By Travis J. McShane, CFP®, CFA

The FICO score is a well-known tool that many lenders use to assess the risk of extending credit to individuals.

Whenever you apply for credit, the financial institution will try to figure out if you are going to pay them back and if you are going to pay them back on time. These factors typically drive the terms of your loan or credit line and whether you are ultimately approved.

According to FICO.com, 95% of the largest financial institutions in the U.S. are FICO clients, so chances are that your FICO score will be used a few times over your lifetime.

FICO scores are constructed by the Fair Isaac Corporation, which is a data analytics company based out of San Jose, California. While we tend to think of our FICO score as a single number, Fair Isaac Corporation produces several variants of our “FICO Score,” which financial institutions then choose from when vetting customers.

The most common models typically score individuals on a range from 300 to 850. The chart below shows what those numbers can mean for you.

If you plan on applying for a loan or credit soon, it is a good idea to check your FICO score in advance to avoid surprises. Several free resources are available online to do this, but one of the simplest ways is to use Discover’s Credit Scorecard. You do not need to be a Discover Card customer to sign up for this tool, and there is no ding to your credit when you run an inquiry.

Another good place to check is your bank, as many of the larger banks are beginning to provide this information to customers via their online portals for free.

How Your FICO Score Comes Together 

The primary factors that affect your FICO score are detailed below, along with their approximate percentage impact:

• Payment history—35%

• Credit utilization—30%

• Credit age—15%

• Recent applications for credit—10%

• Credit mix—10%

Payment history carries the largest weighting in the calculation and reflects whether your credit history shows a pattern of on-time payments. Missing payments, late payments, and underpayments have a detrimental effect on your score, so it’s a good idea to develop strong payment patterns.

Credit utilization is the next-largest factor and focuses primarily on your revolving credit (i.e., credit cards and lines of credit). It is calculated by dividing the amount of credit you’ve used each month by your total credit available. It is generally recommended that you keep this ratio below 30% to avoid weighing down your score.

Credit age refers to how long your credit accounts have been opened. In general, credit accounts that have been open for a long time are viewed favorably on your credit scoring.

Recent applications for credit also have an impact and tend to be more detrimental for people with very short credit histories. For people with longer credit histories, the impact is far less but can still bring down your score some in the shorter term.

Finally, your credit mix refers to the different types of credit accounts you have outstanding. A common mix might be a mortgage loan, an auto loan, and a couple of credit card accounts. This factor is of lesser importance if you have strong payment history, credit utilization, and credit age; however, it becomes more important for people with relatively little information on their credit reports, according to myFICO.com.

It is a good idea to check your score periodically to ensure your credit reporting is in good order to avoid any surprises. If you need guidance on credit scores or any other area of your finances, please don’t hesitate to reach out. Our fee-only advisory firm in Fullerton, California, helps clients make smart decisions about their credit as part of our comprehensive financial planning services.

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