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How to Understand FICO Scoring Categories

Erica Sandberg
Written by Erica Sandberg

On the surface, FICO scores can seem arbitrary. They aren’t, of course, otherwise they’d be useless. In fact, these scores were developed for a specific reason: to help lenders make quick, objective, and accurate business decisions. The numbers, which range from 300 to 850, are essential to meeting that goal. Higher scores indicate less lending risk, and those in the mid-700s and above are considered excellent. Instead of having to read and analyze an applicant’s consumer credit reports to get the information they need, lenders can just pull the person’s credit scores, since it represents what appears on the reports. To get the number, FICO (and other scoring companies) plugs the financial data that is on a credit report into a proprietary mathematical model that is designed to predict lending risk.

So why might your FICO scores be what they are? The best way to understand that is to switch places with a lender. Imagine a stranger comes to you, asking for a loan or line of credit…

Payment History

The first thing you’d want to know is how that person has paid other creditors in the past, so this category takes up the majority of a credit score, at 35 percent.

Were payments made on time, not just recently but over many years? If so, it would seem reasonable to expect that the person will continue in that vein. If he paid late once five years ago, you probably wouldn’t judge him harshly. When a late payment is bookended with a perfect payment pattern, it would appear to be an anomaly. Who hasn’t made a mistake at some point, right? No big deal!

On the other hand, if the person paid late a couple of months ago, you might wonder what happened. It could be an innocent mistake, but it may be an indication of a brewing problem. Because of that possibility, the person’s credit scores would drop. If he missed the last three payments in a row, however, you’d have no trust that he’ll pay you on time either. Something is definitely wrong! Lending money to this person would be highly risky.

Credit utilization

Now let’s say the prospective borrower has been charging each month but also paying his bills to zero (or close to it). That activity would show up on his credit report, along with the available credit line for each credit card account. Owing almost nothing when it’s possible to borrow large sums will be evidence that he has been managing his financial affairs in a healthy way. Therefore his credit utilization ratio – which is the amount a person owes compared to the total credit line – is a key risk factor. It comprises 30 percent of a FICO score.

Yet if the person has maxed out his credit cards, his credit utilization rate would be very poor. It would signal financial trouble. Even if he has been sending all of his payments by the due date, you’d wisely wonder if another loan or credit card would push him over the edge. For this reason, high debt and tapped out accounts will cause a FICO score to tumble.

Length of credit history

Now imagine that the person who comes to you has a long history of using credit cards and loans in super positive ways. With many years of on-time payments, satisfied accounts, and low debt, you would have faith that he’ll keep up this kind of behavior. The length of a person’s credit history is 15 percent of a FICO score.

Conversely, if the person has not used credit cards or loans in the past, or has only just started to use them, he’d be a mystery. Perhaps he’ll be a reliable customer but you really can’t gauge him properly. It shouldn’t take too long for you to get a sense of his abilities, though. A year or two of responsible credit use might be all that you need to make the right business decision.

Types of credit in use

Now consider an applicant who has had a history of managing a wide variety of credit products. Personal, student, home, and vehicle loans in addition to a few credit cards — all handled perfectly — would surely give you an extra boost of confidence in the person’s ability to handle money and credit. This category of a FICO score is 10 percent. It’s not nearly so important as payment history and credit utilization, but it’s nice to have as an added edge.


Lastly, think about the person who, even with a robust and positive pattern of using credit products, has been asking everyone in town for a loan. “Hey, can I borrow money from you? How about you?” It smells of desperation!

While friends and family members don’t send notices to the credit reporting agencies that the person has been hitting them up for cash, banks do. Each time a person submits an application for a credit card, loan, or credit line increase, the lender notifies the credit reporting agencies and a hard inquiry is placed on the person’s report. The more of these inquires in a short span of time, the more it raises a red flag to other lenders that something is amiss. For this reason, pursuit of new credit is a scoring factor. At 10 percent it’s not much, but if the person has little else on his reports that proves he’s a good credit risk, it will have a greater hit on his scores.

By switching perspective and looking at the situation through the lens of a lender, you will know why your own FICO scores are either high or low. So ask yourself this: based on what is on your credit reports, would you lend money to you? If you’d decline or hesitate, identify what would hold you back. Is it a poor payment pattern or an overabundance of outstanding debt? Are you too young or limited in the world of credit, or have you been too aggressive with applications? Whatever the case, you have the power to change your score by adjusting the way you use credit products.

About the author

Erica Sandberg

Erica Sandberg

Erica Sandberg is a freelance editor at large, reporter, and advice columnist covering all things fundamental finance. She’s been KRON-TV’s on-air money and credit expert for over 15 years, and has appeared on virtually every national news show, from Fox to CNN. She hosts Making it with Erica, a video program highlighting ways to live adventurously on any budget.


  • Interesting perspective on flipping leverage positions. My question is; is scoring done with the same mathematical model? Do banks, car loans and Mortgage companies look at credit the same way? And if they are, why are scores always different?

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