What exactly is a Credit Score and how is it calculated?

What is a FICO Score? The Fair Isaac Corporation first introduced the FICO score in 1989.  It is a measure of consumer credit risk and has become a fixture of consumer lending in the US.  Three major credit bureaus issue individual FICO scores: Equifax, Experian, and Transunion.   FICO Scores from each of these bureaus are created by information that has been reported to them and may differ from bureau to bureau.  The information reported to each bureau stems from debts, payments, credit card accounts, and overall financial history.  This collected information is what will then help estimate the level of future risk there may be if a lender extends to you the offer of a loan or any type of credit.

How is a FICO Score Calculated?

  • Payment History- 35% - Missed/late payments will drastically lower your score.  FICO scores do favor recent activity, however, so in order to improve your score you must continue to make on-time payments.


  • Credit Utilization- 30% - How much you owe versus how much credit that is available to you has the second largest impact on your FICO score.  Maxed out credit cards indicate that an individual poses a higher risk of default on a loan.


  • Length of Credit History- 15% - Credit accounts owned over a longer period of time will strengthen your FICO score.


  • Mix of Accounts- 10% - Higher FICO scores are generated if you have a mix of different types of credit accounts.  These accounts can consist of mortgages, credit cards, installment loans, auto loans, etc.


  • New Credit Inquiries- 10% - Continuously applying for extension of credit over a short period of time will have a negative impact on your FICO score. 

Overall Analysis!!!

FICO scores range from 300 to 850.  Simply put, the lower the score, the higher the risk.  Your credit score will be used to determine the approval or denial of any extension of credit.  In addition, your FICO score will determine the interest rate that will be given to you.  Higher credit scores will result in lower interest rates, and vice versa.