What is FICO? All you need to know

If you’re starting your financial journey, you may have come across the term “FICO® score.” Understanding what it is and why it matters can feel like decoding financial jargon. But don’t worry –there’s a clear, straightforward explanation.

Whether you're looking to buy a house, lease a car, or get your first credit card, your FICO score can open – or close – doors for you financially. Let’s dive in to what a FICO score is, why it’s important, and what factors make it go up or down.

What is a FICO score?

A FICO score is a three-digit number that represents your creditworthiness; basically, it's one type of credit score. Credit scores are used to determine your likelihood to repay a loan on time. Lenders review credit scores to decide whether to approve you for things like mortgages or credit cards. A credit score also plays a key role in determining the interest rates you’ll receive on loans or credit cards.

Think of your FICO score as a summary of the information in your credit report, boiled down into a number that lenders can easily interpret. The score measures things such as the length of your credit history, the total credit you have, how much of your available credit you’re using, and your record of making on-time payments.

The FICO credit scoring model is used by over 90% of top lenderss, so your FICO score is a key factor in shaping your financial future – impacting everything from where you live to what you own. Whether it’s high or low, your score tells potential creditors your credit risk – the chance you won’t repay a loan.

A brief history

FICO was developed by the Fair Isaac Corporation in 1989. Before FICO scores became the standard, creditworthiness was assessed in fragmented and often unfair and subjective ways. FICO established a more objective, data-driven system, which has since become the gold standard for determining financial reliability because it's fair to lenders and consumers. Today, FICO continues to refine its scoring model and update it periodically.

How is your FICO score calculated?

FICO scores range from 300 to 850, with higher scores indicating greater creditworthiness. The score is calculated based on five key factors, each carrying a specific weight.

1. Payment history (35%)

Lenders want to know if you've paid your bills on time. In fact, on-time payments are the biggest factor affecting your credit score. Late payments, defaults, or bankruptcies can have a significant negative impact on your FICO score.

• Why it matters: Payment history shows lenders if you’re reliable.
• Example: Jen had always been careful with her finances, but one month she missed a payment. At first, she thought it wasn’t a big deal, but when it passed the 30-day mark, things changed. The late payment was reported to the credit bureaus, and her once spotless credit score dropped. If her score had already been lower, the damage might not have been as severe, but it still would’ve hurt. Jen learned the hard way how even one late payment can impact a credit score.

2. Amounts owed (30%)

The amounts you owe is the total debt you carry, but having high debt doesn’t automatically mean a low credit score. What really matters is your credit utilization ratio – the percentage of credit you’re using compared to what’s available. To keep your score strong, a good rule of thumb is to use 30% or less of your available credit.

• Why it matters: High balances signal to lenders that you are financially overextended.
• Example: Chris has a credit card with a $10,000 limit. Currently, he owes $3,000 on it, which means his credit utilization rate is 30%. That means Chris has a 30% or less utilization rate, which helps him maintain good credit health. On the other hand, Jeff also owes $3,000 but has a $5,000 limit. His utilization rate is 60%, which is considered high and will likely negatively impact his FICO score.

3. Credit history length (15%)

The longer your credit history, the more information lenders have to evaluate your reliability. Lenders are more likely to view someone with a flawless 15-year payment history as a safer bet compared to someone with just three years of on-time payments.

Keep in mind, if you close an old credit card account, it will reduce your credit history length. And if you open several new accounts, it could lower the average age of your accounts.

In assessing length of credit history, FICO considers the following:

• The age of your oldest account
• The average age of all accounts
• How long it’s been since you used certain accounts

Why do lenders look at credit history length?

• Why it matters: Longer credit histories demonstrate to lenders that you have stability and experience with managing credit.
• Example: Sarah has had a credit card since she was 18, while her friend Kelly just got her first one at 25, which is her first use of credit. Even though both have identical payment histories, Sarah will likely have a higher FICO score because her longer credit history shows more borrowing experience.

4. New credit (10%)

New credit refers to recently opened accounts. Opening multiple accounts in a short time can signal financial stress, which may lower your credit score with each application. Before applying for new credit, consider the benefits of additional funds against the potential impact on your score.

• Why it matters: Frequent applications may suggest to lenders that you’re taking on too much debt too quickly.
• Example: Marcos found himself applying for multiple credit cards in a short span of time. Hoping to build his credit score and take advantage of various rewards programs, he applied for a travel rewards card, a cashback card, and a store card all within a month. However, Marcos soon learned that every time he applied for credit, new credit inquiries were performed. Those are considered hard inquiries, which temporarily lowered his score.

5. Credit mix (10%)

Responsible use of a healthy mix of accounts like credit cards, mortgages, and auto loans shows lenders you can manage different kinds of credit. A strong mix includes revolving credit – credit cards, retail store cards, gas station cards – as well as installment credit, such as mortgages, auto loans, or student loans.

• Why it matters: Lenders like to see a healthy credit mix – it shows you can handle different types of credit responsibly.
• Example: Ana had a credit card she used responsibly but didn’t have any other types of credit, like a car loan or mortgage. Without a credit mix, her credit score remained lower than it could have been, even though she paid her bills on time. When Ana applied for a home loan, the lender considered her limited credit history risky and denied her application. She realized too late that diversifying her credit could have improved her score and increased her chances of approval.

FICO score ranges and what they mean

Your FICO score falls into one of several ranges, each carrying implications for your financial opportunities, according to Experian:

• <580 Poor: May struggle to get approvals or face extremely high-interest rates
• 580-669 Fair: Some approvals at higher rates but still seen as risky by lenders
• 670-739 Good: Generally considered creditworthy, offering better interest rates
• 740-799 Very Good: Access to favorable terms
• 800+ Exceptional: Qualifies for the best rates and loan terms

Moving between ranges

Moving from one range to another can have significant financial impacts.

For example, Ana, our fictional would-be homebuyer, had improved her FICO score and was ready to apply for a $250,000 mortgage with a 4% interest rate. But she decided to wait a couple years and worked hard to improve her credit score even further. As a result, she qualified for a 3% rate instead. Over 30 years, this saved her nearly $50,000 in interest, all thanks to a minor score increase. For Ana, the difference wasn’t just numbers – it was life-changing.

Why FICO matters (and who uses it)

FICO scores help millions of people unlock the credit they need for life’s big moments – whether funding an education, buying a first home, or handling unexpected medical bills.

A strong FICO score can unlock better loan terms, lower interest rates, and more financial opportunities. Consequently, you can save big on interest and fees. On the flip side, a lower score might lead to higher borrowing costs and make it harder to get credit when you need it.

A FICO score weighs heavily in the following areas:

• Loan approvals: Lenders use it to decide if they’ll approve mortgages, car loans, or credit cards. Most approvals hinge on credit scores.
• Interest rates and terms: A higher score can lead to lower interest rates and better terms, saving you thousands of dollars over time.
• Credit limits: Better scores mean higher limits from lenders and credit card companies.
• Employment and housing: Some employers and landlords use FICO scores to assess your reliability.

And companies like insurers and utility providers may use FICO Scores to determine your service terms, making them a vital tool for navigating financial decisions.

How FICO compares to other scoring models

While FICO scores are used in the majority of lending decisions, you may encounter other credit scoring models. VantageScore® is one alternative to FICO. It was developed in 2006 by the three major credit bureaus– Equifax, Experian and TransUnion – and provides another method for credit scoring. Like FICO scores, the VantageScore rates your creditworthiness on a scale of 300 to 850, based on factors including payment history, credit utilization, and credit mix. FICO and VantageScore calculate scores similarly but weigh some factors differently, which may lead to slight variations.

For example:

• FICO requires an account older than six months to calculate a score, while VantageScore doesn’t.
• FICO focuses more on your payment history, whereas VantageScore gives slightly more weight to credit utilization trends.

The following are other credit scoring models:

• Experian’s National Equivalency Score: This model assigns a score from 0 to 1,000 based on factors similar to FICO's. Scoring can feel counterintuitive – 200 means a 20% chance of loan delinquency in 24 months, while 800 means 80%. There’s also an alternative 360-840 scale similar to FICO, where higher scores mean better credit.
• TransRisk: Developed by TransUnion, the TransRisk score evaluates risk for new accounts rather than existing ones. It's not widely used by lenders.

How to improve and maintain your FICO score

No matter your credit score, a few best practices can help improve it and your financial well-being.

1.     Pay bills on time

• Payment history makes up 35% of your credit score, so keep it as flawless as possible.
• Use reminders or set up automatic payments.

2.     Pay down debt

• Focus on reducing high balances as quickly as possible.
• Consolidating multiple debts into one manageable payment may be helpful.

3.     Keep accounts open

• Even unused accounts contribute to a longer credit history, showing lenders stability and experience.

4.     Limit new applications

You likely won’t see much of a dip from a single hard inquiry, but several in a short time can cause more damage to your score. That’s because trying to open several new accounts in a short time could suggest you’re struggling financially. How long will it take to see a higher FICO score? Well, there’s no set timeline, but with responsible credit habits and consistent, on-time payments, you’ll likely see progress with months or years of steady effort.

Tips for maintaining your score

• Check your credit report regularly: Look out for any errors that may negatively impact your score and dispute them immediately.
• Consider keeping old accounts open, even if you no longer use them.
• Work toward using less than 30% of your available credit.
• Keep low balances on credit cards and try to pay them off monthly or aim to pay down debt aggressively.

Misconceptions about FICO

It’s easy to fall for myths about FICO scores. Here are some clarifications:

• Myth: Checking your own score hurts it.
  Truth: Checking your score yourself is considered a soft inquiry and has no impact.
• Myth: Closing old credit cards improves your score.
  Truth: Depending on your situation, this can lower your score by shortening your credit history.
• Myth: Carrying a small balance on your credit card helps your score.
  Truth: Paying off your balance in full is better for your score and avoids unnecessary interest charges.
• Myth: Your income influences your FICO score.
  Truth: FICO scores don’t factor in income. They assess credit history, payment habits, and debt levels.
• Myth: You need to go into debt to build a good credit score.
  Truth: You can build strong credit through responsible use of credit, including making timely payments and paying off debt.

Frequently asked questions about FICO

How often is my FICO score updated?

In general, you can expect your credit score to update at least once a month. But if your lenders report to the bureaus more frequently, you could see changes to your score more often. 

Is a paid FICO monitoring service worth it?

For those working to build or improve their credit, monitoring services can offer real-time alerts, helping you take action quickly.

Do all lenders use FICO scores?

Most major lenders do, but others might use alternative credit reporting agencies and methods.

Do certain lenders use different FICO score versions?

Yes. Different lenders often use different versions of FICO scores depending on the type of loan. For example, mortgage lenders may use older versions like FICO Score 2, 4, or 5, while credit card issuers and auto lenders might use more recent versions, such as FICO Score 8 or 9. It's important to know which version a lender uses when reviewing your credit.

Does checking my own FICO score hurt my credit?

No. Checking your own FICO score is considered a soft inquiry and does not affect your credit. It’s a responsible step toward staying informed about your financial health.

Final thoughts

Understanding your FICO score and its influence on your financial well-being is crucial. Use this knowledge to establish good credit habits, monitor your progress, and unlock better financial opportunities.

Increasing your FICO score is a marathon, not a sprint. Start small, stay consistent, and see the results over time.

Interested in learning more? Here are related resources from Snap Finance.

• All about your credit report
• Six steps to financial fitness
• Debt repayment strategies

About Snap Finance

Snap Finance harnesses the power of data to empower consumers of all credit types to get what they need. Launched in 2012, Snap’s technology brings together more than a decade of data, machine learning, and nontraditional risk variables to create a proprietary decisioning platform that looks at each customer through a more holistic, human lens. Snap’s flexible lease-to-own and loan solutions are changing the face and pace of consumer retail finance.

For more information, visit snapfinance.com. 

Snap-branded product offering includes retail installment contracts and lease-to-own financing. Talk with your local Snap sales representative for more details on which product qualifies at your store location. For more detailed information, please visit snapfinance.com/legal/financing-options.