What is FICO score? How is it calculated? Why is it so important?

FICO Score

FICO® scores , FICO scores or Fico credit scores are part of the criteria that many financial institutions use to make lending decisions. Maintaining good financial health requires understanding how you use credit and how it affects your scores.

Using information from your credit reports, FICO assigns a three-digit score to you. This score helps lenders assess your likelihood of repaying a loan. Depending on this, you can borrow less, pay more in interest, and pay less over the course of the loan (the interest rate).

A FICO score can be thought of as a summary of your credit report. You can find out how long you’ve had credit, how much credit you have, how much of your available credit you are using, and whether you’ve paid on time.

FICO scores help lenders make smarter, faster decisions about who they lend money to, but they also make it easier for people like you to get credit when you need it. Since FICO scores are calculated based on your credit information, you can influence your score by paying your bills on time, not carrying too much debt, and making smart credit decisions.

FICO Scores were introduced by Fair Isaac Corporation 30 years ago as an industry standard for creditworthiness scoring that was fair to both lenders and consumers. Many different scores existed before the FICO score, each calculated differently (some even included gender and political affiliation).

How is a FICO® Score calculated?

Many people wonder what factors are most important when determining a FICO score. Several factors have different incidences and weights when it comes to determining whether a person has a high or low credit score.

  • The payment history (35%)
  • The amount of money you owe to creditors and the percentage of credit that you are using (30%)
  • Your credit history (15%)
  • How much new credit you have applied for recently (10%)
  • Your credit mix (10%)

However, keep in mind that these are just guidelines. The importance of each of these factors varies with each individual’s credit history.

These are generally the factors used to generate your credit scores, but your scores are not the only factor considered by lenders when you apply for a loan or credit card. A lender may ask you for additional information, such as your salary, your length of employment at your current job, your occupation, and other information that can help them make an informed lending decision.

Why focus on FICO?

Since all other credit scores are largely based on FICO, understanding your FICO credit score can help you understand how to improve your credit more generally. When you take steps to raise your FICO, you will also raise your credit scores with the three major bureaus. This is in addition to any other scores you may have worldwide. Develop a plan to improve your credit.

What is a good credit score?

Lenders consider consumers with higher credit scores to be less risky than those with lower scores. In general, the higher your credit score, the more likely you are to be approved for a loan and qualify for lower interest rates. However, do you know what a good FICO® Score is?

Based on the FICO® 8 Score, FICO defines five credit score ranges:

FICO® Score Range credit rating
579 and under Bad
580–669 Acceptable
670–739 Good
740–799 Very good
800+ Excellent

How to maintain a high FICO credit score

FICO credit scores range from 300 to 850 points. FICO uses a median credit score value to determine what a good credit score is – according to Fair Isaac and Company, a high credit score is 723.

You can use the following tips to maintain a high FICO credit score:

  1. Never carry a credit card balance that exceeds 50% of your available credit. If your credit card limit is $10,000, you should never owe more than $5,000 on the card.
  2. Keep your total credit balance at 10%-15% of the credit limit.
  3. Make your payments on time, every time.
  4. Don’t keep applying for new credit, as too many credit inquiries can hurt your score, even if you don’t open accounts.
  5. Even if you don’t use old credit lines, leave them open.
  6. Maintain a positive credit history by using credit regularly.
  7. Make sure you review your credit report every year to make sure it is accurate.
  8. Repair your credit if necessary.

Comparison of FICO Scores with other credit scores

Here are a few models of credit scores that you might want to keep in mind.

Scores based on FICO®

Lenders began using FICO  Scores (created by Fair Isaac Corporation in 1989, hence FICO) in 1989, and the models for calculating the scores have been updated multiple times since then. Major lenders utilize FICO ® Scores in more than 90% of cases, according to FICO. Additionally to basic calculations, FICO offers models for calculating scores (and scores themselves) for specific industries, such as auto loans, credit cards, and mortgages.

So even if you check your FICO ® Scores through your bank, for example, you may see a different score than the lender when you apply for credit.

FICO ® Scores range from 300 to 850, and they are calculated based on the following factors:

  • Payment history: 35%
  • Amount due: 30%
  • Credit history: 15%
  • Recent credit requests: 10%
  • Credit Combination: 10%

You may need to know how to interpret your scores based on your scores. The FICO ® Score 8 credit ranges are classified as follows:

  • Outstanding: 800+
  • Excellent: 740-799
  • Average: 670-739
  • Reasonable: 580-669
  • Poor: 579 and lower

FICO® Scores for specific industries, such as the FICO® Auto Score 8 and the FICO® Bankcard Score 8, have a wider range, ranging from 250 to 900 points. They are adjusted for specific types of credit.

You can obtain your free FICO  Scores in several ways, including through your credit card company. Additionally, Discover offers the Credit Scorecard tool.


In 2006, the three major consumer credit bureaus – Equifax, Experian, and TransUnion – formed a joint venture called VantageScore Solutions. There are four VantageScore models and the latest, VantageScore ® 4.0, has a range of 300 to 850 points.

“Data scientists don’t build a model and then put it on a shelf,” says Jeff Richardson, vice president of communications and public relations for VantageScore. The models are constantly tested and validated. As new technologies and modelling techniques become available or if the data changes, their models will be updated accordingly.”

To generate a FICO score, you must have at least one account open for at least six months. In addition, you must have at least one account reported to the credit bureaus during the previous six months.

VantageScore instead can generate credit scores based on one month of history and one account reported in the past 24 months.

Your credit score is used by over 2,200 financial institutions, according to VantageScore.

The following factors contribute to these scores:

  • Payment history: Very influential
  • Credit age and type: Very influential
  • The percentage of credit limit used: highly influential
  • Balances and debt: Moderately influential
  • Recent Credit Behaviour and Inquiries: Less influential
  • Available Credit: Less Influential

It’s pretty much the same as the factors that FICO evaluates, isn’t it?

For the VantageScore ® 3.0 credit scoring model, these are the ranges.

  • Excellent: 750 to 850
  • Good: 700 to 749
  • Regular: 640 to 699
  • Need attention: 300 to 639

Proprietary scoring models

As well as FICO® and VantageScore ® credit scores, each of the three national consumer credit bureaus offers its own credit scores. Often called “educational credit scores,” these scores aren’t usually used by lenders when making credit decisions.

Experian, for instance, offers the PLUS Score, which ranges from 330 to 830 points, and Equifax offers the Equifax Credit Score, which ranges from 280 to 850 points. It is possible that you will have to pay to access these scores.

You will learn how to manage your credit in an intelligent and planned way, so as to maintain a high credit score, so that you have a greater chance of achieving the personal and/or business economic growth you wish.

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