Your FICO score determines your credit risk to lenders, the percentage rate to pay it back, and whether they will offer a loan. Knowing how your credit habits affect the score will help you get the best borrowing rates and lower insurance premiums.

What is FICO?

The FICO score, developed by the Fair Isaac Co., now known as FICO, first started back in 1989 to determine consumer risk to lenders and insurers. There are two scores: FICO credit card/auto is 250 to 900 and the FICO mortgage score ranges from 300 to 850.

A score of 800 or higher is considered exceptional while 670 to 799 – which is the average range – is good. Consumers with scores under 580 are considered a serious risk.

The higher the score, the less risk, resulting in getting the lowest borrowing rates and insurance premiums. Low scores will result in higher rates and even getting rejected for some loans and insurance policies.

Information from one of the three major credit bureaus – TransUnion, Experian or Equifax – is gathered from your credit report by FICO. Both positive and negative information is used to calculate the score.

What Determines the FICO score?

Five factors determine the FICO score. Each factor has an associated percentage of the total score:

  • Payment history (35%)
  • Amount of debt (30%)
  • Length of credit history (15%)
  • Number of new accounts/inquiries (10%)
  • Types of credit (10%)

What Affects the Score?

Late payments, opening too many accounts in a short time and a limited credit history will result in a lower score. Also, if you owe a large amount of your total credit will negatively affect the score.

Just one, 30-day late payment will drop your score by about 100 points. Negative credit activity stays on credit reports for seven years.

Consistent on-time payments, limited credit inquiries and a low ratio of debt to credit will keep your score up.

Keep Tabs on Your Credit Report

Review your credit report at least once a year. The credit bureaus are required to provide a free copy annually upon request. Keeping an eye on your credit report will you detect any possible errors and attempts at identity theft.