If you have a credit history, you have a FICO score. But how is it calculated? The Fair Isaac Corporation has perpetuated the mystery of its FICO score by never releasing the details of its calculation formula. Even if it were known, the details of its calculation method could still change at its discretion.
How is FICO calculated?
FICO doesn’t even create its own scores; FICO makes the software used by the three major credit bureaus. Those companies (Equifax, Experian, and TransUnion) feed their data into the FICO formula to get a property score.
Fortunately for consumers, FICO has published a general overview of what information will be used and how that information will be weighted.
Key Takeaways:
- Fair Issac publishes FICO scores, but the exact formula for calculating the scores is unclear.
- Equifax, Experian and TransUnion merge their data into the FICO formula to get information about a person’s credit.
- FICO scores are provided to consumers in three main categories: credit history, credit utilization, and credit record.
Payment History
Your payment history is the most important factor in your FICO score. Your record includes which bills you’ve paid on time, how much you owe, and how long you’ve been past due. It also includes any adverse public records, such as bankruptcies, judgments, or liens. All of this information combined makes up 35% of your FICO score.
Your Debt and Your Credit
The next most important factor is 30% of debt. This data includes the number of accounts you owe money on, the type of debt, and the total amount owed. Also included is the ratio of debt to available credit, commonly called loan utilization. Interestingly, this calculation means that as consumers open new accounts and have more available credit, their credit utilization will decrease until they have more debt.
Length of credit history
In addition to your payment history and debt, the FICO formula also considers three other factors, but in a much smaller proportion. The length of your credit history is 15% of the score. This factor includes how long your accounts have been open and when they were active.
Because time affects your score, that’s why new immigrants and young people have lower credit scores to begin with. The type of credit used accounts for another 10% of the FICO score you receive.
Generally speaking, it is more beneficial to have more different types of accounts (such as credit card accounts, mortgage accounts, and retail accounts) than to keep fewer accounts.
New loan application
The last 10% of your FICO score is made up of data related to new credit applications, such as the number of recent credit inquiries and how many new accounts you’ve opened. Opening too many accounts in a short period of time is seen as a risk sign and can lower your score.
in conclusion
When asked to summarize the entire Old Testament, Jewish scholar Hillel is said to have said, “And learn.” Similarly, one could summarize the FICO score formula with this statement: “You must pay your bills on time and not get into too much debt, and the rest is details.”
While your payment history and the amount you owe may only account for 65% of your FICO score, it can be difficult to meet the remaining criteria by making payments on time and reducing your debt.
FICO scores are shrouded in an air of mystery, but they really shouldn’t be. While it’s helpful to understand the basics of the FICO formula, consumers shouldn’t feel like they can game the system. Ultimately, your FICO score will be determined by your payment history and debt level.
