A Rare Glimpse Inside the FICO Credit Score Formula

Like the formula for Coca-Cola , the FICO credit scoring formula is a closely guarded secret. The Fair Isaac Corporation, however, does give us a glimpse into the secret sauce from time to time.

For example, Fair Isaac has disclosed what factors go into its scoring model and the weight to be given each factor:

FICO Score Factors

While these factors are helpful, they leave a lot of information out. For example, how does a late payment affect your score? Is it better to have a zero balance on your credit cards? And how exactly will credit inquiries lower your FICO score?

Well, I found some answers to these questions over at the myFICO forums. Apparently, Fair Isaac released the following chart about the FICO formula:

FICO Scoring Model

It took me some time to unravel this chart. But if you spend some time with it, you’ll see that it’s packed with some useful information, particularly if you are trying to improve your score.

For example, if you have a late payment on your record, the biggest impact to your score occurs in the first five months. In month 6 you’ll see a 5 point increase, and by month 12 another 10 points. You get the full benefit of clean record after 2 years.

Another thing I found interesting about this chart is the impact carrying a credit card balance has on your score. You get the biggest boost to your score if you carry a balance ranging from $1 to $99. If you have a zero balance, your score actually takes a 10 point hit. Go figure.

Finally, this gives some insight into how credit inquiries affect your score. With four or more credit inquiries, your score can drop 50 points.

Keep in mind that the actual impact on your score depends on many factors not reflected in this chart. And if you want to check your score, there are several free ways to get your credit score.

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Topics: Credit

25 Responses to “A Rare Glimpse Inside the FICO Credit Score Formula”

  1. I work at Fair Isaac. Sorry to pop your bubble, but that Powerpoint slide is NOT representative of the FICO scoring formula. It’s part of a training curriculum we use with people outside our company. The slide illustrates a couple of principles we use in some formulas, but it doesn’t represent actual numbers or characteristics of those formulas. You can find good advice for managing your credit score on the company’s myFICO website.

      • Ken Dupuy

        Although I can’t formulate a meaningful opinion on the FICO equation until I see it (not holding my breath on this one), the biggest flaw remains with the data going into it, a.k.a. GIGO. The burden of proof isn’t anywhere close to the standard for criminal proceedings. In my case, I can’t get the free reports via internet unless I co-conspire with Discover’s inaccuracy, technically perjuring myself. I sent a letter to notify the one agency of their error, & instead of fixing it, they spread it. I did get a CYA letter stating that it wasn’t “bad” information, but of course it made no mention of accuracy. …and that’s just me.

  2. Steve

    I honestly don’t believe that there is a formula. In my vision the raw data goes in, gets crunched and data mined perhaps by a learning algorithm, and a score comes out the other side.

  3. Beverly Bennett

    Never in 40 years of working earning a salary living on a budget did I default on an obligation until Wall Street decided to get into the mortgage/banking business. Where was I in and around that time? I was trying to keep my bills paid working like a banshee. With equity finally in my home purchased back in 1989, I had to refinance to pay debt from a divorce. In 2004, I unfortunately found myself in a neg-am. with 3 year pre-pay and by 2007 9% interest. I had no choice but to refinance again but the market was lowering home values $10,000 a month ended up with another bad loan, 7/1 ARM interest only. Since 2009 after realizing there were 2 forgeries on the loan docs, I sent with a police report and forensic analysis requesting a new loan to the lender, district attorney, and attorney general. Lender said, “Inconclusive”. District attorney nver replied and attorney general said hire yourself an attorney, our now Governor Davis. Ha, no attorney would take my cause. Thought I had no other recourse but to short sale so defaulted.
    Big Mistake!! Now the New Hamp might have helped me. I have two more years of the 7 years left and I’m current. It was tough and depleted my emergency fund down to one month but I paid back the defaults.

  4. If it’s true that carrying a balance ranging from $1 to $99 is better than a zero balance, then the FICO score is more ridiculous than I even thought. How in the world does not paying off credit card debt, or having it in the first place, prove that you are creditworthy?!

  5. Ever Watch Fight Club

    It’s a bit absurd that the mathematical models that dictate life, what people and afford and what they can’t has been obfuscated. Their models dictate what is available credit, and what isn’t. Are these models malleable? Are they mathematical constants? It’s galling that what a real family can or can’t afford is demarcated by these schmucks. What is their secret sauce? Why can an average consumer not know what decisioning is going into their life choices?
    Now, these models are not something easy to communicate or replicate. I doubt that most people at Fair Issac understand them (or want to). But I think that in this election year climate such opaqueness just doesn’t fly. We have insurance companies (like Progressive) that (theoretically) reverse-engineer the actuarial tables involved in setting insurance rates.
    I can only hope that the mathemagicians at Fair Issac see the writing on the wall, too.

  6. The issue with FICO scores isn’t that they are created to see if someone will be late or default, that wouldn’t be a huge secret. Problem is it is also designed to help creditors decide who will actually make them money. Hence the having a low debt balance having a positive effect and having multiple lines of credit having a positive score. It is about potential gain as well, not just liabilities.

  7. Exactly what Tyler said. The way I understand it is that credit scores are designed to show who is managing debt properly. They are *not* about being the ultimate in financial responsibility, i.e. having *no* debt. Fico doesn’t reward those who have no debt, as this chart shows. It rewards people who have multiple lines of debt (credit/loans), but pay the bills on time. I learned this valuable lesson when I simultaneously paid off three large student loans (total $8k), and my credit score immediately nose dived by 30+ points. I had read about that happening but thought it was a myth until it happened to me. Although I’m sure their calculations are far more complicated (arbitrary), than this chart, the chart is consistent with the research I have done. I currently have zero debt and no credit cards. If I were to get a credit card and immediately put $95 on it my score would go up 30-50 points. That would make me financially ‘responsible’ in Fico’s eyes. Talk about screwed up. No wonder our society has so much debt!!

  8. I read a bunch of these posts and I just wanted to put in my 2 cents. A lot of people are complaining about how these scores are secret (annoyingly with good reason) and how it doesn’t make sense. IMO, Tyler (two posts back) was on the right track, you have to put it on the creditors shoes.

    What does credit card companies do? It lends money. You have a higher score, you can borrow more money. Pretty simple. Now, I’m not a creditor but I would want people who use the credit cards a lot, has money owed (for interest) and has “action”. i.e. Money owed goes up and down meaning its being used. This means, interest gained and more money for the company.

    Missing payments, while that does give late fees, is chump change compared to the possibility that “you” (taking in aggregate the population) might Default. So missing a payment will lower your score.

    A recent thing I learned is that if you use your card a lot and constantly zero it out before the payment due, that is bad too. But not in a negative way. It’s bad because now the credit companies have no data I think. The see 0$ in Sept and then 0$ in Oct, no change.

    Banks have told me that its good to keep some credit on your cards and make sure to pay the miminum, it shows that it’s “live”. The question they couldn’t answer is, how much is a “credit score point” worth? Meaning, if I have to pay $20 in interest per month because I leave a balance, is that $20 worth my credit going up 5 points? 10? 1? That part of the math is the secret part.

    Anyway, it’s a weird system, I just wanted to state why I think the balancing your credit to zero does not give you a good score. The credit card companies then have limited data on you.

    • John Kim

      i just want to make a comment.

      paying off the balance IN FULL every month (aka not carrying a balance… aka not paying interest) still SHOWS a balance in your credit reports…

      i know because i’m buying a home and pulled my credit.

      i always pay off my CC in full every month. but they (the CC companies) report the balance you have WHILE you’re purchasing stuff with it… then you zero it out… but you’re constantly using it so even though it zeros out, you have a balance on it…

      i think people misunderstand “carry a balance” with “carrying balance from month to month”

      again, you can PAY IT OFF IN FULL EACH MONTH and still CARRY A BALANCE on your credit card each month. carrying a balance means you’re using it.

  9. The score is intended to guage whether people can manage debt. If somebody has a credit card but doesn’t use it, they aren’t really managing debt, only managing the potential to have debt which is worth something, but realistically not as much as buying stuff with the card and paying it off in full each month. All you have to do is wait for the bill to be issued before you pay it each month so it will show some activity and you still don’t have to pay any interest. It doesn’t make any sense to pay before you get billed and it is economically a poor choice to carry any balance on a credit card since the interest rates are very high compared to other types of debt.

  10. dave fan

    cash is king, debt is dumb.

    Your score is a snapshot at the time it is computed, so don’t worry about utilization unless you need the extra 5-10 points. In that case, pay your balance off only after credit card posts to agencies, but before your grace period ends. That means you get the best possible score and don’t get charged with interest.

    Never get a car loan, always cash always.

  11. I like to pay my credit cards just before the due date. I don’t pay the whole balance. I try to leave about ten dollars on each card. That way my utilization is at about one percent. I personally think an auto loan is good. But have that big stack of cash to pay on that first payment. Pay most of the loan on that first payment, and then make very small payments until you reach the full term of the loan.

    • John Kim

      again, people misunderstand utilization.

      you can UTILIZE your credit card, or even OVER UTILIZE your credit card even with paying your balance in FULL each month at the due date.

      UTILIZATION is how much of the card’s balance you use on a given month, NOT how much balance you carry past the due date (i.e. not paying off in full).

      I see a lot of people get confused with this so I just wanted to chime in.

      Just sign up for Credit Karma for free and see the utilization rate. It’s a snapshot of when they reported the balance – NOT if you’re paying interest in any balance past the due date.

  12. Learning what to watch out for

    Used to, you couldn’t even get your real fico number without someone in the business running your credit and telling you. I think a lot of people don’t understand how these things work and for good reason: They don’t want you too.

    Like Craig who posted and claimed to work for the fico. Why didn’t he point out a couple of common errors without having to give away trade secrets?

    The higher interest rates a bank can charge and the more fees, the more money they make. They don’t want you to understand it and sometimes, maybe not since the housing crash, put in clauses penalizing you if you overpaid or tried to payoff a mortgage.

    I opened a charge card to raise my score but it continues to drop. I had to look to see why. Low credit line and I’d charged like 38% of the total line in one month which amounted to less than 100 bucks which I paid off before interest hit me. Because it was 38% of the total limit and not under 30%, that dinged my rating.

    Called a mortgage broker about a loan. She did ask if she could run my credit which I said yes. Another ding. Because it wasn’t worth her time, she never even called me back. But, she actually did me a favor because I then ran that company through a google search and found it was one of the worst companies to deal with.

    On credit cards, some are designed to keep you in that vicious cycle of almighty fees and lower fico scores. Buy a house or a car, it’s due on the same day each month. Easy to remember. Get a card with a 24, 25 or even 28 day cycle, it always changes and makes it harder to keep track of. First thing you know, you have in your mind it’s due on the 15th when it’s actually three days earlier. Bam! You get hit with a late fee. Let that happen again and maybe your credit score gets dinged again.

    The system is stacked against the basic consumer; that’s how banks make their real money. When we have homes going up in price so quickly, making the down payment something more of a fantasy than reality, the fall back is renting which is one of the modern slavery bonds of this society.

    When I came of age and was at working looking for another place to rent, I ran across section 8. What is that? An old lady told me. She said that’s when rents got high. Sure, anytime the government hands out money, the price is going to go up. This is true of food stamps, I think, too. Rather than giving out commodities is what it was called when I was a kid and a neighbor was just giving away the stuff she didn’t want (which is probably one reason it was discontinued) coupons are given for food. It’s a win win situation for supermarkets.

  13. Pmlucas

    Credit Karma scores are often 100 points higher than the score obtained by a lender. And all Credit Karma has to say is that “everyone uses different scoring methods”. Well, how about Credit Karma find a way to use whatever the lenders use.
    Also, there is often no apparent correlation between a FICO score and the details of the report from which it is derived. It is unlikely that they are stupid. It must be that they have some other agenda. Other than quantifying credit risk.

  14. Companies need some kind of reference on which to grant credit. I don’t think it makes a lot of sense from a lending point of view, but it does from a credit standpoint. Doesn’t make sense? If your credit score is 750 because you were late on a mortgage payment, and you win the lottery and net $100 million, your credit score is still 750. It might make you out to be less than reliable to pay your debts, but it doesn’t say much about your ability to do so.

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