The last time you applied for credit, did the lender mention anything about your FICO credit score? Whether you were attempting to get approved for a car loan, mortgage, or credit card, chances are your FICO credit score was a major determining factor for approval. And the lender or creditor may have asked if you knew your score to gauge what you would possibly qualify for before applying.
If you had no idea what your FICO credit score was or how it’s calculated, this guide will provide the clarity you need so you’ll be well informed the next time around. This information is also useful if you’ve never applied for credit but plan to do so in the future.
What is a FICO credit score?
In a nutshell, the FICO credit score is a three-digit number, ranging from 300 to 850, that reflects your creditworthiness based on how you’ve managed credit over time. According to myFICO, it “predicts how likely you are to pay back a loan or other credit obligations in a timely fashion.”
It’s used by 90 percent of the top U.S. lenders to make credit decisions. Why so? Well, it helps them understand your credit risk or the likelihood that you’ll pay your bills on time.
Your FICO credit score is calculated using information from your credit report from each of the three credit reporting agencies; Equifax, Experian, and TransUnion. Even better, it changes anytime the information in your credit report changes and is essentially a snapshot of your credit profile at any point in time.
Why do FICO credit scores matter?
For starters, your level of credit risk determines whether you’ll qualify for credit, and at what rate. Decisions are made on a case-by-case basis per lender guidelines, but the most competitive credit and loan products go to those with the higher credit scores.
If you have a lower FICO credit score, you won’t necessarily be banned from credit and loan products. However, you may spend hundreds, if not thousands more in interest due to higher interest rates.
Beyond credit and loan products, FICO credit scores can impact other areas of your life, including:
- Career advancement: When you find that dream job, you go the extra mile to impress interviewers. But if a credit check is a prerequisite to getting hired and your credit history isn’t up to par, you could be removed from the pool of top applicants. (By federal law, your credit score is not accessible, but your credit report is if you grant permission).
- Car insurance rates: If your auto insurance provider analyzes credit history when calculating premiums, a low score means yours could be a bit steeper.
- Deposit requirements for services: Planning on switching cell phone providers or connecting utilities in your name? A lower credit score could trigger higher deposit requirements. Landlords may also require higher security deposits for prospective tenants that pose a high credit risk.
So, while you can’t control your credit score, you have full responsibility for how you manage credit. You should also monitor what’s in your report to ensure it’s accurate and timely. Otherwise, you’ll need to file disputes so your credit score won’t suffer as a result of incorrect information.
What’s in your FICO credit score
Wondering what data from your credit report is used to calculate your FICO credit score. There are five categories:
Payment History (35 percent of FICO credit score )
Since FICO credit scores are an indicator of credit risk in the eyes of lenders, payment history plays an important role in the equation used to calculate your score. In fact, it’s the most important factor of your FICO credit score, and for a valid reason.
If you struggle to make timely payments on your current credit obligations, the likelihood of default on future debts is high. So if you fall into this category, try to prove prospective creditors otherwise by getting caught up on past due obligations and maintaining a positive payment history. This will demonstrate to lenders that you’ve turned a new leaf, and they may be willing to extend credit with more favorable terms to you off the strength of this, alone.
With regards to payment history, you should also know that accounts usually aren’t reflected as delinquent until they’ve reached the 30-day mark. And if the delinquency continues, they will be marked at 60, 90 and 120 days, and most likely written off as a bad debt by the creditor. Both late payments and charge-offs or collection accounts remain on your credit report for seven years, but the later have more serious consequences for your FICO credit score.
Amounts Owed (30 percent of FICO credit score )
This section pays close attention to your credit utilization ratio, or how much of your available credit you are using at a particular point in time. The higher the utilization ratio, the lower your score as it indicates to creditors that you may be overextended.
While installment loans are factored into this category, how you use and manage credit cards will carry more weight. Paying down installment loans according to the amortization schedule is enough to show that you can handle this type of obligation, but credit cards are another story.
You have control over how much credit you’re using each month, and lenders like to see this percentage at 30 percent or lower. If it gets any higher, your score may start to suffer. To illustrate, if you have $5,000 in credit limits, any usage at or below $1,500 is ideal. Otherwise, you run the risk of your FICO credit score dropping.
Length of Credit History (15 percent of FICO credit score )
The longer you’ve been in the credit game, the better your FICO credit score will be. Well, that’s if you’ve responsibly managed your credit over time. And keep in mind that closing an account won’t cause it to be deleted from your credit report and not factored into your credit history.
But this doesn’t mean that you’re doomed for a poor FICO credit score if you’re a credit newbie. By taking the right actions, you’ll be on your way to building a strong score sooner than later. More on that shortly.
Credit Mix (10 percent of FICO credit score )
There are two types of credit accounts: installment (i.e. auto loans, student loans, personal loans, mortgages) and revolving credit (i.e. credit cards). Having one type but not the other may not tank your score as it only accounts for 10 percent unless you don’t have much else going on in your credit report.
So, it’s not a bad idea to have both, but refrain from opening installment or revolving credit accounts you don’t need.
New Credit (10 percent of FICO credit score )
Tempted to apply for several credit accounts in a short span to boost up your available credit? Proceed with caution as each application for credit generates a hard or voluntary credit inquiry, which can drop your credit score by two to five points on each occurrence.
Furthermore, applying for too much credit in a short window of time makes you look riskier to creditors, particularly if you’re a credit newbie. Fortunately, hard credit inquiries only impact your FICO credit score for 12 months, and multiple inquiries are only counted as one when rate shopping. for the best deal on a loan.
What’s not in your FICO credit score
Several components of your credit report are not used to calculate your FICO credit score. These include:
- Personal/ Identifying information, like your race, religion, marital status, address, and age
- Employment history
- Family and child support obligations, including child support and salary
- Involuntary credit inquiries, including those that are not issued by you, but are used by creditors to determine if you qualify for pre-screened credit offers
Are there different types of FICO credit scores?
To date, FICO credit score 8 is the primary figure used by creditors. However, there are several variations to this model including:
- FICO Auto Scores 2, 4, 5 and 8, which is used by auto lenders
- FICO credit score 3, along with FICO Bankcard Scores 2, 4, 5, 8, which is used by credit card providers
- FICO credit scores 2, 4, and 5, which is used by mortgage lenders
Quick note: the most recent versions are FICO credit score 9, FICO Auto Score 9, and FICO Bankcard Score 9.
What are FAKO scores?
Also known as equivalency scores, FAKO Scores are variations to your FICO credit scores that are calculated using alternative scoring models. They are commonly seen on monitoring sites that can be accessed free of charge, but most lenders won’t use these figures when making credit decisions. Instead, they are used to give you an idea of where you stand and could differ drastically from your real FICO credit score.
Popular FAKO scores include the VantageScore 3.0 and the Experian National Equivalency Score.
Where can I find my FICO credit score?
Your credit report is available free of charge on AnnualCreditReport.com. Unfortunately, you’ll have to pay for your score. You can visit any of the three credit bureau’s websites to purchase your score.
But if you’re planning to apply for credit in the near future, it may be worth speaking to the lender to see which version and credit bureau they use to get the most accurate picture of where you stand.
You may also be able to access your credit score for free via your online credit card statement or through your financial institution’s portal. It’s not uncommon for them to provide updated FICO credit scores on a monthly basis.
Why are my FICO credit scores different?
When viewing your FICO credit scores from the three credit bureaus, you may find that they are different. This can be attributed to the fact that not all three lenders and creditors send account information to the three credit reporting agencies.
In addition, there could be a lag in the time the information is being reported. So one credit bureau may have current information while the other one doesn’t. In turn, the credit scores could be different across the board.
What if I don’t have a FICO credit score?
In order to have a FICO credit score, you must have a credit history. Otherwise, you’ll receive an error when attempting to obtain your score. This is referred to as a blank or thin file.
So, what constitutes credit history. According to myFICO, you must have one of the following to obtain your FICO credit score :
- A credit account that’s been open for at least six months
- A credit account that the lender has reported to the bureaus at least once in the past six months
Quick note: if the account listed is shared with someone who is deceased, you may not be able to retrieve a FICO credit score.
How can I increase my FICO credit score?
Depending on what’s in your credit report, increasing your FICO credit score could be quite the marathon. Here are some tips to help you boost your FICO credit score.
- Dispute inaccurate or untimely information
- Make timely payments
- Reduce outstanding credit balances
- Refrain from applying for new credit
- Apply for a secured credit card or personal loan
- Apply for a credit builder loan
By taking these actions, you’ll quickly start to see your score climb. It’s also recommended that you analyze your free credit report to confirm your score isn’t in the trenches as a result of untimely or incorrect information.