FICO vs credit scores – What are the differences?
Credit score is among the top considerations by lenders and creditors when they want to assess your credit risk. There are many different types of credit scoring models available depending on the credit report used, but in most cases, it is your FICO score that is used. This is the credit score created by Fair Isaac Co-operation. Another commonly used score that was developed by the three main credit bureaus is the VantageScore. FICO uses the consumer’s financial report from the three credit bureaus Equifax, TransUnion and Experian including other information to determine the level of your future credit risk. Since different data is used when calculating an individual’s credit score, it is normal for a person to have more than one FICO score. Besides the credit score, lenders also use different criteria when determining whether to give credit depending on the type of loan you want. However, credit score plays an important role in determining the loan amount, interest rate and terms and conditions of the loan. When it comes to comparing an FICO vs credit score, most consumers tend to assume that they mean the same thing. But is there a difference?
FICO vs credit score
When you request for a loan, be it an auto loan, mortgage or credit card, financial institutions would want to know the risk they put themselves in when advancing credit. When lenders request for a credit report, they may still buy a credit score based on your credit report information. Your credit report can easily be evaluated by your credit score since it is a summary of the consumer’s credit risk at a specific period of time. It is however important to know that not all credit scores sold online are FICO scores
The three main credit bureaus Equifax, Experian and TransUnion use information about your borrowing habits to come up with detailed individual’s credit reports. Although the FICO score is commonly used, several other companies also create their own credit scores based on the reports. Besides the FICO score, there are also specialty scores which are used by insurers, landlords and banks. There is a variation in these scores since the data from one credit reporting agency can be different from another agency. The agencies also use different additional information when calculating a credit score. In short, all companies use information on your credit report to come up with a credit score. However, this information can be treated differently depending on the requirements of the lender. When it comes to purchasing a credit score, it is recommended to get a FICO score since it is used by 90% of the lenders. FICO score ranges are categorized as:
- 781-850 excellent
- 720-780 very good
- 658-910 fair
- 601-657 good
- 300-600 unfavorable
FICO credit score formula
FICO credit score ranges from 300-850. A higher score means that you are more attractive to lenders and can easily qualify for different types of credit at low interest rates. On the other hand, consumers with credit scores of less than 620 may find it difficult to access loans at lower interest rates. Besides having the best credit score, lenders also consider the consumer’s income and employment period when offering credit. FICO comes up with their scores using data from your credit reports. It especially pays attention to the following key area;
- 35% of the score is based on a person’s payment history. This is the ability of the person to make timely monthly payments for an installment loan. Credit reports indicate all payments made for every type of credit. Issues to do with foreclosure, repossession, bankruptcy and late payments will have a negative impact on your credit rating.
- 30% of the score is based on your outstanding loans. It is actually not harmful to have to have a number of credit accounts opened at one time, but if you owe a lot of money across the accounts, your credit score can be affected.
- 15% of the FICO score is the length of a consumer’s credit history. The longer you maintain a good payment record the better your score. Here, the factors in consideration are the average age of all your accounts and the age of the oldest account.
- 10% is based on a consumer’s credit mix. Proving that you can manage different credit types like installment payments, mortgages and credit cards can be useful to your credit score.
- Recent searches for credit contributes the remaining 10%. If lenders perform too many hard credit inquiries within a short period, you will be considered a risky borrower thus affecting your credit score.
When the FICO score is calculated based on the information in your credit report, the reasons why you have a specific credit score will also be included. In most cases, these reasons are negative considering that they are the reasons why you may not have a higher credit score. For the credit reporting agency to come up with a score, your credit report must contain enough recent information. This means that you should have an open account that has been in operation for at least six months. A change in your credit report information will also lead to a change in your credit score. If you have a FICO score today, lenders may use a completely different score the following month to determine your creditworthiness.
What is a bad credit score?
Credit scores are used by lenders to determine if you qualify for different types of credit. A bad credit score is a score that is below 620. Having low credit score will reduce your chances of qualifying for credit. Lenders also impose high interest rates and additional fees for borrowers with poor credit.
What is considered good credit?
A credit score of more than 700 is considered good. Having a good score will increase creditors’ confidence that you will repay future debts on time.
What the difference between FICO vs credit score means to you
As much as many lenders will use your FICO score to determine your creditworthiness, other credit scores also have an impact on your financial health. If you do not have a good credit score, it is important to understand your credit history and come up with necessary measures to improve your scores.
Monitoring your credit score
Now that you already know how to get your free credit scores, you can come up with different ways to improve them and become attractive to future lenders. You can also get a copy of your credit score from the three credit bureaus once every year. Getting a copy from all the three bureaus will help you analyze the information to ensure that it is updated and correct. You will then find out the reasons behind your issued credit scores.
How to track your credit score
For you to track your credit score rating, you not only have to use your FICO score but other scores as well. This will cover the difference that comes with using credit report from different consumer credit reporting agencies. Some of the ways you can use to improve your credit score include:
- Review your credit report
- Paying bills on time
- Keeping balances low
- Monitoring your credit card balances
- Consider a debt consolidation plan
Most people believe that FICO scores and credit scores mean the same thing. However, FICO is just one among of the many credit scores available. Regardless of the score you see, most of them will give you an idea of where you stand as far as your financial health is concerned. By knowing your credit score, you will know the next step to improving your credit health. Monitoring your credit regularly will help you keep track of your credit scores trend and address any arising issue.
It is also important to note that lenders use different scores to evaluate your creditworthiness. If for instance you are requesting for an auto loan, a lender may use a credit score that is customized to meet auto loan requirements. There are also other scores that are not available to the public. But as much as there are variations in credit score, what one lender perceives as a ‘good’ score will also be considered good by other lenders.