What Are FICO Credit Scores?

Fair Isaac Corporation credit scores estimate the risk of lending money to a particular individual. High-risk borrowers are people with low FICO credit scores, likely because they do not have much credit history or because they have managed credit poorly in the past. Lenders prefer low-risk borrowers because these individuals' high credit scores demonstrate that they have consistently repaid debts in the past.

Range

FICO credit scores range from 300 to 850, although most people have scores in the 600s or 700s. According to the Consumer Federation of America, in conjunction with the Fair Isaac Corporation, people with scores over 700 should not have trouble obtaining credit, while people with scores under 600 are likely to be offered very high interest rates or have their credit applications denied.

Types

FICO scores include any credit score calculated using the credit-scoring model developed by Fair Isaac Corporation. Individuals have a few different FICO scores because multiple credit bureaus collect credit data. Equifax calls FICO scores "BEACON Scores," Experian refers to them as "Experian/Fair Isaac Risk Model" and TransUnion as "EMPIRICA." The scores might not be identical because each credit bureau could have slightly different information in the individual's credit report file.

Elements

The FICO score combines calculations from five major areas of the individual's credit use. A person's payment history on credit accounts determines approximately 35 percent of the score, including late payments, bankruptcies and accounts sent to collection agencies. Amounts a person currently owes contributes another 30 percent of the score, especially the ratio of balances on credit cards to the credit limits. About 15 percent of the score looks at a person's length of credit history, including the amount of time that has passed since opening each account and how recently the accounts have been used. Two final areas, which each account for 10 percent of the score, are the variety in types of credit accounts and the amount of new credit and credit applications.

Significance

Many lenders use FICO credit scores to help them determine whether or not to approve an applicant's request for credit. Lenders also generally offer better interest rates to people with better credit. Having a good credit score can save a person thousands of dollars during loan repayment because of lower interest costs. For example, repaying a mortgage of $200,000 over 30 years at 7 percent interest costs roughly $47,000 more than repaying the same mortgage at 6 percent interest.