How is your FICO® Score calculated?
The FICO® Score has gone through several iterations since its introduction as the company continues to update its formula to better predict risk. The FICO® Score 10, which is the latest FICO® Score, and the FICO® Score 8 -- the most widely used score -- both weigh the following five factors:
- Payment history (35%)
- Amounts owed (30%)
- Length of credit history (15%)
- Credit mix (10%)
- New credit (10%)
Payment history
Your payment history is the single most important factor in your FICO® Score calculation, making up 35% of your score. It receives this honor because it shows how you've managed your money in the past. Past behavior tends to be an accurate predictor of how likely you are to pay back the money you've borrowed as agreed.
This portion of your FICO® Score looks at your payment history on your credit cards, including retail store cards, as well as mortgages and other types of installment loans, and other types of financial company accounts. Negative information, like bankruptcies and accounts in collection, also affect the payment history portion of your FICO® Score. If you have late payments on your record, the FICO model considers how late they were, how recent they were, how many of them you have across different accounts, and how much you owed.
A single late payment may not seem like a big deal, but it can drop an excellent credit score by 100 points or more, according to FICO data, so paying on time is the best thing you can do if you're trying to raise your FICO® Score or keep it high.
Amounts owed
This category looks at how much you owe on your current credit accounts and is almost as important as payment history, accounting for 30% of your FICO® Score. For installment debt -- loans with predictable monthly payments -- the FICO scoring model looks at how much you owe and how that compares to the initial amount you borrowed.
For revolving debt, like credit cards, where the amount you owe changes from month to month, FICO looks at your credit utilization ratio. This is the ratio between the amount of credit you use each month and the amount you have available to you. So if you have a $10,000 limit on one card and your balance is $5,000, your credit utilization ratio would be 50%. Ideally, you want to keep this number below 30% and preferably as low as you can, as long as that amount is above zero.
Amounts owed is considered an important measure of your financial responsibility because a heavy reliance on credit indicates someone who's living beyond their means. Adding another loan or credit card to that mix could make it impossible for the borrower to keep up with their monthly payments.
Length of credit history
The third factor in your FICO® Score -- length of credit history -- is pretty straightforward and makes up 15% of your score. It gives lenders a more comprehensive view of how well you use credit, so a longer credit history typically translates to a higher score, assuming you've always paid on time and kept your credit utilization low. This category looks at the age of your oldest and newest credit accounts and the average age of your credit accounts, plus the length of time since each account has been used.
Closing an old credit card you no longer use may seem like a wise decision, but if it's the oldest credit account you have, doing so will bring down your average credit age and your credit score could actually take a hit. Unless it has an annual fee you don't want to pay anymore, you're probably better off keeping it in your wallet and using it for an occasional purchase.
Credit mix
Credit mix accounts for 10% of your FICO® Score, and it measures the different types of credit accounts you have. You'll have a better score if you have some revolving debt, like credit cards, and some installment debt, like a home, car, or personal loans, on your credit reports. Lenders like to see that you can responsibly manage both types of debt. Even if you have loans that are now paid off, they still count toward your credit mix.
New credit
The final category is new credit, at 10% of your FICO® Score. Research has shown that applying for a lot of new credit accounts in a short time span indicates greater risk, so you don't want to apply for a bunch of credit cards and loans within a single year. This category looks at the number of new accounts you have and the number of credit inquiries on your report.
Every time you apply for a loan or line of credit, your lender will do a hard inquiry, also known as a hard credit check, on your report which will lower your score by a few points. The FICO model takes into account normal comparison shopping behavior when applying for new credit, so it counts all credit inquiries that take place within 30 days as a single inquiry. If you are in the market for a new credit card or loan, get all your applications within one month to reduce the effect on your credit score.
There's a common misconception that checking your own credit also lowers your credit score. When you check your own credit score, it's considered a soft inquiry and it has no effect on your credit score whatsoever.
What is a good FICO® Score?
There aren't any hard and fast rules about what constitutes a good FICO® Score. Each lender will have its own definition of an acceptable score, but FICO itself defines the credit score ranges as follows:
