A credit score is one factor used in a lender’s assessment of your creditworthiness when you apply for a lending product, such as a loan, line of credit, or credit card. It can also be a factor in lease approval, new utilities setup, and insurance rates. You can have more than one credit score, depending on what credit scoring model a lender uses.
One type of credit scoring model is the FICO® Score, which is used in 90% of lending decisions in the U.S. Since it’s such a widely used determiner, consumers are wise to pay close attention to their own score.
What Is a FICO Score?
The FICO Score is a trademark of the Fair Isaac Corporation. It was the first widely used, commercially available score of its type. FICO Scores essentially compress a person’s credit history into one algorithmically determined score.
Because FICO scores (and other credit scores like it) are based on analytics rather than human biases, the intention is to make it easier for lenders to make fair lending decisions.
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What Is the FICO Score Range?
FICO’s base range is 300 to 850: The higher the score, the lower the lending risk a lender might consider you to be.
• Exceptional: 800 to 850
• Very Good: 740 to 799
• Good: 670 to 739
• Fair: 580 to 669
• Poor: 300 to 579
Recommended: What Is Considered a Bad Credit Score?
How Is a FICO Score Calculated?
There are five main components of your base score, each having a different weight in the calculation:
• Payment history: 35%
• Amounts owed: 30%
• Length of credit history: 15%
• Credit mix: 10%
• New credit: 10%
About two-thirds of your base FICO score depends on managing the amount of debt you have and making your monthly payments on time. Each of the three major credit bureaus — Experian, Equifax, and TransUnion — supply information for the calculation of your credit score, so it can vary slightly even if your creditworthiness doesn’t fluctuate.
The base FICO Score range may not be the range used in all credit and lending decisions. There are also industry-specific scores, such as one specifically for auto loans (FICO Auto Scores), others for credit card applications (FICO Bankcard Scores), and multiple FICO scores used by mortgage lenders.
Industry-specific FICO scores range from 250 to 900, compared to the 300 to 850 range for base scores.
What Is a Good FICO Score?
Strictly referencing the base FICO Score range, a “good” score is between 670 and 739 on the overall scale of 300 to 850.
But what’s considered acceptable for credit approval might vary from lender to lender. Each lender has its own requirements for credit approval, interest rates, and loan terms, and may assign its own acceptable ranges. Lenders may also use factors other than a credit score to determine these things.
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Why Is a FICO Score Important? What Is a FICO Score Used For?
As mentioned above, the FICO Score is used in 90% of lending decisions in the U.S. When a consumer applies for a loan or other type of credit, the lender will look at their credit report and credit score. If there are negative entries on the credit report, which may be reflected in a decreased FICO Score, the applicant may not have a chance to explain those to the lender. Especially in mortgage lending decisions, the lender may have a firm FICO Score requirement, and even one point below the acceptable number could result in a denial.
But what if you’re not applying for credit in the traditional sense? Your FICO Score is still an important number to pay attention to because it’s used in other financial decisions.
• Renting an apartment. Landlords and leasing agents generally run a credit check during a lease application process. They may or may not look at the applicant’s actual credit score — landlords have a lot of flexibility in how they make leasing decisions — but they do tend to look at the applicant’s credit history and how much debt they have in relation to their income — factors that go into a FICO score calculation.
A few late payments here and there may not affect your ability to rent an apartment, but a high debt-to-income ratio may. If you have a lot of income going toward debt payments, the landlord may be concerned that you won’t have enough income to pay your rent.
• Insurance. One of the industry-specific FICO Scores is formulated for the insurance industry (think auto insurance and property insurance). Insurers will typically look at more than just a person’s FICO Insurance Score, but it is one factor that goes in determining qualification for insurance and at what rate. The assumption is that a person who is financially responsible will also take more care when it comes to their home and car.
• Utilities. You may not think of a utility bill as a debt, but since utilities like gas, electric, and phone are billed in arrears, they technically are a form of debt. “Billed in arrears” means that you are billed for services you have already used. Utility companies want to make sure that you will be able to pay your monthly bill, so they may run a credit check, which may or may not include looking at your FICO Score.
Recommended: What Credit Score Is Needed to Rent an Apartment in 2024?
What Affects Your FICO Score?
We briefly touched on how a FICO Score is calculated, but what goes into those different categories? Let’s look at those in more detail.
Payment History (35%)
Do you tend to pay your bills on time or do you have a history of late or missed payments? Your payment history is the most important factor in the calculation of your FICO Score. Perfection isn’t necessary, but a solid track record of regular, on-time payments is important. Lenders like to be assured that a borrower will make their payments, and a past payment history tends to be a good predictor of future payment habits.
Both installment (personal loans, mortgage loans, and student loans, for example) and revolving credit such as credit cards can affect your payment history. Since it’s such an important factor, how can you make sure it’s a positive one for you?
• Making payments on time, every time, is the best way to make sure your payment history is a positive one. Having a regular routine for paying bills is a good way to accomplish this.
• Automating your payments may help you make at least the minimum payment on credit accounts.
• Checking your credit report regularly for errors or discrepancies can help catch things that might have a negative effect on your FICO Score if left uncorrected. You can get a free credit report from each of the three credit bureaus once per year at AnnualCreditReport.com.
Amounts Owed (30%)
The amount of debt you owe in relation to the amount of debt available to you is called your credit utilization ratio, and it’s the second-most important factor in the calculation of your FICO Score. Having debt isn’t at issue in this factor, but using most of your available debt is seen as relying on credit to meet your financial obligations.
Credit utilization is based on revolving debt, not installment debt. If you’re keeping your credit card balance well below your credit limit, it’s a good indicator that you’re not overspending. If you have more than one credit card, consider the percentage of available credit you’re using on each of them. If one has a higher credit utilization than the others, it might be a good idea to use that one less often if you’re trying to increase your FICO Score.
Length of Credit History (15%)
This factor’s percentage may not be as high as the previous two, but don’t underestimate its importance to lenders. As with payment history, lenders tend to look at a person’s credit history as predictive of their credit future. If there is no credit history or short credit history, a lender doesn’t have much information on which to base a lending decision.
Since the amount you owe is such an important factor in your FICO Score, you might think that paying off and closing credit accounts would have a positive effect on your score. But that might not be the best strategy.
Revolving accounts like credit cards can be a useful tool in your financial toolbox if used responsibly. A credit card account with a low balance and good payment history that has been part of your credit report for many years can be an indicator that you are able to maintain credit in a responsible manner.
Installment loans like personal loans are meant to be paid off in a certain amount of time. The account will remain on your credit report for 10 years after it’s paid off.
Paying off a personal loan is certainly a positive thing, but paying off a personal loan early could cause the account to stop having that positive effect earlier than it otherwise would.
Recommended: 11 Types of Personal Loans & Their Differences
Credit Mix (10%)
Having multiple types of credit can have a positive effect on your FICO Score. Being responsible with both revolving and installment credit accounts shows lenders that you can successfully manage your debts.
• Revolving accounts are those that are open-ended, such as a credit card. You can borrow money up to your credit limit, repay it, and borrow it again. As long as you’re conforming to the terms of the credit agreement, the account is likely to have a positive effect on your credit report and, therefore, your FICO Score.
• Installment accounts are closed-ended. There is a certain amount of credit extended to you and you receive that money in a lump sum. It’s repaid in regular installments over a set period of time. If you need additional funds, you must take out another loan. A personal loan is one example of an installment loan.
Credit mix won’t make or break your ability to qualify for a loan, but having different types of debt indicates to lenders that you’re likely to be a good lending risk.
New Credit (10%)
Though lenders like to see that a person has been extended credit in the past, too much new credit in a short amount of time can be a red flag to lenders.
When you apply for a loan or other type of credit, the lender will typically look at your credit report. This is called a credit inquiry and can be a hard inquiry or a soft inquiry. A soft inquiry may be made by a lender to pre-qualify someone for credit or by a landlord for a lease approval, for example.
During a formal application process, a lender might make a hard inquiry into your credit report, which can affect your credit score. FICO Scores take into account hard inquiries from the last 12 months in your credit score calculation, but a hard inquiry will remain on your credit report for two years.
💡 Quick Tip: Generally, the larger the personal loan, the bigger the risk for the lender — and the higher the interest rate. So one way to lower your interest rate is to try downsizing your loan amount.
FICO Score vs Credit Score
These two terms — FICO Scores and credit scores — are often used interchangeably. More accurately, though, is that a FICO Score is one type of credit score, the one most often used by lenders when making their decisions. There are multiple types of credit scores, each of them using analytics to create a rating that illustrates a person’s creditworthiness.
The Takeaway
Your FICO Score is affected by how you manage your personal finances, whether that’s a personal loan, line of credit, credit card, or other type of credit product. Although it’s not the only credit score lenders use, it is the one used in the majority of lending decisions in the U.S. Personal loans are one financial tool that can be used to add some variety to your credit mix. If managed responsibly with regular, on-time payments, your FICO score could be positively affected by having an installment loan like this in the mix.
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