FICO Credit Score — How It Really Works

Your credit score is a 3-digit number that lenders use to decide whether to loan you money and at what interest rate. Understanding it can save you tens of thousands of dollars over your lifetime.

What Is a FICO Score?

FICO stands for Fair Isaac Corporation — the company that created the most widely-used credit scoring model. Your FICO score ranges from 300 to 850. Higher is better. 90% of top lenders use FICO scores when making lending decisions.

You actually have multiple FICO scores — one from each of the three major credit bureaus (Equifax, Experian, TransUnion). They're usually similar but can vary based on which bureau a lender reports to.

Score Range	Rating	What It Means
800–850	Exceptional	Best rates on everything
740–799	Very Good	Near-best rates
670–739	Good	Most lenders approve you
580–669	Fair	Higher rates, fewer options
300–579	Poor	Likely denied or subprime rates

The 5 Factors That Make Up Your Score

FICO calculates your score using exactly five factors, in order of how much they matter:

• Payment History (35%) — Do you pay on time? This is the single biggest factor. Even one missed payment can drop your score 50–100 points. Tip: set up autopay for at least the minimum on every account.
• Credit Utilization (30%) — How much of your available credit are you using? Keep it under 30%, ideally under 10%. Tip: pay your balance before the statement closing date, not just the due date.
• Length of Credit History (15%) — How long have your accounts been open? Older accounts are better. Tip: keep old accounts open even if you rarely use them.
• Credit Mix (10%) — Do you have a mix of credit types — credit cards, auto loans, mortgage? Tip: don't open accounts just for the mix; let this develop naturally.
• New Credit / Hard Inquiries (10%) — Every time you apply for credit, a hard inquiry is added. Tip: rate-shop for mortgages/auto loans within 14–45 days — multiple inquiries count as one.

Hard vs. Soft Inquiries

Hard inquiries (hurt your score): applying for a credit card, applying for a mortgage or auto loan, requesting a credit limit increase, private student loan applications. Typically drops score 5–10 points and stays on your report 2 years.

Soft inquiries (no impact): checking your own credit score, pre-qualification checks, employer background checks, insurance quote inquiries. Zero effect on your score — check freely.

Why this actually matters in dollars: on a $300,000 mortgage over 30 years, a borrower with a 620 score might get a 7.8% rate (~$2,154/month). A borrower with a 760 score gets 6.5% (~$1,896/month). That's a $258/month difference — or $92,880 over the life of the loan. Your credit score is not a vanity number.

Credit Score Dos & Don'ts

Do: pay every bill on time (automate it), keep card balances below 10% of the limit, check your report free at AnnualCreditReport.com, dispute errors immediately, and consider becoming an authorized user on a family member's old account.

Avoid: closing your oldest credit card, applying for multiple cards in a short period, maxing out a card even if you pay it off monthly, ignoring a collections notice, and co-signing a loan unless you're ready to own that debt.

Key Takeaways

• Payment history (35%) and utilization (30%) make up 65% of your score — focus here first.
• Your FICO score affects mortgage rates dramatically: a 620 vs 760 score on a $300K loan can cost $80,000+ extra in interest over 30 years.
• You can check your score for free via your bank app, Credit Karma, or Experian — no hard inquiry needed.
• Negative items (missed payments, collections) fall off your report after 7 years. Bankruptcies after 10.