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Everything You Need to Know About a Fico Score

- Jan 30, 2022 credit, Credit Scores4 comments

If you recently applied for a credit card, mortgage, etc.,  you probably bumped into a 3 digit number called your FICO score. What in the world does that three-digit number mean? In this post, we will discuss everything you need to know about Fico scores. Let’s jump in.

Who is FICO?

The company FICO  (Fair Isaac and Co.) was founded in 1956 by engineer Bill Fair and mathematician Earl Isaac. Nowadays, it is a public company traded on the New York Stock Exchange. FICO is not owned by the US government.

What is a FICO score?

A FICO score is a three-digit number ranging from 300 to 850. The score determines how odd it is for the person to default on a loan. The higher your score basically says that FICO determined that based on the information on your credit report it is less likely for you to default on a loan. The same is true vice versa. 

Is FICO one of the credit bureaus?

No. FICO is a scoring model, not a credit bureau. Credit bureaus are the ones that create your credit report by collecting the information about you from lenders. The three popular credit bureaus are Experian, TransUnion, and Equifax. Fico is a scoring model that takes the information from your credit report (collected by the credit bureaus) and based on the info, calculates your credit score. 

How does FICO calculate a score?

FICO collects data from millions of consumers and figures out which consumers who had any given factors on their report, ended up being 90 days late or more on a loan. Based on these facts, they will determine, using the information found on your credit report, how likely you are to default on a loan.

For example, let’s say in your history you had two 60 day late payments. FICO will see these late payments on your credit report and compare this information to millions of other consumers who also had two 60 day late payments in the same or similar pattern as you. Then FICO will figure out how many of those consumers ended up being 90 days late on a loan and based on those numbers, they will calculate your credit score. (Of course, FICO will take into consideration a lot of other things, like how many positive accounts you have etc. I just wanted to give you a quick and easy example.)

What are the main factors that FICO will look at?

Even though FICO keeps its credit formula highly confidential, these five factors are known to have the biggest impact on your FICO score.

  • Timely Payments= 35% of the FICO score
  • Credit Utilization = 30% of the FICO score
  • Credit History= 15% of the FICO score
  • Credit Mix = 10% of the FICO score
  • New Credit=10% of the FICO score
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Is FICO the only scoring model?

No. There are other scoring models out there, like Vantage score, and others.  But FICO is by far the biggest and most widely used. FICO claims that the stunning numbers of over 90% of lenders use the Fico score model when making lending decisions!

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Does FICO have only one scoring model?

No again. FICO has several scoring models (actually, there are over 50 FICO scoring model versions!!).  Fico 09 is the newest but a new scoring model called  Fico 10 will be released shortly

All of the scoring models are used daily in lending decisions and every scoring model will result in a slightly different FICO score.

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Does every person have a FICO score?

No. In order for FICO to be able to calculate a score, you must have an open trade line for at least six months. And the account must have been active within the last six months.

What is a good FICO score?

According to FICO, the following is how your credit score ranges.

Rating Description
<580 Poor This credit score is well below the average score of U.S. consumers and demonstrates to lenders that the borrower may be a risk.
580-669 Fair This credit score is below the average score of U.S. consumers, though many lenders will approve loans with this score.
670-739 Good This credit score is near or slightly above the average of U.S. consumers and most lenders consider this a good score.
740-799 Very Good This credit score is above the average of U.S. consumers and demonstrates to lenders that the borrower is very dependable.
800+ Exceptional This credit score is well above the average score of U.S. consumers and clearly demonstrates to lenders that the borrower is an exceptionally low risk.

How do I build a good FICO score?

Building good credit is lifetime work. Here are the things to always keep in mind:

  • Be careful never to miss any payments on any loans
  • Never have credit card balances above 9% of your credit limits
  • Don’t open new accounts too frequently
  • Never close your oldest two or three cards
Frequently asked questions
My score dropped by 9 points. What can be the reason?
Scores always go up and down. A 9 point drop is nothing to be concerned about. It's like a heart rate which always fluctuates. Do you run to the doctor every time your heart rate goes down a drop? 

Was this article helpful?

Sam Sam has nearly a decade's worth of experience educating his many readers on everything credit. Sam spends his days checking out credit cards for a full report, from the minute benefit details to the shebang of welcome bonuses. Plus studying the ins and outs of building proper credit. It’s his favorite pastime and he loves sharing it with others.

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4 Comments

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