10 Things You Need to Know About FICO Credit Scores

Matthew Frankel, Contributor, The Motley Fool
May 21, 2019

Before you worry about how your credit cards might affect your score or what measures to take to improve your credit, learn the basics behind FICO — the most widely used type of credit score.

1. Your FICO score is based on five categories of information.

The exact formula FICO uses to determine your credit score is a closely guarded secret, but we do know the five broad categories of information used, as well as the weight given to each one:

  • Payment history: 35%
  • Amounts owed: 30%
  • Length of credit history: 15%
  • New credit: 10%
  • Credit mix: 10%

2. Some people have no FICO score at all.

To be able to generate a FICO score for a particular consumer, there is a minimum level of required information. Specifically, to have a FICO score, your credit report needs to have at least one account open for six months or more, and at least one account needs to have been reported to the credit bureau within the past six months. And while it may seem obvious, the credit report can't indicate that you're deceased.

3. Your FICO score tells lenders how likely you are to become delinquent on your debts.

The central reason lenders use FICO scores when making lending decisions and determining what interest rate you qualify for is to gauge the likelihood that you'll become delinquent or default on your obligations. According to FICO data, consumers with a FICO score of 800 or higher have a one percent chance of becoming 90 or more days late on an account within two years, while a consumer in the 650-699 range has a 15 percent chance.

4. The average consumer has a FICO score of 700.

FICO credit scores range from 300 to 850, with the majority of people in the 500 to 800 range. According to FICO, the average American consumer has a score of 700, which makes sense, as a 700 is a good, but not great, credit score.

For a little more color, the average consumer carries a non-mortgage balance of $8,611 and is using 15 percent of his or her available credit. On average, consumers have six open revolving credit accounts, all of which have outstanding balances.

5. A perfect FICO score isn't impossible to achieve.

Only about 0.5 percent of consumers have a perfect 850 FICO score, but it isn't impossible to achieve the coveted perfect score if you want to. Getting to a perfect score doesn't require any crazy tricks. Most are common-sense credit behaviors, such as paying all of your bills on time, not carrying credit card balances and not opening more accounts than you need. You'll need a little discipline, but it's not impossible to achieve.

6. Maxing out a credit card could hurt your score more than you may think.

It's common knowledge that maxing out a credit card isn't exactly "responsible" credit behavior. As a result, maxing out one of your credit cards could cause your score to drop by 10 to 45 points, according to FICO.

7. Closing old credit cards can hurt your FICO score.

The reason maxing out a credit card can hurt your FICO score is that it raises your credit utilization — that is, the percentage of your available credit that you're using.

Similarly, closing an older, unused credit card can also have the same effect. By closing a card, you're eliminating some of your available credit, which raises your overall credit utilization if you have balances on other cards. In addition, since the age of your accounts is also a factor in your score, closing a card could hurt even more if it's one of your oldest accounts.

8. Three major credit bureaus each produce their own FICO score.

Your FICO score is generated from the information contained in your credit report, and there are three major credit bureaus that produce credit reports: Equifax, Experian and TransUnion. Therefore, you have a FICO score generated from each of the three credit bureaus, and they can all be slightly different. You never know which one a lender is going to check, so it's best to know all three. The caveat: While it's common to get one of your FICO scores for free from a credit card issuer, if you want all three, you'll probably have to pay for it.

9. You also have more than one FICO score from each credit bureau.

Over time, FICO updates its scoring methodology and releases new versions of the FICO credit score. The current version is the FICO Score 9, which made a few changes from prior versions. Specifically, FICO Score 9 no longer considers paid collection accounts, and it places less emphasis on medical collections than other types of debt.

In addition, FICO offers industry-specific FICO scores, such as FICO Auto Score and FICO Bankcard Score, designed for auto and credit card lenders, respectively. These are designed to specifically measure the likelihood that a borrower will default on a specific type of obligation. To make it just a little more complicated, these scores range from 250 to 900 instead of the 300-850 range of base FICO scores.

Furthermore, there are several different versions of each. In all, between the three bureaus, old and new versions and industry-specific FICO scores, there are 28 different FICO scores based on your credit that lenders could potentially see.

10. Most lenders don't use the newest version — yet.

If you've paid collection items or medical debts, don't start jumping for joy just yet, now that FICO has decided to eliminate or de-emphasize these in its latest formula. The majority of lenders have not yet adopted FICO Score 9 yet, although it's been available for more than a year. Rather, FICO Score 8 remains the most widely used version.

This article was written by Matthew Frankel from The Motley Fool and was legally licensed through the NewsCred publisher network.

The views and opinions expressed in this article do not necessarily represent the views and opinions of First Republic Bank.