The 5 FICO Score Categories Used to Calculate Credit Scores

Vector hands holding two smartphones with credit score app on-screen.It can get old hearing about the importance of fiscal responsibility and maintaining healthy credit scores, even if you have a love of personal finance. But for this round of financial literacy, take a deep breath and relax. We will cover what FICO credit scores are and how to use this information to increase your own to obtain more funds with better interest rates.

Whether you like it or not, your credit history is of extreme importance. It is nearly impossible to be approved for a credit card, a mortgage, or an affordable auto loan without a solid credit score to back you up. A credit score is a 3-digit number determined by a set of specific calculations that rank your creditworthiness and the risk associated with offering you credit. The most commonly used credit scoring system is FICO, with a base credit score range of 300-850.

Although there are various credit ranking systems in use today, including VantageScore, FICO is still used by most of the top lending institutions. The exact equation and criteria used to calculate a person’s credit score are kept secret, but FICO does offer some details about the structure of its rating system.

How FICO Credit Scores are Determined

FICO breaks down each person’s credit score into five categories: payment history (35%), the amounts a person owes (30%), the average length of credit history (15%), the diversity of credit accounts (10%), and the number of new credit lines (10%). Let’s take a closer look at each category starting with this pie chart.

5 FICO credit score categories pie chart.

1. Payment History (35 percent)

The payment history category is the most important and influential to your credit score. Monthly payments towards your credit card and loan balances are reported by creditors to each of the three main consumer credit bureaus, Equifax, Experian, and TransUnion. These details are then used in the calculation of your credit score. If you miss a payment, it will be recorded on your credit report and impact your score negatively.

Making consistent on-time payments shows that you are a responsible borrower and that you live within your means. Missing a payment is one of the quickest ways to drop your FICO Score substantially.

2. Amounts Owed (30 percent)

The amount owed on credit cards, lines of credit, and outstanding loans is the second most important factor in calculating your FICO credit score. Especially, the percentage of the available credit limits you are using. Say you have a total credit limit of $5,000 on a credit card. If you carry a $1,000 balance on it, your credit utilization ratio would be 20 percent. This is on the higher end of what FICO considers a healthy credit utilization rate, but not bad.

Maintaining a high amount of debt on your credit cards, or worse, maxing them out, shows risky and unstable financial behavior which negatively impacts your FICO credit score. Keep your credit utilization rate below 30 percent for a decent credit score, 20 percent for a good one, and below 10 percent for an excellent score.

3. Length of Credit History (15 percent)

Your credit history length is important too but it doesn’t hold quite as much weight as the amounts you owe and your on-time payment history. For each credit card or loan, the amount of time you’ve had each of those credit accounts will be averaged and that number considered.

Lenders prefer borrowers who have a long, documented history of taking on new accounts and spending money on those accounts at a healthy, slow rate, then repaying them by their payment due dates. Combined with a strong overall payment history shows that you’re able to manage debt responsibly.

FICO recommends that you do not close your oldest credit cards for the best FICO Score because this would lower your average credit account age significantly.

4. Credit Mix (10 percent)

The type of credit you have constitutes 10 percent of your total credit score. For example, having a mortgage loan and credit card could have a greater positive impact on your FICO score than two credit cards because the FICO equations look at the diversity of your credit accounts. Credit cards are not the only form of credit used to determine your score.

Diversifying your credit report with a credit card, loan, and other line-of-credit account could help to boost your FICO score.

5. New Credit (10 percent)

FICO recommends not to open new credit lines unless you need them. New accounts, plus the frequency of which you apply for the new credit lines could negatively affect your FICO credit score. FICO will take into account how many new accounts you’re opening when determining your score, which will also affect your length of credit history – so keep that in mind.

Try to avoid applying for too many credit cards over a short period of time as this may lower your credit score in the short-term.

What’s Considered a Good FICO Credit Score?

In my opinion, the answer to this question can be a bit subjective, and it depends on which FICO score model is being used. Here’s a good rule of thumb taken directly from the myFICO website:

  • >580:        Poor
  •  580-669:  Fair
  •  670-739:  Good
  •  740-799:  Very Good
  •  800+:       Exceptional

With the right knowledge, you’ll be able to implement new behaviors and strategies to grow your credit quickly and reach the next level of financial independence. If you’re not sure where to start, check your credit score for free first, then work toward improving these habits to get the FICO scores you want or need.

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Posted on November 9, 2021 by in Credit Monitoring

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