FICO is the biggest name in town when it comes to credit scores. Most major card issuers and lenders in the U.S. use FICO’s traditional model to decide whether to extend credit to consumers and at what interest rate. According to the company’s website, 90 percent of all lending decisions in the U.S. use FICO scores, and more than 27 million scores are sold each day.
So how is your FICO score calculated?
FICO doesn’t collect credit data on its own. Instead, it pulls your credit reports calculated by credit bureaus (Experian, Equifax and Transunion) and crunches that information into a three-digit credit score.
While the inner workings of the FICO scoring system are a closely guarded secret, the company is open about the five general components of a FICO credit score and how big a role each plays in coming up with the number.
See related: What is a good credit score?
Here's a breakdown of the five elements of the FICO score:
1. Payment history
Your payment history comprises 35 percent of the total credit score and the most important factor in calculating credit scores. According to FICO, past long-term behavior is used to forecast future long-term behavior.
FICO keeps an eye on both revolving loans – such as credit cards – and installment loans, such as mortgages or student loans.
“FICO scores consider the frequency, recency and severity of reported missed payments,” said Tommy Lee, principal scientist at FICO. “Generally speaking, FICO scores do not consider missing a loan payment as more negative than missing a credit card payment.”
One of the best ways for borrowers to improve their credit score as a whole is by making consistent, timely payments. Previously, you had to rely on lenders and landlords to report this information to the credit bureaus. But with the 2019 launch of Experian Boost, you can take more control of your credit score by self-reporting good behavior.
2. Credit utilization
Credit utilization – the percentage of available credit that has been borrowed – makes up 30 percent of your total credit score.
Since FICO views borrowers who habitually max out credit cards – or who get very close to their credit limits – as people who cannot handle debt responsibly, try to maintain low credit card balances. FICO says people with the best scores tend to have an average credit utilization ratio of less than 6 percent, with three accounts carrying balances and less than $3,000 owed on revolving accounts.
There’s no benchmark credit utilization ratio above zero that will maximize your credit score – not even the oft-cited “30-percent rule,” Lee said. Credit utilization is measured individually by card and also across multiple cards.
As you see, the first two factors make up nearly two-thirds of your score. So, if you pay your bills on time and don't carry big balances, you're two-thirds of the way toward a good credit score. The final credit score pieces can move you from a good score to a great one.
3. Length of credit history
Length of credit history – the length of time each account has been open and the length of time since the account's most recent action – is 15 percent of your total credit score.
It’s impossible to have a perfect credit score if you’re new to credit, but it doesn’t necessarily take long to achieve a high score. A longer credit history provides more information and offers a better picture of long-term financial behavior.
Therefore, to improve their credit scores, individuals without a credit history should begin using credit, and those with credit should maintain long-standing accounts.
“Those who don’t have a long credit history can still have an excellent FICO score if they have no missed payments and low utilization ratios,” Lee said.
4. New credit
While new credit accounts for 10 percent of your total FICO credit score. But this doesn’t mean that opening multiple credit lines at the same time will improve your score. In fact, such behavior could suggest you are in financial trouble by needing significant access to lots of credit.
“We encourage consumers to apply for and open new credit accounts only as needed,” Lee said. “New accounts will lower your average account age, which will have a larger effect on your FICO scores if you don’t have a lot of other credit information.”
See related: A two-step plan for building young credit
5. Credit mix
Credit mix makes up the last 10 percent of your score. While this is somewhat of a vague category, but experts say that repaying a variety of debt products indicates the borrower can handle all sorts of credit. According to FICO, historical data indicates that borrowers with a good mix of revolving credit and installment loans generally represent less risk for lenders.
“People with no credit cards tend to be viewed as higher risk than people who have managed credit cards responsibly,” Lee said. “Having credit cards and installment loans with a good credit history will help your FICO scores.”
Knowing the various weights given to components of a FICO credit score can help you identify the areas where your score most needs to improve.