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What Is a FICO Score and How Does It Work?

You’ve been playing the game for years now. You’ve had it for so long, it’s almost like a buddy. You live and breathe by those three life-altering digits. 

That’s right—we’re talking about your credit score. And it’s time to start thinking about it in a whole new light.

But what is a FICO score anyway? What is this thing you’ve allowed to rule your life? And when did everyone start using it as the ultimate gauge of how successful you are? It’s time to break down everything you need to know about the FICO score. 

What Is a FICO Score?

Your FICO score is a kind of credit score used to figure out if you’ll be approved to borrow money. Lenders use this credit scoring system to decide if they can count on you to pay back your debts.

So, who do we have to thank for the “almighty” FICO score? That would be the company that used to be called the Fair Isaac Corporation. Founded back in 1956 by Bill Fair and Earl Isaac, FICO has become a powerhouse of credit reporting over the years. 

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In the world we live in, most people probably think the FICO score is as old as time itself. But that’s just what the powers that be at FICO want you to think. In reality, the FICO score didn’t even become a thing until 1989—and that means it could be younger than you! Kind of makes you think twice about how much people rely on this thing, doesn’t it?
In reality, a FICO score doesn’t gauge how good you are with money, how wealthy you are, or how successful you are. All it really says is how good you’ve been at making payments to banks and lenders over and over again. 

FICO Score vs. Credit Score

Believe it or not, the FICO score is actually just one type of credit score—it’s not the only kind of credit score out there. Sure, the FICO credit score is the most commonly used across the board, but it’s not the only credit score in town. 

Your credit score can actually be different, depending on what scoring model is used and whether it’s Equifax, Experian or TransUnion reporting the information. 

Still, FICO has such a presence that when someone is talking about their credit score, they’re pretty much just talking about their FICO score (whether they even know it or not). 

FICO Score vs. VantageScore

VantageScore is a credit scoring system just like FICO, except the people at TransUnion, Equifax and Experian created this one. That’s right, everyone’s got their hands in the pot when it comes to credit scores. 

FICO and Vantage pretty much use the same kind of information to determine your credit score, but the VantageScore is used more when someone doesn’t have enough credit history to generate a FICO score report. 

To get a FICO score, you usually need to have one open account with at least six months of history.(1) Vantage can usually give you a score based on one month of account history and one open account used within the last 24 months.(2) But make no mistake about it—whether it’s Vantage or FICO, it’s still a credit score and you still don’t need it. 

How Is a FICO Score Calculated?

The folks at FICO love to keep their cards close on this one. In other words, no one outside the company really knows exactly how they calculate the scores. But here are the factors we do know they take into consideration to figure out your credit score: 

  • Payment history (35%)
  • Amounts owed (30%)
  • Length of credit history (15%)
  • Credit mix (10%)
  • New credit (10%)(3)

FICO Score Calculation break down: Payment History 35%; Amounts Owed 15%; Credit Mix 10%; New Credit 10%.

What does a credit score not take into consideration? Oh, you know, just the really important things, like how much money you have in savings and your net worth. 

Yeah, they don’t pay any attention to those things. They really aren’t interested in how well you handle money. What they really care about is how good you are at juggling debt. 

What Are the Types of FICO Scores?

When we talk FICO, a lot of people assume there’s only one score. But that’s not really the case. Truth be told, there are actually a few different types of scores with different scoring ranges. 

Base FICO score: 300–850

You’re probably most familiar with the base FICO score. This is the number that usually gets pulled when you apply for a credit card or loan. This score looks at all the different types of debts you’ve ever had and your history paying on them. 

Industry-specific FICO score: 250–900

This one is just like it sounds: It’s a credit score that applies directly to the industry you’re looking at. Did you know there are specific credit scores for auto loans that are actually different than an overall FICO score? Yep, it’s true. They use the base type of credit score and then build another one that says how credit-worthy you are just for a car loan. Crazy stuff, right?

UltraFICO score: Can raise your overall score by 20 points(4)

You might have heard, but we have some really strong thoughts when it comes to the UltraFICO score. In a nutshell, the UltraFICO score is designed to “boost” the credit score of people who already have a low score. These are people who might have trouble paying back a loan or keeping up with their credit card payments. 

But thanks to UltraFICO, they can now be approved for more credit. If they’re denied for a loan or credit card, they can ask to pull their UltraFICO. This opts them in to have their checking, savings and money market accounts looked at in order to try to get the artificial boost they need to qualify.

Taking advantage of people who are already struggling and trying to dish out more debt to them? That’s ridiculous!

What Are the FICO Score Ranges?

Here’s the breakdown of FICO score ranges: 

  • Excellent: 800–850 
  • Very Good: 740–799
  • Good: 670–739
  • Fair: 580–669
  • Poor: 300–579

Fico Score Ranges

FICO scores range from being called “excellent” to the very bottom of the barrel of “poor.” The higher the credit score, the less the credit risk for lenders (supposedly). They assume that if you’ve taken out enough debt to get a high credit score, then surely you’re less likely to default on them. 

A Low Score Is Not the Same as No Score

Let’s make sure we’re being perfectly clear here: We’re not preaching that you should have a low credit score. What you want is no credit score to speak of at all. Zip. Zero. Nada. Well, technically it would read as “indeterminable.” But still, that’s what you want. 

The important thing is that once you have zero debt to your name, that magical indeterminable credit score will find you. The longer it’s been since you paid your last debt and closed your cards, the closer you’ll be to that highly desirable indeterminable score.

(P.S. Just in case you’re wondering: Yes, Dave Ramsey’s credit score is indeterminable. And he wears that accomplishment with pride.)

Does Your FICO Score Matter?

If you’re applying for a credit card, yes. Need to get a car loan? Sure, you’ll want a credit score.

But hold on to your seats. We’re about to make a really bold statement: You don’t need a credit score. 

Cue the shock, the awe and (for some) the horror! People who “need” a credit score are people who plan to take on more debt. That’s not what we want for you! The goal here is to become completely debt-free, and debt-free people don’t need a credit score. Why? Because they aren’t taking on more debt!

Around here, we like to say a credit score is just an “I love debt score.” Think about it. A credit score doesn’t reflect your salary increases, the amount of money in your savings account, or how well you budget each month.

If someone in your family was to pass away and leave you a million dollars, your credit score wouldn’t change one single point. Your net worth would skyrocket, but your credit score wouldn’t budge. Seems fishy, doesn’t it?

In other words, a credit score has nothing to do with how well you handle your money. But it does show how well you play around with debt. Your credit score is solely built on how much debt you have, what kind of debt you have, how long you’ve had it, and how you’ve paid on it.

That’s all. 

But wait—don’t you need a credit score to buy a house? Nope.

Despite what your real estate agent might say, you can buy a home without having a credit score. There are other ways to prove you pay your bills that don’t require you to have debt or a credit score at all.

Allow us to introduce you to a wonderful thing called manual underwriting. You can get a mortgage without a FICO score, as long as you find a company that still does manual underwriting. Yes, they’re out there! 

Manual underwriting isn’t anything tricky. It’s just the process of making sure you’re a human who pays bills and has a job. They’ll verify your income, employment and payment history on things like rent and utilities. Sounds pretty straightforward, right? That’s because it is. 

You Can Live Without a Credit Score

Seriously. You can. And you should. 

How? Draw a line in the sand and decide you’re done with debt forever. Start living on a budget and pay for things with money you actually have. Then make a plan to pay off whatever current debt you have as fast as you can. Pretty soon, you’ll be able to focus on building your net worth instead of your credit score. It’s as simple as that.

When you’re paying off debt or you’re debt-free and know you’ll never mess with debt ever again, it’s easy to stop bowing down to your credit score. You don’t need debt anymore. So hit the road, credit score! Hasta la vista! 

Wouldn’t it be great to live life with no debt and finally have true financial peace? Millions have done it and you can too! Grab a copy of Dave’s best-selling book The Total Money Makeover and get started on your journey!


Ramsey Solutions

About the author

Ramsey Solutions

Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books (including 12 national bestsellers) published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners.

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