Several credit scoring systems exist, but FICO, created by the Fair Isaac Corporation, is by far the most widely used. FICO indicates that 90 percent of reputable lenders make credit decisions based on this type of score. The calculation draws from the information in your credit report and assigns a number indicating how likely you are to repay or default a loan.
FICO Score Ranges
A FICO score can fall anywhere from 300 -- which is very poor -- to 850, which is excellent. The higher your score, the more likely it is that you'll qualify for a loan. No one single number determines whether a certain lender will consider you creditworthy based on your score. Lenders have different opinions as to what's acceptable and what's not. One might think a score of 650 is OK, while another only lends to consumers with scores of 700 or higher. A FICO score of about 750 is usually considered good enough to get you approved for almost any loan.
The FICO Calculation
When a potential lender requests a copy of your credit report from one of the credit bureaus, it can ask for your FICO score, too. Your score appears at the top of the report. The credit bureau -- not FICO -- also lists up to five factors that influenced your score. These are usually things that might have pulled it down, such as a history of late payments. The FICO equation is based on five factors derived from the information in your report.
- Your payment history makes up 35 percent of your score, so paying accounts late can easily drag down your score.
- Your credit utilization ratio affects 30 percent of your score. This is the difference between how much credit is available to you and how much of it you've used, so maxed-out credit cards can lower your score.
- How long you've been borrowing affects 15 percent of your score -- the more years the better.
- A healthy balance of different types of credit accounts -- installment loans, mortgages, credit cards and retail store cards -- accounts for 10 percent of your FICO score. If you're overloaded with credit cards and have no auto loan or mortgage, this can hurt a little.
- New credit affects 10 percent of your score. This isn't the same as having a long borrowing history. If you've applied for or taken out a lot of credit in the recent past, this can send up a red flag for lenders and drop your score a bit.
The notations at the top of your credit report, next to your score, tell the lender which of these areas, if any, affected it. Your FICO score isn't based on your income, where you live, where you work, your gender, your race or your marital status.
Your Score Can Change Frequently
If you've ever requested your FICO score from all three credit reporting agencies at the same time, you might have discovered that they weren't all the same. Your score is based on the information in your credit report, and each of the credit bureaus maintains its own report on you. One might include different information. For example, you might have been 30 days late on a credit card payment very recently and that lender has reported to one bureau but not the others yet. The late payment would be reflected in only one calculation, the one applied by the credit bureau that knows about it. Your score isn't stagnant -- it goes up and down relatively frequently as your account activity is reported.
Fair Isaac tweaks and upgrades its scoring system every so often, and several versions are available to lenders. It launched FICO 9 in late 2014. This most recent scoring model puts less emphasis on medical debt, which has historically been treated the same as credit card debt or mortgages. FICO determined that this was unfair because although people voluntarily go out and take on consumer debt, they don’t usually amass a lot of medical debt of their own free will. This is good news for those struggling to pay off health care bills, but lenders don’t have to request this scoring model. They’re free to request one of the older FICO versions that count medical debt just as heavily as other forms.