FICO Score

Updated on April 10, 2024
Article byNanditha Saravanakumar
Reviewed byDheeraj Vaidya, CFA, FRM

What Is a FICO Score?

FICO score meaning describes a kind of credit score created by the Fair Isaac Corporation (FICO) in the U.S. It is a three-digit number like any other credit score that assesses the risk in lending money and calculates the creditworthiness of borrowers. Credit agencies compile this score from the borrowers’ credit reports and credit history.

how fico score works

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Banks and mortgage lenders widely use FICO models to extend loans. The various FICO versions assign scientific weights to five important factors: payment history, existing credit, length of credit history, new credit, and types of credit.

Key Takeaways

  • The FICO credit score, developed by the Fair Isaac Corporation, is one of the well-known methods to measure the creditworthiness of borrowers.
  • It assesses the credit risk based on five parameters related to the borrower – payment history, existing credit, length of credit history, new credit, and types of credit.
  • The score usually ranges from 300 to 850, with a higher score denoting better creditworthiness. Lenders do not extend credit to borrowers with a poor score below 580.
  • Paying bills on time and reducing debt can improve an individual’s credit score.

FICO Score Explained

FICO Score is a fair, comprehensive, reliable, prominent, and widely accepted credit score measure that facilitates easy lending and borrowing. An estimated 90% of lenders use this score while providing loans as it helps them understand the debtor‘s ability to repay the borrowed money.

The Fair Isaac Corporation (FICO), originally known as the Fair, Isaac, and Co., is an analytic firm founded in 1956. Many FICO models are an accepted measure of assessing credit risk in the U.S. The development of the first version took place in 1989. There are currently many versions tailored for different industries and the needs of businesses and consumers.

FICO compares the reports from three credit bureaus- Experian, TransUnion, and Equifax to understand consumers’ credit. These agencies are responsible for gathering and providing information on individual consumers. Banks, financial institutions, landlords, and utility companies. They rely heavily on the information they provide to determine the creditworthiness of individuals.

The credit bureaus use different methods to calculate the scores, but they are variations of the FICO methods. The different types include auto FICO score, FICO Bankcard Score, etc., for auto lending, mortgage lending, and credit card decisions, each having sub-versions. The most commonly used score is Score 8, while the recently updated version is the Score 10 Suite, which can score up to 90% of the U.S. population.

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How To Check FICO Credit Score?

Credit ratings are necessary while applying for loans or credit. Individuals can check their scores by visiting the FICO website. The score is usually updated at least once a month and keeps track of the consumers’ credit. It is also possible to check FICO scores using the online FICO score calculator offered by many websites.

FICO Score Range 

Usually, the FICO models provide scores anywhere from 300 to 850. And the borrower must meet specified limits to get a loan. So, a higher score means higher creditworthiness and better chances of getting a loan.

Score rangeCreditworthiness
Score rangeCreditworthiness
300 – 579Poor
580 – 669Fair
670 – 739Good
740 – 799Very Good
800 – 850Excellent

The lenders do not give any credit to the individuals who fall under the ‘Poor’ category, as they will not be able to repay their debts. However, banking institutions will offer loans to individuals with a ‘Fair’ score if they meet certain lending criteria. For example, a ‘Good’ score is more than enough for some creditors to lend money. On the other hand, it is easier for individuals with ‘Very Good’ and ‘Excellent’ scores to get credit.

What Is A Good FICO Score?

A score of more than 740 is always desirable, and it is better to fall under the ‘Very Good’ and ‘Excellent’ categories. Despite a specified score connoting the creditworthiness of an individual, it always depends on the lender/banking institution to offer credit to someone. In addition, timely payment of bills and dues, maintaining a low debt, and not defaulting on payments can improve the score. For example, even if a person scores 672, the lender might still not loan the amount.

What Affects Your FICO Score?

Here are the parameters, along with weights assigned to them, which FICO uses to calculate the credit score:

Factors Affecting FICO score-new

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  1. Payment history is the most important factor affecting an individual’s score and has a weightage of 35%. It considers the timely payments made by a person in the past and ensures the lender that the borrower will repay the loan on time.
  2. Existing credit is the second most crucial factor affecting one’s creditworthiness and accounts for 30% of the score. The borrower will fail to manage the repayment of extra credit if their existing credit is high.
  3. Length of credit history – With a weightage of 15%, the length of credit history is another factor determining the score. The longer an individual’s credit history, the better the score will be.
  4. New credit – This parameter accounts for 10% of the score. It refers to the recent accounts opened by a person. The credit score will decrease if an individual opens too many accounts.
  5. Types of credit – It accounts for 10% of the score. It is also known as credit mix, which refers to the different kinds of credit owed by an individual, including credit card debt, loans, mortgages, etc.

Apart from these parameters, lenders also look for other factors, like the borrower’s background, income, source of income, etc., before offering a loan.

How To Increase Your Score?

  1. Avoid having high debt. The credit score agencies analyze the debt-to-income ratio. The lower the debt, the higher will be the score.
  2. Refrain from making late payments, as it negatively affects the score. It is because the credit score agencies draw the conclusions that borrower has difficulty meeting their monthly obligations.
  3. Avoid a lot of credit account activity over a short period. For example, many companies access the borrower’s credit score at around the same time. In that case, it indicates that the borrower is taking too much debt accounting for a low score.

Frequently Asked Questions (FAQs)

Is FICO score the same as a credit score?

No, FICO is a type of credit score which is more prominent and widely used. FICO models accurately assess the credit risk and depict a person’s creditworthiness.

Is FICO score accurate?

FICO is reliable and accurate. More than 90% of creditors use the FICO credit score to provide loans to debtors based on their ability to pay back.

What does FICO Score 8 mean?

FICO Score 8 is the widely used version to assess the credit risk in lending loans to debtors. FICO developed Score 8 in 2009.

How FICO Score is calculated?

The FICO credit score is calculated by considering five factors in pre-determined weights – payment history (35%), existing credit (30%), length of credit history (15%), new credit (10%), and types of credit (10%).

This has been a guide to What is FICO Score and its meaning. Here, we explain how to check it, its range, good score, the factors affecting it, and how to increase it. You can learn more from the following articles – 

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