What is a FICO Score? How the Popular Credit Scoring Model Calculates Your Risk

FICO is not the name of a dog. That would be Fido. But FICO can be just as loyal and rewarding — if you treat it right.

FICO is a credit scoring system, and your FICO score is a number that tells lenders whether you’re a trustworthy borrower or a bit of a gamble.

A FICO score is a three-digit number representing an assessment of your creditworthiness derived from your credit history that is used by lenders to gauge the riskiness of lending to you.

Now, I’m not going to sugarcoat it — this number is incredibly important. Buy a house, get a new car, or just open a credit card, and your FICO score will snitch on you like a nosy neighbor.

Not to worry, as I will break it all down here so that by the end of this read, you’ll be on a first-name basis with your FICO score and what makes it tick.

Consider your FICO score as your financial reputation expressed in numerical terms. A little reductive, don’t you think? A few key components make up your score, things like how well you have paid your bills and how much your incurred debt has been until now. 

Knowing what goes into your score is essential because it helps you make smarter financial decisions and clears up at least a little of the mystery of how lenders view you.

The FICO Score Range

The most popular FICO score model, FICO Score 8, ranges from 300 to 850, and your score really does make a big difference in your perceived creditworthiness. Each range has a name and meaning attached to it, so it is easy to know where one stands.

My list here breaks down the FICO score ranges and what they mean in simple English.

• Very Poor (300-579): If you have a score in this range, you’ve had some credit troubles, like missing payments or running up too much debt. Maybe you have an account in the collection or bankruptcy. Lenders consider you a high risk, so it’s hard to get credit approved. You might still find some options, but you can pretty much bet they’ll come with steep interest rates and terms.
• Fair (580-669): You’re doing OK, but you’ve got room for improvement. Lenders view you as somewhat of a risk, and although you might get approved for credit, that doesn’t mean it will come with the best terms. You should work on improving your score if you are able to do so.
• Good (670-739): A score in this range tells lenders that you have a solid credit history. Most likely, you’ll be approved for the majority of loans and credit cards at pretty decent interest rates. Keep up the good work — you could move up to the “Very Good” range.
• Very Good (740-799): You present a low risk to lenders, and you can get pretty much the best rates and terms. You have done quite well managing your credit, and you show it. Continue what you’re doing, and you just may make the top tier.
• Exceptional (800-850): You are the cream of the crop! A score in this range is as perfect as can be and proves to lenders you are the champion where credit management is concerned. You shouldn’t have any issues getting approved for credit with absolutely the best terms and rates available.

No matter where you are on the scale, knowing your score helps you understand what creditors think when they check your credit. And if your score isn’t quite where you want it, don’t worry — there’s always room to propel it higher. 

I know ‘cause I started off with fair credit, and it’s taken many years to claw my way into the very good category. I’ve vowed not to let them bury me until I hit “exceptional.” 

Why Lenders Use FICO Scores

Lenders use FICO scores to figure out how big of a risk it is to lend you money. They want to know whether you are going to repay what you borrowed from them, and your FICO score gives them a quick summary of your financial past. 

The higher the score, the better your credit record. A low score is a huge red flag, and will send a lot of lenders running.

Lenders check your FICO score to see how well you manage credit and it helps them make decision on whether to approve your application

Whenever you enroll for a loan or request a credit card, the creditor checks your FICO score (and/or VantageScore) to decide whether to accept you and what interest rate to charge. With a good score, you will usually secure better loans and cards, meaning they will have low interest rates and attractive terms. 

Low APRs mean less of your money is gobbled up by interest. On the opposite side, a low score guarantees higher interest rates, assuming you are approved in the first place.

Think of it like this: Your FICO score is essentially a graded report card for the financial portion of your life. That’s a pretty compelling reason to whip yours into shape.

How to Check Your FICO Score

Dying to know your FICO score? There are several places to get it. The big three credit bureaus — Equifax, Experian, and TransUnion — are as good a place to start as any. Many of them provide ways to check your score for a fee or as part of a credit monitoring service. 

You can also receive your FICO score through various financial institutions. Many banks and credit card companies will give you free score access to spur you into doing business with them. It never hurts to contact your bank or your credit card issuer to find out whether they offer this service. 

You can also use online services or apps specializing in credit scores and reports. Sources such as myFICO and Credit Karma can provide access to your score and tips on how to improve it. Always be sure that you are dealing with a trusted source so you know the score you see is the real thing.

Knowing how FICO crunches your score is sort of like learning the recipe for how Mom makes her Meat Loaf Surprise — you have some understanding of why it turns out the way it does. 

Your FICO score is based on the information furnished to the nation’s three major credit bureaus — Equifax, Experian, and TransUnion — courtesy of banks, credit card companies, and other creditors. Your public records also enter the mix.

Here are what the categories boil down to (and I’ll explain them much more in-depth later):

These bureaus gather all the data about your credit use — your borrowings and repayments. The bureaus then churn the information through their supercomputers and spit out your FICO scores. I hope Mom’s meatloaf receives better treatment!

Why does this matter? Well, knowing what goes into your score gives you the power to improve it. If you know the ingredients in your dinner, you can make changes to improve its nutrition and flavor. But enough preamble. I’ve assembled descriptions of the five main factors that make up your FICO score so you can see how to care for it.

Payment History (35%)

Your payment history is the big kahuna of your FICO score — it’s the most critical factor, accounting for 35%. It’s the big cheese because lenders want to know that you repay your borrowed money when it’s due. Timely payments show you are reliable, and that’s just what lenders want.

Payments 30 days overdue for a credit card, mortgage, or loan are reported in your credit history and can stay there for seven years. Even just one late payment can ding your score, so staying on top of due dates is critical. I suggest you set up automatic payments or reminders to save yourself a lot of trouble.

The good news is that it’s not the end of the world if you slip up a time or two. That said, the more overdue a payment gets, the more painful it’ll be to your score. 

Amounts Owed (30%)

The amount of money you owe accounts for 30% of the FICO score pie. This ratio combines the dollar amount that you owe. But it’s not just the dollar amount that you owe; it’s also how much of your available credit you are using. 

This is reflected in the credit utilization ratio, an essential part of this category. Lenders like to see that you’re not maxing out your credit cards because that may signal that you’re overextended.

The ratio is calculated by dividing the amount of credit you’re using by the total amount available to you, and it can be a big deal. You always want to keep it at 30% or less. The lower the ratio, the better — people with the best FICO scores have CURs down around 1%. High ratios will drag down your score as rapidly as a stone thrown into a lake.

While this category has a great deal to do with credit utilization, it also includes the total amount of debt you carry across all accounts, how much you owe on certain types of accounts, such as credit cards versus loans, and how much you have paid off from your original loan amounts. Keeping your debt in check really does help nursemaid your score.

Length of Credit History (15%)

It’s all about showing experience with managing credit; 15% of your FICO score stems from the age of your credit accounts. Generally speaking, the longer you have credit accounts open, the better it looks to lenders; they very much want to see you have been using credit responsibly over a long period.

This category considers the age of your oldest account, your newest account, and the average age. Old accounts are good. For example, if you’re 10 years into a credit card and just got a new one, the average age of your credit accounts drops, which can hurt your score.

You may be tempted to close old accounts that you never use anymore. Think twice. It’s one of the worst ways to slice years off of your credit history and lower your score. Sometimes, that old account is better left open, even if you are not using it much, just to show a long history of good credit account management. Of course, you should take any annual fee into account — it may not be worth paying for a card you never use.

Credit Mix (10%)

Your credit mix refers to the variety of credit accounts you have. This includes credit cards, mortgages, auto loans, and other kinds of credit. Lenders like to see that you can manage all sorts of credit effectively, so this tends to bump up the score just a bit more.

Here’s the thing — don’t chase new types of credit just to expand your mix. That is a dangerous game that could backfire, increasing overspending and debt, which could then lower your credit score. 

I advise you to apply for a new type of credit only if you really need it, not to try to bump up your score. Generally, you can benefit from having a broad mix of credit accounts, but it’s not worth the trouble if you’re stretching yourself too thin. 

New Credit (10%)

This category looks at how often you apply for new credit. Each time you do, it generates a hard inquiry from the creditor, resulting in a mild ding to your FICO score.

However, lenders get nervous if you apply for too much credit in too short a time span. I recommend you wait at least six months between applications.

Hard inquiries will remain on your report for two years but affect your scores only for one. FICO gives you a pass when rate shopping by counting all inquiries made within a 45-day window as one, so it won’t impact your score very much.

Not all inquiries are created equal — soft ones, like checking your own credit or getting pre-approved, never affect your score at all. If you’re smart about the way you apply for credit, it won’t bother your score — like water off a duck’s back.

Your FICO score is like a secret handshake in the world of credit cards and loans. It can open some doors or slam them shut. That’s why you should pay attention to how your score affects everything it touches. It is a titanic influence on whether you sail in calm waters or end up visiting Davy Jones’ locker. 

Interest Rates 

When it comes to interest rates, your FICO score can become a kingmaker. A better score quells creditors’ fears, allowing them to let you borrow at a lower interest rate. Creditors are sensitive creatures who want to feel that you are going to pay them back. A low interest rate is their way of saying, “We trust you — but don’t cross us.”

Your FICO score determines how high your interest rates are on loans and credit cards. If your score is high, you’ll qualify for much better interest rates.

Creditors get really nervous if you’re on the lower end of the FICO score range. They may still offer you credit, but it’ll come with a catch: higher interest rates. They do this to protect themselves in case you don’t pay up on time. It’s like paying extra for insurance, just in case things go south. That’s why it pays (literally) to keep your FICO score in good shape. 

Even a small difference in interest rates can add up to a lot of money over the life of a loan. So, if you’re gunning for the best deals, start by bumping up that score.

Loan and Credit Card Approval

Your FICO score controls the airlock separating you from the loans and credit cards you need. It’s the way lenders determine whether you can enjoy a pleasant borrowing atmosphere or you run out of financial oxygen. 

When your score is not that great, the offers can be less than stellar, with higher rates and fewer perks. The good news? With the improvement of your score, so are your options. You will move from the kids’ table to the grownups’, where the deals improve a lot. So, if you can afford to wait, take some time to build your score before applying. 

Rates and Terms for Other Financial Products 

Your credit score is the key to your ability to acquire financial products, from mortgages and car loans to many others. A high score will mean that lenders can accept you at better interest rates, saving you money in the long run.

A higher FICO score can save you thousands (or tens of thousands) of dollars in interest over the life of a 30-year mortgage.

On mortgages, the high scores can save you tens of thousands in interest. For car loans, it means more of your payment goes toward the car and not just interest. Conversely, a low score means higher rates and bigger down payments on more expensive loans. That’s why monitoring your FICO score is central to getting the best deals.

I’m pretty confident you’d rather have a smooth financial life than one chopped up by a low FICO score. Here are some tips to keep things humming like a well-oiled machine: 

1. Always Pay Bills on Time 

Paying your bills when due is like arriving on time for your audience with the King — it’s good manners. Make it a habit to pay all of your bills in a timely manner, and you’ll project a trustworthy aura. 

Simple in concept, this has enormous implications for your FICO score, so make it a priority to pay every bill by its due date. Set up reminders or put it on autopay if you can; after all, even one late payment can drop your score a notch.

2. Manage Your Debt Wisely 

When I go hiking, I want a light backpack that won’t weigh me down. I feel the same about debt — I want to keep it manageable. The less you owe in debt, the better your FICO score will be. First off, focus on the high-interest credit cards and always try to keep the balances low. 

Using less than 30% of your credit card limit will perk up your score. Borrow intelligently, don’t bust your budget, and repay as fast as you can. It doesn’t guarantee happiness, but it’s not chopped liver either (that’s a food for Boomers).

3. Limit New Credit Applications

Think of applying for new credit as candy — it’s not good to have too much of it. Every time you apply for a new credit card or loan, the event is recorded in your credit report as a hard inquiry, which dings your score just a little. 

So be judicious about when and why you apply for new credit. Do it only when you have to, and your score will be healthier. Better to savor what you have than to grab at more than you can handle.

Your FICO score indicates how reliably you deal with the money you borrow. A good score communicates to the world that you are trustworthy and take care of obligations. Unsatisfactory scores are evidence that you have difficulty managing credit. 

Tend to your debts carefully, and your financial garden will bloom. Neglect them, and you’ll have nothing but weeds.