How Is a FICO Score Calculated? 5 Factors That Go Into Your Score

Chances are you’ve heard of your FICO score and consider it pretty much interchangeable with your “credit score.” This article will explore how one corporation came to be synonymous with the “credit scoring” industry and give a little insight into how a FICO score is calculated based on your credit history.

While your credit report is a record of your payment history, your credit score is a number lenders and banks use when determining whether to lend you credit. Sometimes even landlords, employers and insurance firms use your FICO score to determine your responsibility when it comes to paying back debt.

Introduced in 1989 by Fair, Isaac and Company (FICO), a majority of banks and creditors now use the score to guide the loan or credit process. FICO uses reports from the three national credit bureaus–Experian, Equifax, and TransUnion–to calculate these scores. As you probably know if you’ve ever used a service like Credit Karma to check your own credit score, the classic score can vary based on the information provided by the credit bureau.

How Is a FICO Score Calculated?

Though FICO doesn’t release the exact way your score is calculated, in general, a score is based on the following factors:

• Payment History—35% of your score is based on whether or not you have paid past credit accounts. This is usually the first thing a creditor wants to know about you and by far the most important element of your credit score. To keep your score as high as possible, it’s a must to pay every bill on time.
• Amounts Owed—30% of your score is based on how much money you owe to lenders and is often looked at in terms of a “utilization ratio”. Owing money doesn’t necessarily mean that you will have a low score, but your score takes into account how much you owe against your available credit. This can help banks and lenders figure out if you’re overextended and at a higher risk of defaulting on your loans.
• Length of Credit History—15% of the score is comprised of the age of your credit accounts. FICO takes into consideration your oldest account, your newest account and a median of all of them. The longer you’ve had an established credit history, the better. FICO also looks at how long it has been since you last used your account.
• Types of Credit In Use—10% of your score is based on the varying types of loans and credit that you have. This can cover credit cards, retail accounts, and mortgages among other things. While it’s not necessary to have one of each, a little bit of diversity can help boost your score.
• New Credit—The last 10% of your score is based on how many new lines of credit you have opened. FICO states that “Research shows that opening several credit accounts in a short period of time represents a greater risk – especially for people who don’t have a long credit history.” Try to space out your new credit lines as much as possible.

What Doesn’t Go Into a FICO Score?

FICO only uses the information in your credit report to assign you a score. In general, FICO doesn’t care about the following when calculating your score:

• Your age, race, marital status, religion or origin.
• Your occupation, salary and length of employment.
• Any financial obligation listed as child/family support.
• Interest on an account.
• Any information not found in your credit report.
• Whether or not you are participating in credit counseling.

What Are FICO Score Ranges?

There are several other types of FICO scores including bankcard, personal finance, mortgage, installment loan, or auto loan. The range for the classic FICO score is between 300-850. If you are in the market for a business loan, the types of loans you can qualify for will depend on your credit score. The scores generally line up like this:

300-579: Poor credit

Generally, having poor credit will make it very difficult to get credit from a lender. It’s very likely that applications in this range may only qualify for a secured credit card or loan, meaning you should expect to put down cash before you’re extended any credit.

580-669: Average/fair credit

A score that falls under 669 but above 580 is considered fair. Applicants in this range may be approved for a loan, but should expect subprime rates that are significantly higher than the interest rates offered for higher credit scores.

670-739: Good credit

A good FICO score is the average for most U.S. borrowers. This range will is considered acceptable to many lenders and most applicants will qualify for a wide array of credit cards and loans. That said, they will likely not be offered the best interest rates available. If you’re interested in an SBA loan, this is typically the lowest FICO score range that will be approved.

740-799: Very good credit 

Very good credit scores will provide applicants with even better interest rates and approval odds.

800 and up: Excellent credit

An excellent (or even perfect) FICO credit score is the range many borrowers strive for. This range will open up a wide array of options, including the very best interest rates and terms on the market.

According to FICO, the median average score was 711 in 2011. In 2003, the passing of the Fair and Accurate Credit Transactions Act allowed consumers to get a free copy of their credit report once a year from each of the credit bureaus. For your own free copy, check out Annualcreditreport.com (and don’t fall for fake competitors who will try to charge you!)

How Often Is a FICO Score Calculated?

Every month lenders report updated account information to the credit bureaus. Depending on what is reported, this may or may not change your FICO credit score. Each time you or a lender requests your FICO score, it’s recalculated, but it may not change depending on whether your credit report has changed.

In addition, your FICO score automatically changes from time to time as you make on-time payments and improve your credit utilization ratio. That said, it may take a few months to see a big change to your FICO score, even if you’ve made positive changes. According to FICO, on average only one in four people saw a 20-point change over a three-month period.^[1]

Article Sources:

1. myFico.com. “Do FICO scores Change That Much Over Time?“