FICO Score: How It Works [Complete Guide]

Key Takeaways:

  • A FICO score is a three-digit score between 0 – 850 that is calculated based on the information on your credit report.
  • Each credit bureau in the U.S. uses a different method to calculate your FICO score.
  • There are five main categories that make up your score: payment history, debt owed, length of credit history, new credit accounts, and types of credit used.

FICO scores have been around for more than 25 years and they have become one of the most popular factors when determining your creditworthiness.

Created by the Fair Isaac Corporation (FICO), the FICO Score model is continually updated to ensure lenders can make informed decisions when assessing a borrower’s application for credit.

In this guide, we look at what FICO scores are, how they work, and how you can improve your score to get the best loan terms.

> Short on time? Get your FICO Score free right now

What Is a FICO Score?

A FICO score is a three-digit score between 0 – 850 that is calculated based on the information on your credit report.

This includes things like your payment history, outstanding balances, and credit utilization and it is designed to predict how likely you are to repay a loan if you were to take one out.

Lenders use this information to decide whether or not to approve your loan application and what interest rate they will offer you.

A higher FICO score means that you’re seen as a lower-risk borrower and thus may be offered better loan rates.

If you’re looking for the best loan terms, understanding how FICO scores work can help you choose the right lender and obtain the best terms on a loan.

How Do FICO Scores Work?

There are three credit bureaus in the United States: Experian, Equifax, and TransUnion. Each one uses a different method to calculate your FICO score.

The most common scoring model is the FICO Score 8 from Fair Isaac Corporation. It’s used by 90% of lenders when they’re making decisions about loans.

FICO scores use data in five different areas to determine a borrower’s creditworthiness: payment history, the current level of indebtedness, types of credit used, length of credit history, and new credit accounts.

FICO scores range from 300 to 850, with most people falling somewhere in the 600s or 700s. Lenders use this number along with factors like income, employment stability, and outstanding debts when considering whether or not to extend a loan or credit to a borrower.

You might be shocked to learn that you technically need to have 21 lines of credit open to hit the perfect 850 FICO score.

Example: You have a credit score of 600 but only have one credit card with a $2,000 limit. By opening a second card with an $8,000 limit on it, you might see your score shoot up by 80+ points on your FICO reports.

There are many reasons for this, but basically, if you can show creditors that you can successfully manage large lines of credit, they consider you trustworthy.

This behavior is viewed as a positive to other lenders who are willing to now work with you more because you display a healthy relationship with managing money.

What Is a Good FICO Score?

A good FICO score is typically a score between 670 and 739. Here’s a full breakdown of FICO scores and what they may mean for borrowers:

ScoreRatingLending Opportunities
<580PoorLoan applicants may struggle to get credit without a deposit. It can be difficult to be approved for credit with this rating.
580-669FairApplicants may still struggle to get optimal lending rates and may still be rejected by certain lenders.
670-739GoodMost lenders will provide credit to those with good lending however they may offer average lending fees.
740-799Very GoodMost applicants may receive better than average lending rates.
800-850ExcellentLess than 22% of Americans have excellent credit. Those with credit scores at this level are considered optimal applicants.

How Are FICO Scores Calculated?

There are five main categories that make up your score:

  • Payment history (35%)
  • Debt owed (30%)
  • Length of credit history (15%)
  • New credit accounts (10%)
  • Types of credit used (10%)

What Is FICO Score 8?

FICO Score 8 is one of the latest FICO Score models widely used by Experian, Equifax, and TransUnion.

The range for FICO Score 8 is between 300-850 and to be considered good, you typically need a score of at least 700.

Some of the changes in FICO Score 8 include a heavier focus on late payments, which is a major factor in your credit score – amounting to about 35%.

If you are nearing your credit limit on a credit card it is now more important when determining your FICO Score, which forms part of your credit utilization.

Another important factor of the FICO Score 8 model is that small amounts of $100 or less sent to a collection agency no longer count.

FICO Score 10 and 10T

FICO Score 10 and 10T are among the latest score model updates.

With FICO Score 10 the model relies on similar features to previous models but it also looks at specific shifts in consumer behavior, including the increase in personal loan use, especially in terms of debt consolidation.

FICO Score 10T is based on similar features but also includes trended credit bureau data when calculating users’ scores.

This data takes into account a longer payment history of 24 months or longer to get a more accurate overview of a borrower’s profile.

How Lenders Use FICO Scores

When new score versions are released, lenders can decide whether they want to upgrade to the latest version or use their existing version.

FICO Scores update regularly to keep up with the times, especially when it comes to evolving user needs. Although the score models have similar underlying functions, some have newer features and modern risk prediction technology.

The latest released version is the FICO Score 10. It is used by all three major credit bureaus although specific lending types may prefer specific scoring models.

Here are some of the FICO Scoring models available:

VersionWidely Used In
FICO Auto Score 9
FICO Auto Score 8
FICO Auto Score 5
FICO Auto Score 4
Auto lending
FICO Bankcard Score 9
FICO Bankcard Score 8
FICO Bankcard Score 5
FICO Bankcard Score 4
FICO Bankcard Score 2
FICO Score 3
Credit card lending
FICO Score 2
FICO Score 4
FICO Score 5
Mortgage lending

What’s the Difference Between FICO vs Credit Score?

A credit score is a number that lenders use to evaluate your borrowing risk. The higher your score, the less risky it is for the lender to approve your application.

A FICO Score is one of three major credit scores used in the United States. It’s calculated from data about how often you have paid off your loans on time and how much debt you owe relative to your income.

FICO scores are the most widely used type of credit score. They’re created by the Fair Isaac Corporation and are used by lenders to determine your creditworthiness. Credit scores, on the other hand, are simply a numerical representation of your credit history.

While both types of scores can be used to gauge your creditworthiness, FICO scores are generally given more weight by lenders.

This is because FICO scores are based on a number of factors that lenders feel are important in predicting future financial behavior, such as payment history and outstanding debt.

If you’re hoping to get approved for a loan or new line of credit, it’s a good idea to check both your FICO score and credit score ahead of time.

That way, you’ll have a better idea of where you stand and what kind of interest rate you can expect to receive.

FICO Scores – FAQs

How often are FICO Scores updated?

FICO scores are updated as often as new information is reported to the credit bureaus. So, if you have a recent late payment, it will show up on your next FICO score.

But if you have since paid off that debt, and the creditor reports that fact to the credit bureau, then your score will go back up.

In general, you can expect your FICO score to change whenever there is a significant change in your credit report. So, if you’re trying to improve your score, make sure you keep tabs on your credit report so you can see the impact of any changes you make.

What is the range of FICO Scores?

FICO scores range between 0 and 850.

What is a FICO Auto Score?

A FICO Auto Score is a credit score that lenders use to help assess your creditworthiness when you apply for an auto loan. This score is based on information in your credit report, and it helps lenders determine whether you’re likely to repay your loan on time.

A high FICO Auto Score means you’re a lower-risk borrower, which could lead to a lower interest rate on your loan.

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Lorien is the Country Manager for Financer US and has a strong background in finance and digital marketing. She is a fintech enthusiast and a lover of all things digital.

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Last Updated: December 1, 2022

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