Credit Score Series - Part 1

Understanding the FICO® Credit Score

Have you ever heard the phrase, “Life isn’t fair”? I frequently tell my kids, “Fair doesn't always mean equal." The use of credit scores in the U.S. is a great example of this. We could spend all day debating whether or not the credit score system is fair… or we can learn the rules of the game so we can get the outcomes we want. Understanding how your credit score works can mean the difference between paying hundreds or even thousands of dollars more (or less) on loans, insurance, and other services.

When “Fair” Isn’t Equal

Many banks charge a monthly maintenance fee for accounts under a certain “minimum balance.” People who can afford to leave a cushion in their account avoid the fee, while those living paycheck-to-paycheck often end up paying it- sometimes $15 per month or more!

It’s a frustrating cycle: those with less money end up paying more just to access basic services. Credit scores can work the same way.

The FICO® Score- one of the most commonly used credit scoring systems- costs nothing to have. But the lower your score, the more expensive certain parts of life become. It can raise your interest rates, your insurance premiums, even your security deposits on utilities or rental housing.

In short: the system may not feel fair, but you can absolutely learn to make it work in your favor.

What Is a FICO® Score, Really?

The FICO® Score was created in 1981 by the Fair Isaac Corporation as a quick way for lenders to measure a borrower’s level of risk. A higher score means you’re statistically less likely to default on a loan. Over time, variations of the FICO® Score (they're currently on versions 10 and 10T, although previous versions are still widely used) have expanded beyond just loans- today, it can influence everything from your mortgage rate to your car insurance premium.

A low credit score doesn’t necessarily mean you can’t get credit. It simply means you’ll probably pay more for it in the form of higher interest rates or other less favorable loan terms.

Also, note that one person can have multiple credit scores, each using a different algorithm. The FICO® Score is one of the most well-known and widely used, so I've focused on that particular score here, but there are others as well, such as the VantageScore (currently on version 4.0).

Why Credit Scores Matter More Than You Think

You might think your driving record is what determines your car insurance rates- and it does affect it- but insurers in many states also factor in your credit score. That means even if you’re a safe driver with no accident history, a low credit score could still raise your premiums.

It’s one of the clearest examples of how deeply credit scores are woven into modern financial life. Your score affects not just how much you can borrow, but what you pay for things you already need.

Breaking Down the FICO® Score

Your FICO® Score is calculated using five main components, each weighted differently:

Component	Weight	What It Means
Payment History	35%	Do you pay your bills on time?
Amounts Owed	30%	How much of your available credit are you using compared to your credit limits?
Length of Credit History	15%	How long have your accounts been open?
New Credit	10%	How many new accounts or inquiries do you have?
Credit Mix	10%	Do you have a variety of account types (credit cards, loans, etc.)?

Together, these five areas tell lenders how reliable you are when it comes to managing credit. Let’s look at why this breakdown matters.

The Two Most Important Factors

1. Payment History (35%) This one’s pretty straightforward: do you pay what you owe, and do you pay it on time? Even one missed payment- especially if it’s more than 30 days late- can lower your score and stay on your report for up to seven years. The good news? The more time that passes, the less impact those older mistakes have.

2. Amounts Owed (30%) This isn’t just about how much debt you have- it’s about how much of your available credit you’re using. This is called your credit utilization ratio. If you have a credit card with a $10,000 limit and regularly carry a $7,500 balance, you’re using 75% of your credit, which is considered high. People with top-tier credit scores (800+) tend to use only about 7% of their available credit. A good general rule: keep your utilization below 30%, and ideally closer to 10%.

The Remaining Three Components

3. Length of Credit History (15%) Older accounts help your score because they show a longer track record of responsible credit use. That’s why it’s usually a good idea to keep your oldest credit cards open- even if you don’t use them often.

4. Credit Mix (10%) Lenders like to see that you can handle different kinds of credit, such as a mix of revolving accounts (like credit cards) and installment loans (like a car loan or mortgage). You don’t need both to have good credit, but variety can help.

5. New Credit (10%) Opening several new accounts at once can signal financial distress to lenders. Each new credit application triggers a “hard inquiry,” which can temporarily lower your score. On the flip side, opening an occasional new account can improve your overall utilization and mix if done strategically.

Why This Matters: A Quick Example

Imagine two people each want to finance a $25,000 car.

• Cpl Beltbuckle has a 780 credit score and gets an interest rate of 5%.

• LCpl Schmuckatelli has a 640 credit score and is offered 11%.

Over a five-year loan, LCpl Schmuckatelli will pay more than $3,500 extra in interest- for the exact same car. That’s how much power your credit score holds.

Taking the First Step: Check Your Reports

Knowledge is power, and the first step toward improving your score is knowing what’s on your credit reports. You can request free reports from the three major credit bureaus-Equifax, Experian, and TransUnion- at www.annualcreditreport.com. These used to be free only once per year, but due to an increase in fraud during the COVID-19 pandemic, US law now allows consumers to pull their reports weekly. I don't know anyone who does this, but it essentially gives you unlimited access to your own information, which is the way I think it should be anyway.

Review each report carefully for accuracy. If you find errors, you can dispute them directly with the bureau to have them corrected. Sometimes, removing incorrect negative information can give you an instant jump in your credit score, so this is particularly useful to do any time you're planning to apply for a new loan or are shopping for new insurance coverage.

Master the Game

You don’t need to be a financial expert to have excellent credit. You just need to know the rules and follow them consistently.

Over the next few posts, I’ll break down each of the five components of the FICO® Score in detail and share specific strategies for improving your score. Stay tuned!

And if you want personalized help reviewing your credit reports or understanding how to strengthen your score, reach out to schedule a free Q&A call.