If you have credit, you have a FICO score. But how is it calculated? The Fair Isaac Corporation perpetuates the mystery of its FICO scores by never releasing the details of the FICO formula. Even if it were known, the fine points of its methodology are still subject to change at its discretion.

How is FICO Calculated?

FICO does not even produce the scores itself; FICO creates the software that is used by the three major credit bureaus. Those companies, Equifax, Experian, and TransUnion, plug their data into the FICO formula to produce proprietary results.

Fortunately for consumers, FICO has disclosed a general outline of what information is used, and how it is weighted.

Payment History

Your payment history is the most critical factor in your FICO scores. Your history includes which of your accounts were paid on time, the amounts owed, and the length of any delinquencies. Also included are any adverse public records such as bankruptcies, judgments, or liens. All of this information collectively comprises 35% of a FICO score.

Your Debt vs.Your Credit

At 30%, the next most crucial factor is your debt. This data includes the number of accounts you owe money on, the type of debt, and its total amount. Also included is the ratio of money owed to credit available, often referred to as a credit utilization rate. Interestingly, this calculation means that when a consumer opens up a new account and has more available credit, their credit utilization ratio will go down, so long as they do not incur additional debt.

Length of Credit History

Beyond your payment history and your debts, the FICO formula takes into account three other factors in much smaller proportions. Your length of credit history makes
up 15% of your score. This factor includes the length of time your accounts have been open and how long it has been since they have been active.

Because the length of time impacts your score is why recent immigrants and young adults start with lower credit scores. The types of credit used comprise another 10% of the FICO derived scores.

New Credit Applications

The last 10% of your FICO score is made up of data related to new credit applications, such as the number of recent credit inquiries and how many new accounts have been opened. Opening up too many accounts in too short of a period is interpreted as a sign of risk and will lower your score.

The Bottom Line

Reportedly, when asked to sum up the entire Old Testament, the Jewish scholar Hillel is supposed to have said, "That which is hateful to you, do not do to your fellow. That is the whole Torah; the rest is the explanation; go and learn." Likewise, one could summarize the FICO scoring formula by saying, "You should pay your bills on time and not incur too much debt; the rest are details." Although your payment history and the amount you owe may only make up 65% of your FICO score, it would be difficult to run afoul of the remaining criteria while paying your bills on time and carrying little debt.

There is an aura of mystery surrounding the FICO score, but it doesn't have to be that way. While it is helpful to know the fundamentals of the FICO formula, consumers should not be tempted to feel like they can game the system. Ultimately, your FICO score will be closely dictated by your payment history and your level of debt.