How FICO Determines Your Credit Score

  • 5 min read

FICO is one of the most popular credit scorers around. Many employers, banks and other potential lenders use these to determine your qualifications. FICO essentially pulls all the financial information from your credit reports and puts it into their algorithm. This produces a score between 300 and 850. There are a number of factors that contribute to your resulting score, as well as a number that they ignore when determining it. As you use your card, the weight of each factor is altered, making it difficult to figure out your final score without the use of your entire report.

What does FICO consider important to your score?

There are five factors that they consider when calculating your credit score. Payment history, credit utilization, the length of your credit history, the types of credit you use and your pursuit of new credit are scrutinized in the process.

Let’s look into what each of these mean.

  1. Payment history covers 35% of your FICO score. This is heaviest because potential lenders prefer on-time payments more than any other aspect of your score. Your credit report records your credit cards, as well as each time you’ve used it and made payments on the debt.
  2. Credit card utilization is 30% of your score. This is the ratio between use and credit limit. Lenders want to see that you are capable of handling lines of credit without falling into debt. It’s best to keep your balance 30% below your spending limit, as it shows control and responsibility.
  3. How long you’ve had your credit card has a 15% role in calculating your score. The longer you’ve had your card active and used it, the better your score will be. The history will remain on your report and will be factored in, as long as you continue to use your card.
  4. 10% of your score is the types of credit you are using. This includes credit cards, installment loans and other types of credit. You should have a decent mixture of credit types.
  5. Your current pursuit of new credit lines impacts 10% of your score. Companies do not like seeing you aggressively searching for a new credit card, so go easy on your hunt.

FICO scores have a few things they do not take into consideration. For example, US law prohibits credit scoring from considering facts such as your race, national origin, sex, religion and marital status. FICO doesn’t consider your age, salary, occupation, employer, title, date of employment or history of employment, though other scoring companies may.

Other factors not included are your location, what interest rates are being charged to cards, items reported as child or family support, rental agreements and whether you are participating in credit counseling. Certain types of inquiries, such as consumer-initiated requests for your credit reports, promotion-related inquiries from lenders for pre-approved credit offers and requests made by lenders to review your accounts with them.

All you need for a FICO score is an account that’s been open for at least 6 months, an undisputed account that has been reported to the bureau and no indication of deceased on the report.

A FICO score, otherwise known as a Credit Score, is set up with the intent of representing how reliable of a person you are to lend money to. When a company sets out to lend money, they want to make sure that they will get it back sooner or later.

The FICO score is used to determine what cards, interest rates, and loans are available to each individual person so it’s best to keep it high if possible.

These are the key areas that credit agencies look at when determining your FICO score.

  • Payment HistoryHow have you been about making your payments and on time? Your score may be lowered if you miss payments and may go up if you make payments on time for a long time.
  • Amount of Money Owed –Each credit card has a certain limit on the maximum amount of money you can hold on the card in debt you need to pay back. If you get close to the limit and stay there then it will negatively impact your score.
  • How Long Your Credit History Is – If you just started out with credit cards and loans, then there’s not a lot of history for credit rating agencies to look at with regards to your FICO score. Companies trust those who have proven themselves reliable borrowers over years then someone who has never even had a credit card. The longer you’ve been around borrowing and paying back debts, the higher your credit score tends to be.
  • New Lines of Credit –One reason that it’s not always a great idea to take on new credit cards or loans on a regular basis is that it may negatively impact your credit score. When you get a new credit card, there’s a period where your credit rating tends to be a little lower. Although it might not be a huge impact by itself, it’s still understandable that changes in your active credit options leads some companies to be a little uncertain about lending more to you.
  • Types of Credit Used – Certain types of credit are considered more stable than others. Depending on what kind of credit you use whether mortgages, credit cards, installment loans, retail accounts, or company finance accounts, your score will be impacted somewhat. People who have credit cards and repay them on time are generally considered more trustworthy than people who don’t use credit cards at all.

Christopher - BSc, MBA

With over two decades of combined Big 5 Banking and Agency experience, Christopher launched Underbanked® to cut through the noise and complexity of financial information. Christopher has an MBA degree from McMaster University and BSc. from Western University in Canada.