What Are FICO Scores and How Do They Work? Here is What You Have to Know!

Last Update: September 14, 2023 Credit Report Loans

FICO scores are used by approximately 90% of lenders when determining the creditworthiness of their applicants. By far, it is the most respected type of credit score around; many advise against relying on non-FICO scores, which have been coined as FAKO scores.

In 2014 alone, there were around 11 billion FICO scores sold. The next closest figure comes from the VantageScore, sold to the tune of approximately 1 billion scores. While the VantageScore rating has grown immensely in popularity in recent years, there’s no doubt that your FICO score is still more important (and by far).

But, do not go into all this credit gibberish with an empty mind; it’s important to know how FICO scores work and how they impact you, so we will help you understand that!

Let’s get started …

What Does FICO Stand for?

FICO is an acronym for Fair Isaac Corporation. In 1956, the business started when Earl Isaac (mathematician) and William Fair (engineer) ventured to create ‘borrower ratings’ for lenders. They started pitching their credit scoring system just two years later; by 1989, they established the first official FICO score rating algorithm.

The FICO system is used to evaluate a borrower’s creditworthiness. It’s compatible with the three major credit bureau Equifax, Experian, and TransUnion and currently serves as a rating system for borrowers in the United States, Canada, and Mexico.

Some quick facts about FICO’s rating system:

  • Most scores range from 350 to 850 points.
  • Equifax, Experian, and TransUnion each offer their own FICO rating.
  • While scores can vary by the information on your file, they use the same formula.
  • In 2014 alone, close to 11 billion FICO scores were pulled.

Why is Your FICO Score so Important?

At least 9 times out of 10, you can ‘bank on it’ that your new lender will pull your FICO score to qualify you. It does not matter whether it’s for a credit card, mortgage, or a new car loan.

Different FICO scores (ex. FICO Auto Score) make it easier to evaluate creditworthiness by financing type. The platform was many years in the making, and it has certainly stood the test of time.

Lenders put serious value into these ratings, which is easy enough to prove considering the nearly 11 billion FICO scores pulled in 2014 alone.

Here is Why You Should Care About Your FICO Score

Your FICO score can make a huge difference in the amount of interest you end up paying to a lender.

  • Buying a home

With a FICO score ranging from 620 to 639, you can expect to pay approximately $93 more a month towards your mortgage. Over the course of 30 years, your fixed-rate home loan could cost $33,627 less if your score was between 760 and 850 instead.

Even with a low credit score, you can still qualify for home financing, as FHA home loans can help. But going that route is also disastrous, considering the interest rates are no better, and premiums are tacked onto your payments under FHA’s financing terms.

We covered your credit score’s impact on your mortgage rates and total cost before; you can find more information about this in our ‘What Credit Score is Needed to Buy a House?‘ post.

  • Buying a car

If you have a FICO score ranging from 500 to 589, you can expect to pay around $591 a month for a 60-month new car loan. You will also face $10,467 in total interest payments. This is substantially more than what someone with good credit can expect to pay; a FICO score between 720 and 850 for the same loan will cost $139 per month less. In the end, the borrower with great credit will save around $8,326 in interest premiums.

Even worse, your insurance costs will be higher. It’s a proven fact that auto insurance providers consider their policyholders’ credit scores when calculating their coverage costs. This is not a good situation to be in, which is why we suggest you first establish a good FICO score and then apply.

Which FICO Scores Do Lenders Use?

Over 50 different FICO scores exist, which means there is no one-dimensional answer to this question.

Before you get confused, remember this: the FICO score established in 1989 is the “base FICO score,” which now has many newer versions, such as FICO Score 4 and FICO Score 9.

Meanwhile, there are other rating algorithms that FICO offers for different borrowing situations. The perfect example is FICO Auto Score, its own “base FICO score” in a sense, as FICO Auto Score 2, FICO Auto Score 3, and any newer versions are just updates to the base FICO Auto Score.

Aside from the many FICO scores, countless FAKO scores exist. These are alternative rating methods that are generally not used by lenders in any frequency. Although the VantageScore rating system is pretty popular, over one billion of those scores were pulled in 2014 alone.

To generalize for simplicity purposes, here are the most-used score types:

  • Buying or refinancing a home

Most mortgage brokers use the standard FICO score algorithm when determining a potential borrower’s creditworthiness. At this time, the easiest to access version of the base FICO score is FICO Score 8, which is sold under MyFICO. As a buyer, you should focus on your base FICO score or any of its’ updated versions.

  • Buying a new car

Most car loan providers will evaluate your creditworthiness based on your FICO Auto Score. This scoring algorithm was derived from the basic scoring system, but it considers other variables too. The point was to make a score that truthfully informs auto lenders what they can expect from a prospective borrower. As FICO finely grooms its approach towards rating auto borrowers, new versions of FICO Auto Score get introduced and used by lenders.

  • Applying for a new credit card

Many credit card companies will use one of the base FICO score versions to determine creditworthiness potential cardholders. However, the FICO Bankcard Score is also often used by credit card issuers. But, it really just boils down to the particular card you apply to get. If you go for a retail credit card, your base FICO score is more likely to get used.

  • Applying for a personal loan

Financial institutions do not like to change the score they use all the time; however, some will flex and pull the VantageScore 3.0 rating instead. If you enter the bank in hopes of getting a personal loan, chances are they will look at your base FICO score or a slightly newer version. Although, this is more likely when dealing with newer borrowers that have a decent income.

Note: VantageScore is a type of FAKO score (by definition), but it gets used frequently, so you should educate yourself on what’s different between each of the score types.

What Is The Difference Between FICO, FAKO, and VantageScore?

FICO has proven that it was the most correct. That is why most lenders use it. FAKO gives borrowers a way to see how their credit score progresses, but it does little when most lenders pull a completely different score. VantageScore is the exception. Not only is it used by around 10% of lenders, but it actually serves a purpose.

See, VantageScore works like FICO score. This particular rating approach is quite appealing to borrowers and lenders because it does not discriminate as much.

Take a look below at four key points that make the VantageScore rating formula appealing to borrowers and lenders!

  • It would help if you had less on your credit report to get rated, so you can start building credit faster. FICO wants half a year with an account reported before you get a score, but VantageScore calculates after a month.
  • Late payments on mortgages hurt more than on credit cards, yet FICO treats late payments the same; your first missed payment will not be as damaging under VantageScore’s rating formula.
  • You have 14 days to apply for credit cards without getting hit with a ton of hard inquiries, while FICO only offers this on car, home, and student loan inquiries.
  • With the latest VantageScore formula, debt ‘in collections’ does not matter so much, while FICO Score 8 only devalues the smaller ($100 or less) debts in collections.

With that said, you still want to focus the most on your FICO score. After all, most lenders still use and will likely continue for years for many years to come.

How is Your FICO Score Calculated?

Forget all the deviations, and look at the base FICO score up to its most recent version. You will find that the formula used to calculate these scores is much of the same.

The main commonality would be the sections that impact your credit score calculation and their strength.

Category:Score Impact:Factors Considered:
Payment History35%Length of payment history, frequency of missed payments, etc.
Amounts Owed30%Outstanding debts among all accounts, amount of available credit tied up, etc.
Length of Credit History15%How old your accounts are, the average age of accounts, etc.
Credit Mix10%How many accounts and how much debt is held based on the type of financings, such as installment or revolving.
New Credit10%How many new hard inquiries, fresh accounts, and how much debt was recently taken on.

This is the standard formula used by FICO to calculate scores, but the truth is there are many variables within that can influence your score. As the base FICO score releases with new versions of it, each category’s deviations grow larger. This is also why many banks stick with the older FICO scores, as otherwise, it might be impossible for excellent borrowers to refinance when needed.

With that said, FICO has stepped up to create new credit rating formulas. This initiative came as a result of the success with VantageScore; now, FICO has started rolling out a new score, which also targets those who have a marginal credit history. Different metrics will get used with the latest rating, and thus, millions of consumers will have access to the financing they previously could not get.

What’s a good FICO score?

The minimum and maximum points vary by FICO score type. This is how the base FICO score and its updated versions get classified by score range.

How Do You Find out Your FICO Score?

By now, you probably know about AnnualCreditReport handing out your free annual credit reports from each of the bureaus. If you inspected your report, it should be obvious that your FICO score never gets mentioned. However, that could change the ‘Fair Access to Credit Scores Act of 2013’ may eventually come to life.

Regardless, the wheels are already turning in the right direction. Around 100 million Americans qualify for free FICO scores through FICO ‘Open Access Program’.

Need your credit score now?

The fastest way would be to order your FICO score from MyFICO. This is the consumer’s part of FICO’s business, not some fly-by-night scam site. However, you can expect to pay $19.95 for each of the scores. It’s better to get your FICO score from all three bureaus, which would cost $59.85 in total.

Can You Get Your FICO Score for Free?

We went into detail on this subject recently. Read our post: How to Get Your FICO Score for Free!

After extensive research, we concluded that there are no completely free ways to obtain your FICO score. At best, you will qualify as holding an account with a company that offers it as a feature or promotion.

Currently, more than a third of America’s adult population can get their FICO score for free through the FICO Score Open Access Program.

How Often Should You Check Your FICO Score?

Your FICO score undergoes constant change, but the fluctuations directly result from changes to your credit report. For example, your FICO score could change day-to-day due to old missed payments aging, new credit improving your utilization ratio, and much more. These changes might not always get noticed, as in, and it’s not necessarily new accounts and huge debt repayments that matter.

We recommend you monitor your FICO score at least once every three to four months. Many credit monitoring services (and even identity theft protection plans) offer tri-annual credit monitoring. This might seem like the obvious solution but wait. You must remember that most of these offers either a FAKO score or a VantageScore rating.

A slightly more expensive alternative, the MyFICO credit monitoring service, might make sense. This gives you your credit report and score every four months, as well as credit monitoring and identity theft prevention help. It also gives you access to the 19 most-used FICO scores, not just one. While the other features are not as impressive as the competitors offer, it is an excellent service for anyone focused on upping their credit score.


If a stranger asked for $200,000 out of your lifetime income, would you give it to them?


Well then, why would you hand the same amount to a lender? Because that’s effectively what you are doing by not caring about your credit rating. In fact, it’s been proven that the additional fees and interest for a low credit borrower (versus an excellent borrower) can run far more than $200,000 over a lifetime.

Even if you build a ‘generally respectable’ credit history, you will be able to achieve a good credit rating. This alone can save you around $140,000 of the interest losses, so even if you only borrow when you need to, building your credit beforehand could save you a lot! And the clock is ticking, so all you can do is work towards a better tomorrow.