Whether it’s buying your dream retirement home or applying for a job, having good credit as a consumer can unlock many doors. It can help you take out loans at cheaper rates, qualify for credit cards, and even pay less in insurance premiums. At the heart of good credit is a simple three-digit number that has a major impact on your borrowing power: the FICO® score.

“Your FICO score plays a big role in your financial health,” says Jessica Johnston, NCOA's Senior Director for the Center for Economic Well-Being. “It’s not just about mortgages and credit cards. Your credit score will be reviewed by a landlord when you’re applying for housing, and many employers today check applicants’ credit reports to inform their hiring decisions.”

Despite its power, the FICO score remains shrouded in mystery. In this article, we’ll demystify this topic and shed light on why it matters so much to our financial security, even as we age.

What does FICO stand for—and what is it?

FICO stands for Fair Isaac Corporation, a data analytics company founded in 1956. Fair Isaac Corporation was one of the first companies to develop a method for calculating consumer credit scores based on information collected by credit reporting agencies.

The FICO score is a numerical representation of your creditworthiness (i.e., a measure of risk based on your track record of paying bills on time). While there are other credit scoring models available, such as VantageScore®, the FICO is considered the most widely known. It’s used by roughly 90% of major banks and lenders to assess a borrower’s credit risk when making lending decisions.

How is my FICO score calculated?

Your FICO score is based on the contents of your credit report. It’s calculated using a complex formula that takes various factors into account. The following factors each help determine your FICO score to some degree:

• Payment history (35% of score): Your payment history is one of the most important factors in calculating your FICO score. It measures whether you've paid your credit accounts (e.g., credit cards, loans) on time, had any late payments, or experienced more serious issues like bankruptcies or foreclosures.
• Credit utilization (30% of score): Credit utilization refers to the amount of your available credit you're using. It's calculated by dividing your credit card balances by your credit limits.
• Length of credit history (15% of score): The length of your credit history considers how long your credit accounts have been open, as well as the age of your oldest and newest accounts. Longer credit histories tend to be more favorable for your FICO score.
• Types of credit used (10% of score): This refers to the variety of credit accounts you have, including credit cards, installment loans (like car loans), and mortgages. Having a variety of credit card account types can positively impact your score.
• New credit inquiries (10% of score): Whenever you apply for new credit (e.g., an auto loan for a new car), it generates a hard inquiry on your credit report. Multiple recent inquiries can have a negative effect on your FICO score, since it may suggest higher credit risk.

Other factors like bankruptcies, tax liens, and accounts in debt collection can also impact your personal FICO score. 

What is a good FICO score?

According to Experian, a good credit score ranges from 670-739. The agency breaks it down this way:

• Exceptional: 800-850*
• Very Good: 740-799
• Good: 670-739
• Fair: 380-559
• Poor: 300-379

*Scores can range up to 900 depending on the type of scoring used

In 2022, the average FICO Score in the U.S. was 714.1 For adults age 58 and older, the average score was higher: 742-760. It’s important to keep in mind that lenders use their own criteria to define a "good" credit score.

Why do I have different FICO scores?

There are three major agencies that collect credit data: Experian, Equifax, and TransUnion—and each may have different credit reporting data. Your credit score may vary based on which agency’s data a lender uses to calculate your score.

Another cause of different FICO scores is the use of alternative scoring models. FICO’s basic scoring model can be tailored to various types of lenders based on which factors are most important to them (for example, a special FICO score for car loan lenders). This means you could have an array of FICO scores based on data from the same credit reporting bureau.

Do older adults still need a good credit score?

Most older Americans have been building credit for much of their lives, and this population tends to have higher FICO scores than average. But being older doesn’t mean you no longer have to worry about your credit score. There are several reasons you’ll want to have good credit in your retirement years:

• Downsizing or relocating: If you're looking to buy a smaller home or head for a warmer climate—and you can't pay cash for a house—you'll need to apply for a mortgage.
• Getting the best insurance rates: Auto and other types of insurers may look at your credit report to help them determine your premium costs.
• Applying for retirement housing or assisted living: Housing communities and long-term care facilities often require a background and credit check for new applicants.
• Taking out a personal loan: Emergencies happen. Should you run into unexpected expenses stemming from an urgent household repair or medical crisis, taking out a personal loan could cost you less in interest compared to using credit cards.
• Landing a job: Some employers pull the credit reports of job applicants to get a sense of how responsible and trustworthy they are. If you need to switch careers or return to the workforce, a good FICO score could help improve your odds of success.
• Getting good credit card deals: When used wisely, credit cards can be a money-saving tool. Many of today’s credit cards offer rewards programs that may benefit older adults—such as travel credits and cash back. Securing these cards requires you to have decent credit.

How can I maintain a good FICO score?

There’s no magic bullet for having a high credit score. However, these five tips can help:

1. Pay your bills on time: Make sure all your bills, including credit cards, loans, and utilities, are paid by the due date on the invoice. Pay your credit cards in full each month (and use them sparingly). Reminders and automatic payments can help you avoid late payments.
2. Keep your credit card balances low: Aim to keep your credit card balances well below your credit limits (ideally, keep your utilization rate under 30%). Paying down high balances can help improve your FICO score.
3. Check your credit reports regularly: Each year, get free copies of your credit reports from all three reporting agencies and review them for errors. If you spot any discrepancies, dispute that activity with the agency to make sure your report is accurate.
4. Be cautious with new credit applications: Apply for new credit only when necessary—and research the terms and conditions in advance. Too many inquiries in a short period can drop your FICO score.
5. Avoid delinquent payments and collections: If you have trouble paying your bills, contact your creditors right away and seek assistance or repayment plans if needed.

As Amy Thomann, head of consumer credit education at TransUnion, recently told CNBC: “Remember: your credit score is just one piece of your overall financial health.” While it's important to maintain a good FICO score, you should also focus on budgeting smart, saving money, and other ways to achieve financial security in your retirement years.

Visit NCOA's Budget CheckUp to find out how to make your money work harder each month. You can also browse BenefitsCheckUp to learn how you can spend less on the basic costs of living.

Sources

1. Experian. What Is the Average Credit Score in the U.S.? Feb. 24, 2023. Found on the internet at https://www.experian.com/blogs/ask-experian/what-is-the-average-credit-score-in-the-u-s/