the Fair Isaac Corporation. Credit scores are a way for lenders and other companies you deal with financially to see your past history of repaying your debts, as well as other indicators of financial well-being such as your amount of debt compared to your available credit.

Think of it as kind of a crowd review in reverse. Instead of consumer reporting on experiences with companies, credit reports and credit scores tell companies what they might expect when dealing with you.

FICO scores are popular. According to FICO, they are used by over 90% of top lenders when deciding who they will lend money to, and what terms they will offer.

See related: What credit scores do mortgage lenders use?

Why is a FICO score important?

Your FICO score is important because, along with other factors, it may determine whether you qualify for a loan or credit card, or the interest rate you are offered. The higher your credit score, the more likely you are to be offered credit, and the better the terms you are likely to be offered.

Your FICO score may still affect you, even if you’re not applying for credit. Your insurance rates may be raised if your credit score goes down. You may also have your credit score checked when you apply for a job, an apartment or even senior living facilities. It’s best to pay attention to your FICO score throughout your life, even when you don’t think you’ll need it.

What are the factors of a FICO score?

Your FICO score is determined by five main factors:

Payment history (35%)

The biggest factor in your score is how well you have repaid debts in the past. Payment history includes your record of making payments, any missed or late payments and bankruptcies. One missed payment can significantly lower your score, so it’s important to pay on time, every time.

Credit utilization (30%)

Potential lenders want to know how much you currently owe and how it compares to your available credit. If you’ve used every dollar of available credit, such as credit card limits, that’s a sign you could be headed for financial trouble. Keeping a low credit utilization – ideally, within the single-digit range – is key to maintaining a strong credit profile.

Length of credit history (15%)

Credit accounts you’ve had and used for a long time carry more weight than accounts you opened recently – or accounts you no longer use.

Credit mix (10%)

Lenders and other companies prefer to see a mix of types of credit, instead of just credit cards, for example. You can have a good score without different types of credit, but to get a top score, you might have a mix of credit card accounts, retail or auto loans, and a mortgage loan.

New credit (10%)

Recently opened accounts, or credit inquiries from applying for new accounts, can lower your score. When you apply for a credit card, your FICO score may drop five to 10 points. Fortunately, that’s not a huge drop, and it’s temporary. It’s good to know, however, because a new credit inquiry can make a difference if it lowers your score right before you apply for a mortgage.

How does a FICO score differ from non-FICO credit scores?

Only FICO scores are created by the Fair Isaac Corporation. According to myFICO, non-FICO credit scores can differ by as much as 100 points. Because the lenders you choose probably use FICO scores, you’ll want to know your FICO score before you shop for a loan.

See related: What’s the difference between VantageScore and FICO?

What is a good FICO score?

FICO scores generally range from a low score of 300 to a high of 850.

To get the best interest rates and be sure of qualifying for desirable loans, you should try to have a FICO score of 740 or higher. There’s not much advantage to raising your score once it’s over 800.

If your score is in the “good” range, from 670 to 739, you have an average or above-average score. You should qualify for credit, although you may pay higher interest rates than you would with a “very good” or “exceptional” score.

If your score is “fair,” you may not have access to credit from the lenders you choose, or you may be charged exorbitant rates of interest.

With a “poor” score, lenders see you as a risky borrower. You may have trouble getting new credit.

FICO score ranges

Exceptional800-850
Very good740-799
Good670-739
Fair580-669
Poor300-579

How to improve your FICO score

The first step to improving your FICO score is to make a plan to always, without fail, pay your bills on time or early. Even one bill paid more than 30 days late can drag your FICO score down, and it takes time for your score to recover. Set up alerts and automatic minimum payments when feasible, and use other methods to make sure your bills are paid.

For many people, the next most important step is to work on their credit utilization rate. That means paying down debt, and possibly increasing credit limits to improve your total debt to available credit ratio. An oft-cited rule of thumb is that 30% utilization is the threshold of a good credit score. However, it’s best to keep your balances as low as possible, and pay them off in full each month if possible.

You may want to improve your credit mix if you currently only have one type of credit. You don’t have to buy anything that you wouldn’t otherwise, or necessarily pay interest expense. For example, if you only have a mortgage loan, you could open one credit card account and pay it off every month to improve your credit mix.

Finally, you’ll want to avoid closing your oldest accounts or adding too many new ones to preserve a lengthy credit history. And don’t apply for new credit right before you want your FICO score to be at its best.

See related: How a closed account affects your credit score

Bottom line

If your FICO score is lower than you would like, don’t take it personally. If you are young or haven’t had credit accounts for very long, a low score is not your fault. Even if your credit score is low due to financial missteps, you can always start to build a better score today.

The FICO score is based on data and formulas. By knowing what FICO scores are and how they are calculated, you can take steps to improve your own FICO score, so you get the credit you deserve.

Editorial Disclaimer

The editorial content on this page is based solely on the objective assessment of our writers and is not driven by advertising dollars. It has not been provided or commissioned by the credit card issuers. However, we may receive compensation when you click on links to products from our partners.

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