Your FICO score is the three-digit number lenders use to decide whether to approve your credit card, car loan, or mortgage, and what interest rate to charge you. It is the most widely used credit score in the United States, and it can save you or cost you tens of thousands of dollars over a lifetime. Yet most people have only a vague idea of what is actually inside it. Here is the breakdown of how FICO calculates your score, and what moves it.
Where the Number Comes From
FICO, originally the Fair Isaac Corporation, builds its scores from the data in your credit reports at the three major bureaus: Equifax, Experian, and TransUnion. The bureaus collect your payment history, account balances, credit limits, and public records like bankruptcies. FICO feeds that data through a proprietary model that assigns weights to different factors, producing a score between 300 and 850.
The score is not a judgment on your character. It is a statistical prediction of how likely you are to miss a payment in the next two years. Every factor in the model exists because it correlates with that outcome.
The Five Factors and Their Weights
Payment history is the heavyweight, worth about 35 percent of the score. FICO looks at whether you pay on time, how recently you missed payments, and how severe the misses were. A single 30-day late payment stays on your report for seven years and can drop a good score by 60 to 100 points. The best defense is autopay on every account.
Amounts owed, about 30 percent, is the second factor. This is your credit utilization ratio, the percentage of available credit you are using. Keeping balances low, ideally under 30 percent of your limits, keeps this factor healthy. Paying your balance in full each month does not help if the statement catches a high balance, so pay before the statement date if you are applying for credit soon.
Length of credit history is worth about 15 percent. Older accounts are better, which is why closing your first credit card can hurt your score for years. Keep old accounts open, even if you barely use them.
New credit is about 10 percent. Every hard inquiry, triggered by an application, can cost a few points and stays on your report for two years. Rate shopping for a mortgage or auto loan within a short window counts as one inquiry, so shop quickly.
Credit mix, the final 10 percent, rewards having different types of credit, such as a credit card, an auto loan, and a mortgage. You should never open accounts you do not need just to improve your mix, but over time, a healthy mix is normal and helps.
What the Ranges Mean
Scores above 800 are exceptional and get the best rates available. Scores from 740 to 799 are very good, and 670 to 739 is good. Below 670 is subprime territory, where rates climb sharply and approvals get harder. Improving your score by even 50 points, from 680 to 730, can meaningfully reduce your mortgage interest rate and save tens of thousands of dollars over the loan term.
How to Check and Improve Your Score
You are entitled to a free credit report from each bureau once a week at annualcreditreport.com, and most credit cards now include your FICO score for free on your statement. Check it quarterly, and dispute any errors you find, because roughly one in five reports contains a mistake that can hurt your score.
To improve your score, the levers are simple: pay everything on time, pay down balances, and let your oldest accounts age. There is no quick fix. Anyone promising to boost your score overnight is selling something. The real fix is time, consistency, and the habits above.
