The Ultimate Guide to Understanding Your FICO Score | ModMoney

The Ultimate Guide to Understanding Your FICO Score

Credit card spending is a great way to earn cash back, award points, awesome travel perks, and lucrative sign-up bonuses. However, in order to fully enjoy these benefits, it is imperative that you take a disciplined approach and have a solid FICO score. This post will cover the basic building blocks of your FICO score: what it means, how it's calculated, and how you can find yours.

What is a FICO Score?

Calculated using the data on your credit report, a FICO score is the most common metric used to evaluate your risk as a borrower. It allows prospective creditors (think credit card companies, mortgage and auto lenders) to predict the likelihood that you will make your payments on time. We can break down a FICO score into the following ranges:

  • 300-580 (Poor)
  • 580-670 (Fair)
  • 670-740 (Good)
  • 740-800 (Very Good)
  • 800-850 (Exceptional)

Your FICO score doesn’t just influence which credit cards you will be approved for. It also determines the interest rate on your mortgage or car loan, insurance rates, and can even show up on employee background checks. For that reason, it’s important to monitor it and to know what levers you can pull to help increase it. There are 5 different factors that go into the calculation of your score. Knowing what they are and the importance of each is the first step to building up your credit.

Breaking Down Your FICO Score

1. Payment History – 35% of your score

The first thing a prospective lender will want to know about you is your track record of making on-time payments on other credit cards and loans. So, what if you have one or two missed payments on your credit report? Unfortunately, these will have an impact on your credit score, and you should try to create an otherwise clean track record of consistent and timely payments around them. Missed payments will typically fall off of your credit report after seven years, but that’s still a good amount of time for them to influence your score. It is very important to keep your payment history blemish-free, as it is the largest contributor to your FICO score.

2. Amount Owed – 30% of your score

The second most important contributor to your FICO score is the amount you owe to your creditors as a percentage of the total credit extended to you. (Ugh algebra). This metric is commonly referred to as your “credit utilization” and is calculated as:

Total Balance Across All Credit Cards / Total Credit Limit

Let’s look at a simple example. Let’s say I have 2 credit cards, each with a $5,000 credit limit. I currently have a balance of $1,500 on the first card and $500 on the second card. I would calculate my credit utilization as follows:

($1,500 + $500) / ($5,000 + $5,000)

($2,000) / ($10,000)


In this scenario, my utilization ratio is 20%. I calculated this by summing my total credit card balances ($2,000 across 2 cards) and dividing this amount by my total credit limit ($10,000 across 2 cards). The typical guidance is to keep your utilization ratio below 25-30% (but still greater than 0%) to show the credit card issuers that you can responsibly use and manage your credit lines without overextending yourself.

You can manage your utilization ratio in two ways – increasing the denominator or decreasing the numerator. Let’s first look at increasing the denominator, or your total credit limit. You can do this by increasing your credit limit on your existing cards or by opening a new card. Second, you can decrease the numerator, or your current balance. If you stay below your credit limit and responsibly pay off your new balances every month, this shouldn’t be a worry.

3. Length of Credit History – 15% of your score

Having a longer credit history is generally good for your score since it gives lenders more insight and comfort into your borrowing and repaying habits. I like to tell people that if they have an older credit card that does not charge an annual fee, it’s generally a good idea to keep it open to boost the average age of their credit history. Just make sure that you use it every once in a while. Otherwise, the issuer may close your account after a period of time with no activity. If you’re a newbie to the credit card game, it’s important to start establishing a history. FICO needs at least 6 months of data on an undisputed account in order to generate a score for you.

4. New Credit – 10% of your score

New credit inquiries impact 10% of your FICO score. Each time you apply for a new card or loan, the issuer will make a “hard inquiry” into your credit history. I often hear the misconception that one should be cautious about applying for a new credit card, simply because the application will result in a hard inquiry and ding your score. While you shouldn’t get carried away and apply for multiple cards in a very short period of time, this concern is over-exaggerated for a few reasons:

  1. Hard inquiries fall off of your FICO score after 12 months.
  2. New credit inquiries only contribute to 10% of your score, so the impact is minimal.
  3. If you pay this new card off on time each month, this helps your Payment History, which we know is the largest contributor to your FICO score (scroll back up to number 1 if you need a refresher).
  4. Opening a new card increases your available credit, which decreases your utilization. And as we know from point number 2, your credit utilization is the second largest contributor to your FICO score.

The important takeaway here is that even though a new hard inquiry may temporarily lower your credit score by a few points, the net long-term impact to your score is positive when you open a new card (assuming you pay it off every month).

5. Types of Credit – 10% of your score

The last 10% of your FICO score comes from the various types of credit extended to you, or your credit mix. Typically, credit card companies like to see that you can manage multiple credit cards or loans, so having a good mix of retail accounts, credit cards, mortgages, or car loans is a good thing. However, this is the least important factor comprising your score. It is not necessary to have all of these types of loans in order to achieve a great score!

How do you check your score?

Now that you know the factors used to calculate your FICO score, how can you check yours? Several credit card issuers offer their cardholders a free FICO score, including American Express, Barclaycard, Chase, Citi, Capital One and Discover, among others. Not all credit cards offered by these issuers provide FICO scores, so be sure to check with yours specifically. It’s also important to note that your FICO score may differ slightly if you check it in different places. This is because different issuers may pull your score on different dates or based on different credit reports from different bureaus. There are three consumer credit bureaus (Experian, TransUnion, and Equifax) that collect your data and create credit reports, and not all three will be identical.

If you do not have a credit card that allows you to see your FICO score, there are other options. Each person is entitled to review his or her credit report for free once a year with each of the three credit bureaus. This is a great way to check whether you have any adverse transactions or disputed accounts in your credit history. In fact, I recommend you check all of your credit reports every year to ensure that there are no mistakes and to file disputes if there are. Visit to request your free credit reports from each of the three bureaus.

The Bottom Line

Your FICO score is a very important number to know. In fact, I keep mine on the same pedestal as my social security number, BFF’s phone number, and Uber rating. It’s THAT important! Many people understand credit scores in the context of applying for a new credit card. However, it is so much more widespread than that. Let’s say you’re in the market for a new home or car. Having a good FICO score can meaningfully impact the interest rate your bank charges you. Now let’s say you bought (or leased) that rover and are purchasing insurance on it. Your rate will also be partially based on your credit. Landlords, utility companies, and even cell phone companies can require security deposits based on your credit score. It’s everywhere! So it’s important to (1) know it, and (2) know how to increase it. Being aware of the 5 factors that comprise it will help you do just that!

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