The FICO score explained with our fictional friend Eddy

Eddy is in his early 30s, just got married, has a good job, and still has some federal student loans from his bachelor's and graduate work in architectural engineering. He and his wife, now, having combined their finances as a result of their marriage, comfortably have enough for a down payment on the house they've had their eye on. They're going to an open house today, and then, as soon as that's over, they need to meet with the bank to show them the financial statements they asked for, to safely approve Eddy and his wife for a 30-year fixed-rate mortgage so they can get the house before it's too late, either because someone started a bidding war, or because someone just outright made a much better offer. 

One of the most important things the bank will want to know about Eddy is his FICO Score, commonly called a "credit score." This number, ranging from 300 to 850-- the higher the better-- is a one-stop-shop for a financial institution to know how much they can trust you when they extend you credit, that is, let you open a credit card, take out a mortgage or car loan, or do anything else that involves some amount of risk to the bank as it gives you money. 

This score has several components and is calculated like you would have calculated your grades in school, giving different weights to quizzes, exams, homework, and so on. The categories and their weights are as follows:

• Opening new credit is 10% of your score: it's good for you to open new lines of credit once in a while, but don't go accepting every "COME GET THIS CREDIT CARD FOR 50,000 FREE AIRLINE MILES!!!!!" offer that comes in the mail, or you'll be opening credit too often, which will damage your score. 
• The length of your credit history is 15% of your score: the longer you've been using credit cards, taking out loans, having bank accounts, and so on, the more information about you is available. It's much safer, from the bank's perspective to loan money to a 68-year-old who has 50 years of a credit history than to an 18-year-old who has just 50 days because it was just their birthday, and they're just now setting up accounts in their own name.
• Credit mix accounts for 10% of your score: Are the only things in your name student loans? Do you also have credit cards? Do you have a car loan? Is the only thing in your name a credit card with a balance way overdue? Having a good mix of different types of credit helps your score go up.
• Amounts owed account for 30% of your score: Lenders will give you a certain maximum amount of credit. How much of that you actually use-- the recommendation is usually no more than 30% utilization-- affects your score.
• Payment history accounts for 35% of your score: This is the biggest component of your score and the most sensitive part of your score. This accounts for how well you pay people on time. 100% on-time payment is obviously excellent, but 99% is already enough to ding you here, and 97% puts you in hot water; anything even less than that and your score will really suffer. 

There are 3 companies, called "credit bureaus" in the US that have their own ways of calculating this score, based on their different ways of gathering the information on which the score is based. The 3 credit bureaus are Equifax, Experian, and TransUnion. Checking your score too often can ding it a few points, but remember this: by Federal law, each of the 3 bureaus must give you 1 check, for free and without affecting your score, every year. 

It's important that everyone takes advantage of those yearly checks because not everything is reported to all 3 bureaus the same way or at the same time, and this gives you a chance to make sure you recognize all the credit associated with your name, and to find, recognize, and fight, fraud or identity theft that may be committed under your name by malicious actors.

Important life events, like Eddy's hope that he'll be approved for a mortgage with his wife, or when Eddy starts a new job, or even when, years ago, Eddy wanted to start renting at the complex where he and his wife met, as next-door neighbors fresh out of college can all have a credit check associated with them, especially if, like wanting to rent or get a mortgage, they involve someone putting a lot of trust in the person to pay some large amount (rent or the mortgage) on time every month for a long time month. 

Don't overspend your credit, keep a good mix of credit types, build a history, and pay on time every time, and your score will go up significantly over time. Take advantage of your free yearly checks to spot bad actors, and always dispute anything you don't recognize. 

Remember, the higher your score, in the eyes of a bank, potential new landlord, or even potential new boss, the more trustworthy you are with money, and the better for the other person if they take a risk on you, by renting to you, loaning you out a mortgage, or giving you a job. Those things-- getting an apartment, a house, or a job-- are all great, but there's another benefit to you: a higher score will save you lots of money, because the higher your score, the less risk you pose to a lender, so they'll charge you less interest. (Click here to learn just how much a single percentage point can change how much interest you end up paying on a loan.)