Did you ever think that you’d be graded on anything as an adult? After years of schooling and report cards, it can be a relief to enter the “real world” — that is, until you realize you get scored just about as often as you did before. No, I’m not talking about work evaluations (although they certainly can feel like grades as well). I’m talking about credit scores. More specifically, the FICO® score.
What Is FICO®?
Before credit scores were created, the only way a lender could verify a person’s creditworthiness was through their personal reputation. That was a world in which you might have relied on a reputable family member who could vouch for you, or on a pre-existing relationship with your bank. Certainly not scalable, this method wasn’t objective either.
Enter Fair Isaac Corporation, the creators of FICO®. This company was founded in 1956 and ushered in a new way to do business. Instead of personal relationships and local reputation, the credit score would soon help to create a scalable, objective method for evaluating consumers for credit.
Now, years later, credit scores are a crucial part of most people’s financial lives — and it all started with FICO®.
How Does FICO® Factor Into Your Life?
Since its beginning in the late 1950s, FICO® has grown into a large-scale analytics company — and its credit scores are some of the most widely used. According to FICO®, it’s “the most used credit score in the world,” with 100 billion of its scores being sold since the company was founded.
Although FICO® was the first credit scoring company, it’s not the only one. And although there are similarities in how credit scoring companies evaluate your credit, understanding who’s on top can help you target your efforts in improving your credit.
FICO® also says that its “clients include more than half of the top 100 banks in the world, more than 600 personal and commercial line insurers in North America and Europe … 400+ retailers and general merchandisers … 95 of the 100 largest financial institutions in the U.S., and all the 100 largest U.S. credit card issuers and more.”
In other words, FICO® is the leading credit scoring company. Because of that, there’s a fair chance that lenders you want to work with may be looking at one of your FICO® credit scores when you apply for credit. Now, let’s talk about what you can do about it.
How FICO® Credit Scores Are Calculated
As much as it may seem that credit scores and the factors that play into them are hidden behind a curtain, it’s fairly easy to understand how these formulas work. For starters, here are the basic factors that are used to calculate your FICO® credit scores:
|FICO® Credit Score Factor||Percentage|
|Length of credit history||15%|
What you need to glean from this chart is simple. If you want to score well with FICO®, pay the full amount due on all your bills every month, and be sure to make those payments on time. Then try to keep your credit card balances as low as possible. Payment history and amounts owed, after all, make up more than half of your FICO® credit score calculation.
The other factors (length of credit history, credit mix, new credit, and available credit) aren’t as easy to control other than making sure not to close old accounts, keeping revolving credit balances low and not applying for too many different types of credit at one time.
All that said, this is the basic formula for calculating FICO® scores, but there is more than one FICO® score. In fact, the company has different scores for different types of credit, meaning that you have more than just one credit score. Here’s a chart breaking down each type of FICO® score:
|Most Commonly Used||Auto||Credit Cards||Mortgages||Newly Released|
|FICO® Score 8||FICO® Auto Score Score 4||FICO® Bankcard Score 4||FICO® Score 4||FICO® Score 9|
|FICO® Auto Score Score 5||FICO® Bankcard Score 5||FICO® Score 5||FICO® Auto Score Score 9|
|FICO® Auto Score Score 8||FICO® Bankcard Score 8||FICO® Bankcard Score 9|
As you can see, lenders don’t have to take your general FICO® score to determine how you might use the type of credit they’re offering. Instead, they can choose to see a specific algorithm based on that type of credit, theoretically helping them to predict better how you’ll handle it.
How to Keep Tabs on Your Credit Scores
Knowing that we all have more than one credit score — and knowing that the scores can vary based on loan type — can feel overwhelming at times. After all, working to build credit is one thing, but how are we supposed to build good credit when there are so many different types of scores?
The truth is, if you simply focus on the factors listed above, then you can set yourself up to build a solid credit history. And when you check your credit scores, just know that they can vary from each other. To keep it simple, focus more on the range your credit score falls into than the actual number so you can get a general viewpoint of where you stand. Here’s a listing of the FICO® credit score ranges:
|FICO® Score||FICO® Score Range|
As for where to get your scores, there are many places to do that. Here at Upturn, for example, you can create a free login and view one of your credit scores and the range it falls into, although it’ll be your VantageScore® 3.0 by TransUnion®, not one of your FICO® scores.
What’s more, you can see individual cards of data from your TransUnion® credit report that will enable you to see what’s on that report and dispute what shouldn’t be on there. You’ll also be able to discover actions you can take to improve your overall credit.
If you remember nothing else about FICO® credit scores and credit in general, remember this: You have the power to improve your credit. Yes, it can sometimes feel like we’re being graded on things we can barely understand, but the truth is more straightforward than that. By learning the simple behaviors that can help you build good credit (such as paying your bills on time and keeping revolving debt as low as possible), then you enable yourself to get credit when you need it and at better interest rates. And that means help fulfilling whatever’s on your ultimate financial wishlist.
Understand your credit report and improve your credit scores: Here’s what you need to know.