What Is the Meaning of a FICO Score?

And How You Can Improve Yours

Credit report form on a desk with calculator and other paperwork.
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If you're looking into your credit report or trying to get approved for a loan or credit card, you're bound to come across your FICO score. This score is the branded version of your credit score most widely used by the nation's largest financial institutions to make credit and loan approval decisions. There are 27 million FICO scores sold each day, and it's used in 90% of all lending decisions in the United States.

History of FICO

FICO was founded in 1956 by engineer Bill Fair and mathematician Earl Isaac and originally was named Fair, Isaac, and Company. The initial goal, according to its website, was to improve business decisions by using data intelligently. Fair and Isaac developed and sold their first credit scoring system in 1958. In 1991, FICO scores were released to the three major credit bureaus, and by 1995, Fannie Mae and Freddie Mac were recommending the use of FICO scores for mortgage lending. In 2009, the company officially changed its brand name and stock symbol to FICO.

FICO Versions and Your Score

FICO has evolved through many different versions over the years. Since 2014, the newest version of the FICO score, FICO 9, has eased the impact of medical debt on consumer credit scores. Not all lenders adopt the latest FICO scores at the same pace, though. Many still rely on FICO 8, and some utilize several versions, so it's important to know which system your lender uses.

Whichever version your lender uses, what the FICO score means to them is how risky you are as a borrower. Each of the three major credit bureaus—Equifax, Experian, and TransUnion—calculates scores using FICO's formulas and information in detailed reports they keep on your credit history. Scores range from 300-850, with a higher score representing a lower risk to lenders.

In terms of general meaning, scores higher than 700 are considered good, while scores higher than 750 are considered excellent. Scores lower than 650 generally are considered bad, and lower than 600 are very poor. It's important to understand, though, that different lenders have different standards, and they're all looking at different details on your credit report. For example, a score of 675 may get you approved for a mortgage, but not for a particular type of credit card. And no matter how low your credit rating may be, you can start building a better score today.

The FICO Factors

Your FICO score is based on five key pieces of information

  • The timeliness of your payments accounts for 35% of your score. This is a simple question of whether or not you pay your bills on time. If payments are late, are they 30, 60, or 90-plus days late? Have any accounts been sent to collections? Have you had any bankruptcies or foreclosures? The more negative marks you have and the more severe they are, the more your score will be impacted.
  • The amount of debt you have affects 30% of your score. Credit bureaus look at what's called your credit utilization ratio. Typically, your score will be higher if you use no more than about 30% of your available credit. So, if you have credit cards with combined limits of $10,000, your score will be higher if you keep your combined balances to no more than about $3,000. The lower you keep this ratio, the better.
  • The age of your credit counts for 15% of your score. How long have you had your accounts open, on average? If you've been using credit for decades and doing so responsibly, you'll probably have a higher score than someone with a very short credit history. This is why it's a good idea to keep credit card accounts open even if you no longer use them.
  • The number of recent credit applications you've submitted accounts for 10% of your score. If you apply for credit frequently, creditors will view you as a risk, which will lower your score. From a lender's perspective, people who seek new credit more often might be suffering from cash flow problems. And cash flow problems are a big red flag for lenders.
  • The mix of accounts you have contributes about 10% of your score. This includes all types of loans: mortgage, auto loan, student loans, credit cards, and any other type of credit. The greater the variety of accounts you have, the better your score will be. Work to build a balanced blend of credit types over time.

What's Not Included in Your FICO

FICO scores cannot be based on anything discriminatory, such as your sex, race, marital status, religion, nationality, or age. Additionally, FICO says it doesn't consider information about where you live, your job, salary, or the interest rates on your credit accounts. And while your credit applications can affect your score, soft inquiries into your credit do not impact FICO. These include your own requests to view your report, requests by potential employers, or lenders checking for pre-approval offers.

Checking Your Score

You can purchase your FICO scores from the three major credit bureaus by visiting myFICO.com. Some banks, credit unions, credit card issuers, and other financial services include a free FICO score with your monthly statement. You can also request a free copy of your credit report, which will include your FICO score, every 12 months from each of the three major credit bureaus.

Now that you know more about your FICO score, what it means, and how to track it, you can see what causes yours to fluctuate over time. Try setting yourself some goals for how you'll improve yours this year.