Your FICO score is a three-digit number based on the information in your credit report. Learn about your FICO score, its importance, and how it is calculated.
This article contains general information and is not intended to provide information specific to American Express products and services. Similar products and services offered by different companies will have different features and you should always read the product details before purchasing any financial product.
FICO scores range from 300 to 850. Scores above 800 are considered “excellent.” FICO scores are calculated based on the information on file in your credit report. Paying your bills on time and not using too much of your available credit are great ways to build an excellent FICO credit score.
The FICO credit score is the most common system that credit card issuers and lenders use to quickly understand if you are financially responsible. It is a three-digit number calculated from the information in your credit report. If you want to borrow money to buy a car or a home, your FICO score is very important. It affects whether you are approved, the amount of loan you get, and the interest rate you will pay. A high FICO credit score is also generally required to get a credit card.
Understanding the ins and outs of what FICO scores measure, and using that knowledge to promote responsible use of credit, can earn you an excellent FICO credit score and help you save money over the years. First things first: FICO is a promotion of the Fair Isaac Corporation, which created the scoring system decades ago. If you have a high FICO score, you’re likely to do well under VantageScore, another major credit scoring system.
Why is your FICO credit score important?
To understand why your FICO credit score is so important, put yourself in the shoes of a credit card issuer or lender. Every time you use a credit card, you’re essentially asking the credit card issuer to lend you money to make a purchase. Ideally, you’ll pay your credit card bill in full when you get it to avoid paying interest. But you can also choose to pay only part of your credit card balance each month, which means the credit card issuer trusts you to pay off the balance plus interest over time.
A home mortgage or auto loan is more demanding. The lender will provide a large amount of money to help you buy a car or home, trusting that you can make the monthly payments for up to 30 years.
Enter your FICO credit score. This is a key factor in how companies understand your financial responsibility and credit habits. Therefore, it affects the debt terms they offer. For example, when you apply for a new credit card, your FICO score plays a big role in determining the annual percentage rate (APR) you’ll pay on your unpaid balance. Generally speaking, the higher your FICO score, the lower your APR.
FICO credit scores range from 300 to 850. A FICO score of at least 740 means that the company is likely to repay its loan on time. FICO calls scores of 800 or higher “excellent,” meaning you’re a very low risk.
How FICO Calculates Credit Scores
There are three main credit reporting agencies: Experian, Equifax, and TransUnion. Each credit reporting agency tracks your credit card history and loan payments, the amount of debt you owe, and other financial identifiers, such as any accounts sent to collection agencies or any bankruptcy filings in the past 7 to 10 years.
The data from your credit report is fed into the FICO algorithm, which calculates your three-digit score. You actually have three basic FICO scores: One based on your credit report from each agency. If you apply for a credit card, the card issuer may collect a FICO score. For mortgages, lenders typically combine all three FICO scores.
Anyone can view their three general credit scores at www.annualcreditreport.com. 1 FICO also calculates special scores for credit card issuers, auto lenders, and mortgage lenders. To learn more about special scores, read Different Types of Credit Scores.
In theory, your FICO credit scores should be very similar, but it’s important to check your credit reports regularly to make sure each one is up to date and doesn’t contain any errors. Checking your credit reports or signing up for a credit monitoring service can also help you monitor for identity theft. Read “How Often Should You Check Your Credit Reports and Scores?” and “How to Dispute Your Credit Reports on All Three Agencies.”
Did you know that as an extra security measure to prevent fraud, American Express reports reference numbers – not your actual account number – to credit bureaus?
What is most important in the FICO algorithm
Your FICO score is based on five main components, each with different weights :
- 35%: Payment habits – your record of making payments on time.
- 30%: Credit utilization ratio – how much of your total available credit you are using right now.
- 15%: Credit history – the length of time you’ve had credit accounts.
- 10%: Debt mix — The different types of credit you have, including credit cards, car loans, personal loans and mortgages.
- 10%: Credit Inquiry – A recent application for a new loan or credit card will result in a “hard inquiry.”
Because it matters so much, your payment habits and credit utilization are the biggest factors. A good way to make sure you pay your bills on time is to sign up for an automatic payment service. When it comes to credit utilization, it’s best to keep your outstanding balance below 30% of your total available credit—the lower, the better. To learn more, read “What Affects Your Credit Score?”
It’s a fact that your FICO credit score is very important in your financial life. Companies use it to determine how likely you are to pay back what you owe. A good FICO credit score may help you get approved for a new loan or credit card and play a role in the terms of the deal. Paying your bills on time and not using too much of your available credit are key steps to building an excellent FICO credit score.
Kara Fried is a freelance writer who has focused on personal finance throughout her career. Her work has appeared in The New York Times , Money , CNBC.com, and Consumer Reports , among many other outlets.
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