What is a FICO Score? Everything You Need to Know

If you’re an adult living in the United States, you’ve probably heard of FICO® Scores. Maybe you know that a FICO Score reflects your history with debt, and that you have better chances qualifying for loans with better rates if your scores are “good.”

However, most people don’t know much about how FICO Scores really work. That includes details like how the scores are calculated and how you can gain points. After all, FICO scores can be kind of difficult to understand, since they’re based on complex formulas that include loads of information about your debt. 

With that said, it’s not impossible to develop an understanding of how FICO Scores work! In fact, the information in this article can help you better understand your scores, and even give you some clear insights on how to gain points.

Defining FICO: The industry standard for credit scores

Before the modern credit scoring system, evaluating a potential borrower’s creditworthiness was more casual and largely subjective. Loan officers would use their best judgment to make lending decisions, which were often inconsistent and subject to racial, gender, and class bias.

In 1956, an engineer, Bill Fair, and mathematician, Earl Isaac, set out to change that and founded the Fair Isaac Corporation (FICO) to build an objective, mathematical way to measure credit risk. In 1989, FICO introduced the first standardized credit scoring model called the FICO score. This shift replaced subjective human judgment with an impartial, data-driven 3-digit score—democratizing access to credit for millions of Americans.

Today, FICO is the credit score that’s used by most creditors: 90% of them, according to FICO. When you apply for new credit, there’s a strong chance the creditor will use one or more of your FICO Scores to determine if you qualify. So if you ever plan to take out a credit card or loan, it’s important to understand the basics about how these scores work.

How is a FICO score calculated? (The 5 key factors)

A FICO Score is a three-digit number that reflects your history of managing debt. There are many factors that go into calculating a score, but FICO generally puts its scoring factors into five distinct categories that are each weighted differently.

Many people make the mistake of assigning equal importance to these five categories. But notice that the first two categories combined make up a whopping 65% of your credit scores. 

In other words, if you want to ensure your FICO Scores grow, you’ll need to prioritize these two categories. You can do that by paying your debt on time every single month, and by keeping your credit card balances low, ideally paying them off each month.

FICO score ranges: What do the numbers mean?

Many people want to know if they have good FICO Scores or bad scores. But each creditor has different requirements to qualify for their products, and many will work with people who have low scores. 

However, it can be helpful to have a general idea of what range your FICO Scores fall into before you try to apply for a loan, a credit card, or even an apartment. The ranges listed below are based on the traditional FICO scoring scale, of 300 to 850 points.

Why your FICO score matters to lenders

FICO Scores are crucial to lenders because they reflect your “creditworthiness.” In other words, they give lenders a quick and reliable way to determine if you’ll pay back your debt.

In fact, FICO Scores are one of the best tools lenders have for predicting how likely you are to pay back what you borrow. That’s because, over the years, FICO has fine-tuned their credit scoring models based on ever-evolving information about borrower behavior.

With that said, FICO scores aren’t the only detail that matters to lenders. Before approving you for new credit, most lenders will consider other factors that aren’t reflected in your credit profile, including your income and employment history. 

FICO vs. VantageScore: Key differences explained

FICO isn’t the only company that calculates credit scores. FICO’s biggest competitor is VantageScore, another credit scoring agency that was developed by the three credit bureaus (Experian, Equifax and TransUnion). VantageScore has been in the business since 2006.

With both scoring models, your scoring range is typically 300 to 850, and higher scores mean you have better credit. But here’s a look at some of ways VantageScore scores different:

• Scoring categories: Their scoring models have different weights, with some VantageScore scores placing more weight on your payment history and the amount of available credit you’re using.
• Small collections: Unlike FICO, collection accounts with balances below $100 are included in your score calculations.
• First scores: You only need to have a debt account open for one month to build your first credit score, versus FICO that requires six months.
• Banking information: You can opt to include your banking information in some score versions.

Because of all these differences, it’s normal for your FICO Scores and VantageScore scores to be different, sometimes even falling into different score ranges.

How higher FICO Scores help you

FICO Scores are important to understand, since they impact your financial opportunities. If your scores are low, you may have trouble qualifying for loans and credit cards, apartments, and even certain jobs. The higher your scores are, the more affordable it will be to borrow money.

But even if your FICO Scores are low, that doesn’t mean you’re stuck with bad credit forever. It can take some time and effort to make significant credit score improvements, but every time you make a debt payment on time or pay off your credit card balance, you can help your FICO Scores grow.

¹Credit cards offered through Prosper are issued by Coastal Community Bank, Member FDIC, pursuant to a license by Mastercard.