What’s the Score on Your Credit?

Do you know your credit score? It’s an important number.

Your credit score can cost you a lot of money or save you a lot over your lifetime. An excellent score can land you lower interest rates, meaning you will pay less for any line of credit you take out.

The strategy for achieving a good credit score is simple: pay your bills on time and keep your credit balances low. Paying bills late or using too much of your credit limit lowers your score.

Fee, Fie, FICO

A FICO score is a credit rating that has become a benchmark of consumer lending. When deciding whether to lend you money or issue you credit, 90% of the largest U.S. lending institutions will use your FICO score for risk assessment. The FICO score was created in 1989 by the analytics software firm Fair, Isaac, and Company (now the Fair Isaac Corporation), hence the acronym. FICO uses a proprietary formula to gauge creditworthiness.

The formula is applied to data in reports from the credit reporting agencies Equifax, Experian, and TransUnion to produce your score. The agencies’ credit reports contain identifying information such as your payment history, a listing of your credit card accounts, and details about your mortgage and personal loans. Often, the credit bureaus have slightly different data from one another, so your score may vary for each bureau.

The overall FICO score range is between 300 and 850. In general, scores in the 670 to 739 range indicate good credit history; most lenders will consider scores in this range favorable. In contrast, borrowers in the 580 to 669 range may find it difficult to obtain financing at attractive rates. To determine creditworthiness, lenders take a borrower’s FICO score into account, but they also consider other details, such as income, how long the borrower has been at their current job, and the type of credit requested.

Examples of negative items include delinquent accounts, late payments, and late fees. Your report also shows some public records which might contain negative items, such as a bankruptcy or a foreclosure. Most negative items stay on your report for seven years.

Calculating FICO Scores

Lenders use borrowers’ FICO scores along with other details on borrowers’ credit reports to assess credit risk and determine whether to extend credit. FICO scores consider data in five areas to determine creditworthiness: payment history; current level of indebtedness; types of credit used; length of credit history; and new credit accounts.

To determine credit scores, FICO weighs each category differently for each individual. However, in general, payment history is 35% of the score, accounts owed is 30%, length of credit history is 15%, new credit is 10%, and credit mix is 10%.

• Payment history (35%) concerns whether you have paid on time. Late payments can ding your score, although 30 days late is not as bad as 60 or more. A bankruptcy or accounts in collections could also hurt you.
• Amount of debt relative to credit limits (30%) is how much of your available credit you are using—the less, the better for your score. It is better to keep your balances at or below 30% of what is available.
• Age of credit (15%) refers to how long you have had credit and the average age of your credit accounts.
• Recent applications for credit (10%). A so-called “hard inquiry” when you apply for new credit can nick your score for up to six months.
• Whether you have more than one type of credit (10%). Having both installment loans (those with level payments, such as a car loan or mortgage) and revolving credit (such as a credit card) can help your score.

FICO Versions

Various versions of FICO exist because the company has periodically updated its calculation methods since introducing its first scoring methodology in 1989. Each new version is made available to lenders, but it is up to them to determine if and when to implement the upgrade.

The most widely used version as of 2021 is still FICO® Score 8, even though it has been followed by FICO® Score 9 and FICO® Score 10 Suite. FICO® Score 9 was introduced in 2016, with adjustments to the treatment of medical collection accounts, increased sensitivity to rental history, and a more forgiving approach to fully paid third-party collections. It did not surpass FICO® Score 8 in popularity. FICO® Score 10 was introduced in 2020 and treated late payments and debt more severely.

According to FICO, Score 8 is consistent with previous versions, but there are several specific features that make it a more predictive score than prior versions. Like all prior FICO score systems, FICO® Score 8 attempts to convey how responsibly and effectively an individual borrower interacts with debt. Scores tend to be higher for those who pay their bills on time, keep low credit card balances, and only open new accounts for targeted purchases. Conversely, lower scores are attributed to those who are frequently delinquent, over-leveraged, or frivolous in their credit decisions. It also completely ignores collection accounts in which the original balance is less than $100.

The innovations in FICO® Score 8 included increased sensitivity to highly utilized credit cards—meaning that low credit card balances on active cards can more positively influence a borrower’s score. It also treats isolated late payments more judiciously than past versions. FICO® Score 8 is more forgiving if a late payment is an isolated event and other accounts are in good standing, and it divides consumers into more categories to provide a better statistical representation of risk. The primary purpose of this change was to keep borrowers with little to no credit history from being graded on the same curve as those with robust credit histories.

Versions Vary

Mortgage lenders typically use much older FICO score versions. Right now, FICO is  the only tool to evaluate credit risk that is approved for use by government-sponsored enterprises such as Fannie Mae and Freddie Mac. As such, lenders generally follow their guidelines to ensure their loans can be resold to investors.

Because there are several different versions of the FICO score, and while the most widely used one is the FICO® Score 8, some lenders may use others. Although each score version is built on the same foundation, each has subtle differences that could impact your score. While your FICO score may meet the minimum criteria using one version, it might not meet those criteria if the lender is using another version.

Also, your FICO score is based on information found in your credit reports. But depending on your past and current credit relationships and how they’ve been reported, information can vary between the credit bureaus. If you check your FICO score based on data from one bureau and the lender uses a different bureau, the same score pulled at the same time but from different bureaus may come out different.

Other Scores

Banks, mobile phone providers, insurance firms, credit card companies, and digital finance concerns, among others, may offer credit scores.  Although these may look the same as FICO scores, other credit scores can vary as much as 100 points from your FICO score.

Lenders sometimes use VantageScores, based on an algorithm developed by Equifax, Experian, and TransUnion in 2006 to compete with FICO. Both FICO and VantageScores use the range from 300 to 850. The most likely reason that the credit bureaus established their own algorithm is that the credit bureaus have to pay FICO’s parent company licensing fees for use of the FICO system. Establishing a VantageScore may take less time than establishing a FICO score. VantageScore can produce a score within just a month or two after a consumer opens a credit account. FICO scores require six months of credit history. However, Fannie Mae, Freddie Mac and the FHA all use rely on FICO scores for evaluating credit, and as they go, so goes the mortgage industry.

Conclusion: Know the Score

It’s important to keep your score creditworthy. In the end, it’s up to you, the borrower, to make sure your credit remains strong so you can have access to more opportunities to borrow if you need to.

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