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How are credit scores calculated? FICO scores explained

What three-digit number can make or break your ability to borrow money? That’s right—it’s your credit score. Applying for any type of financing and even housing opportunities can all come down to what FICO says about your financial history.

As one one the most popular measuring sticks when it comes to rates on personal or auto loans, credit cards, housing opportunities, and insurance, your FICO score often holds the key to opening doors for you financially. This includes things like your mortgage payment, your car payment, and the interest rates on your credit cards and student loans.

Generally, three-digit credit scores range from 300 to 850. The higher your number, the better your credit score, as you're perceived to be a more responsible borrower. How those scores are calculated and the differences between FICO and scoring models remains a mystery for many consumers. But, it doesn’t have to be confusing or complicated.

So, what is FICO exactly, and how are credit scores calculated? Here’s a primer.

What is a credit score?

The three major credit bureaus—TransUnion, Experian, and Equifax—assign people a credit score based on their financial history. Lenders reference your credit score when they’re deciding how trustworthy you are when it comes to borrowing money.

High scores are good—the higher, the better, actually. Scores above 700 reflect healthy spending and debt repayment. On the flip side, lower scores can indicate a checkered financial past, including missed payments or too much debt.

What is FICO?

Formerly known as Fair, Isaac and Company, FICO is the company responsible for the industry standard in consumer credit scores. Over 30 years ago, FICO engineered a new scoring model that quickly became a trusted way for lenders to measure consumer risk. It also acted as a solution to historically unfair scoring that put some individuals at a disadvantage based on factors like gender or political affiliation.

As the dominant and best known scoring company, it’s become synonymous with credit scores. But, it’s also one credit scoring company among many, as a credit score can come from a number of different sources and developers, and each scoring company develops their own algorithms and scales.

Today, FICO scores are used by 90% of top lenders. If you’re comparing your FICO score to a non-FICO score (like Equifax or VantageScore), the two might differ by as much as 100 points because of model differences. Lenders trust FICO as a fair, reliable, and evolving scoring model.

How are credit scores calculated?

Several factors go into your FICO credit score. A mix of negative and positive milestones in your financial history gives lenders the most accurate representation of your identity as a borrower.

Here’s what factors are weighted in your FICO score.

1. Payment history

This category is the most important, making up 35% of your total score. FICO references your payment history to understand whether you pay your bills on time. Consistent on-time payments boost your score, whereas late or missed payments are a red flag for lenders.

2. How much you owe (debts)

FICO also takes into account how much you owe other lenders, adding up to 30% of your score. This credit utilization score has more to do with the ratio of utilized versus available credit than the fact that you have debt at all. Try to keep your debt to credit ratio under 30% for positive effects on your score.

3. Age of your credit history

The amount of time you’ve had your accounts open amounts to 15% of your score. Lenders like to see a credit mix that includes some long-standing accounts, which is another reason to hold off on closing out old accounts. FICO will measure the age of your newest and oldest accounts to generate an average.

4. New credit lines

Opening too many new lines of credit at once is a red flag for lenders. FICO references how recently you’ve requested new credit and counts their findings as 10% of your total score.

5. Total credit mix

Your total credit mix represents how many types of credit you have. It also accounts for 10% of your FICO score. It’s beneficial to your score to have different types of credit that you’re paying off regularly.

Installment loans, such as student, auto, mortgage, or personal loans, are a common type of credit where you’re paying off a lump sum. Credit cards are considered revolving credit. Open credit is an example of a sum that differs over a set period of time, like utility bills.

How can I check my FICO score?

It’s free to check your FICO score at over 200 different institutions. Many credit card companies offer cardholders the option to check their FICO score in their online account portal. It’s also common for banks to offer this service, especially credit unions. Alternatively, you can use a site like (by Experian) to obtain your score.

There are paid options available, but it’s worthwhile to check with your financial institutions first. It’s likely that at least one will pull your score for you for free.

Lenders rely on FICO to produce fair, reliable scores to help them make their decisions about borrowers. Knowing your FICO score is just one more way to prepare for your financial future.

How can I improve my credit score?

Keep in mind that your credit score will be in flux throughout your lifetime, so it’s best to treat smart financial behavior like a marathon, not a sprint. But, if your credit score isn’t quite as high as you’d like it to be, you can start making an impact today by incorporating smarter financial habits—here are some tips for getting started.

1. Pay down outstanding debts

Lenders like to see borrowers take on healthy “risks” like installment loans, and these can help boost your score to a degree. But what can cause your score to dip is taking out too much debt and not repaying it back on time. If you have outstanding debts, focus on paying down the loans or credit cards with the highest interest rates first.

2. Follow up on missed or late payments

As we said before, payment history is the top factor in your credit score. If you’re not paying your bills on time, changing your payment habits will have the biggest immediate impact. Explore setting your bills to auto-pay so you won’t accidentally forget a due date.

3. Pay bigger bills more often

This tip ties into your credit utilization ratio, or the number that reflects how much of your total credit limit you’ve spent already. If you regularly carry a large balance on a card, you can keep your credit utilization ratio lower by making a payment twice a month instead of one large lump sum on your regular due date. Aim for a ratio below 10% of your total credit limit if you can.

4. Raise your credit limits

Raising your credit limit is another way to lower your credit utilization ratio and boost your score. If you’ve been paying your credit card off responsibly, the provider may be open to raising your card limit. While 10% is the ideal ratio, you can always aim for 30% first.

Keep in mind that this suggestion is geared towards those with responsible spending habits. If you’re one of the many who struggle with overspending, taking on more debt may just threaten your credit score more.

5. Negotiate a lower rate

Sometimes, it’s possible to lower the rate on outstanding balances. If your lender agrees to a lower interest rate, you can reallocate the funds you’re saving each month to your principal balance, or to another loan with a higher interest rate.

6. Add to your credit mix

Lenders like to see a healthy mix of credit types, such as installment loans (mortgages, student loans, and auto loans) and recurring credit card payments.

If you have only one credit card but you use it responsibly, consider getting a second and managing purchases across both cards to lower your overall credit utilization ratio. The Varo Believe Credit Card, with no minimum security deposit, no annual fee, and no hard credit check to apply, can help you start building your credit today¹.

Depending on your circumstances, it’s worthwhile to assess the potential benefits of a home or auto purchase on your overall credit score.

7. Be thoughtful when applying for new credit

As we said before, opening too many new lines of credit at once is a red flag for lenders. This may be a no-brainer, but if you’ve already reduced your score by requesting too many credit lines, you shouldn’t count on additional credit in order to improve it. It’s smart to be intentional about applying for new credit only when it makes sense for your overall credit portfolio.

If you have many lines of credit open already, it’s probably best to focus on paying down balances and keeping them low. Consider applying for new lines of credit only if you currently have a limited number, and if it makes financial sense for you both now and in the long run.

Remember, raising your credit score may take time. But, armed with a few tips and a shift in your overall spending mindset, you can positively impact your score both in the immediate future and in the long run.

An understanding of how FICO works and what factors impact your score can go a long way towards increasing and maintaining your score in the future. Given that this score can be the deciding factor when it comes to future borrowing or housing opportunities, it’s important to regularly check up on it and ensure you’re taking it seriously as a measuring stick for financial stability.

1To be eligible to apply for the Varo Believe Card, you need to have received Incoming Deposits of $200 or more in the past 31 days to your Varo Bank Account and/or Savings Account. Incoming Deposits include any deposit into your Varo Bank Account and/or Savings Account from any source outside of Varo, Varo to Anyone transfers between Varo customers, and final dispute credits.


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