Credit Repair

FICO Score vs. Credit Score

People often use the terms “FICO® score” and “credit score” synonymously, but they’re not the same thing. In fact, there are numerous FICO scores and dozens of competitors. Understanding the general differences between credit scoring models can make checking your credit score less confusing.

Read on to learn the difference between a FICO score and a credit score, how the various scores are calculated and what you can do to improve most of your credit scores.

How your FICO score works

Lenders most often use the FICO credit score model in making credit decisions. According to the FICO website, nine out of 10 lenders use its scores to make credit-related decisions on an annual basis.

The Fair Isaac Corp. released the first FICO scoring model back in 1989. Today, the company has several versions of the FICO credit scoring model, the newest being the FICO Score 9 and the upcoming UltraFICO. FICO periodically updates and releases newer versions of its scoring models, as well as develops product-specific models like the FICO Auto Score and FICO Bankcard Score.

Any given FICO score estimates how likely you are to repay debt, based on your past behavior using credit. A FICO score is calculated using only the information in your credit reports compiled by credit reporting bureaus Experian, Equifax and TransUnion. Because the information on your credit report may vary by credit bureau, you may have different FICO scores with Equifax, Experian and TransUnion.

What is it used for?

Lenders use FICO scores to estimate the risk they may take on if they extend credit to you. That information helps them determine the terms of any products they offer you. Lenders may also use credit scores for targeting marketing efforts.

In addition to your credit score, lenders may consider other factors in determining your creditworthiness, like your income, past relationship with the lender and/or your debt-to-income ratio.

Lenders and credit bureaus use various FICO scores, which may not be the latest model. For example, mortgage lenders pulling Experian credit reports use FICO Score 2, while mortgage lenders using Equifax information use the FICO Score 5. But a credit card issuer using Experian data may look at either the FICO Bankcard Score 8, FICO Score 3 or FICO Bankcard Score 2 — it all depends on the lender and the product.

How is it calculated?

Although there are several FICO scores, they are all calculated using the same five groups of data. The percentages reflect how heavily the algorithm weighs each category when calculating FICO scores for the general population. FICO scores are generally:
● 35% payment history
● 30% amounts owed
● 15% length of credit history
● 10% new credit
● 10% credit mix

FICO doesn’t get into specifics on the intricacies of its models, but it does say the importance of the above categories may vary by person.

What do the numbers mean?

Base FICO scores generally range from 300 to 850, while industry-specific scores range from 250 to 900. A lower score indicates you are less likely to repay your debt, making you a higher risk to potential lenders.

Credit score standards vary by lender. For example, one lender may offer its lowest interest rate to those with scores above 760, while another may require borrowers have an 800 score to receive its lowest interest rate. Here is how FICO categorizes its scores:

Exceptional: 800 and higher
Very good: 740 to 799
Good: 670 to 739
Fair: 580 to 669
Poor: 579 and lower

How your other credit scores work

Many non-FICO credit scoring models exist, like those calculated by other companies, banks, landlords, insurers and other lenders. In 2006, the three major credit bureaus created an alternative to the FICO score called VantageScore, the most recent version of which is VantageScore 4.0. Each score has its own proprietary algorithm and will also vary depending on the data used in calculations.

What are they used for?

The use of credit scores falls in one of two categories: marketing and lending decisions or understanding one’s credit health. If a scoring model is not commercially available to lenders, it’s called an educational credit score. Some free credit score services show scores used in lending decisions, while some show educational scores — look for a disclosure stating which scoring model you’re looking at. Educational credit scores have declined in popularity as free credit score services like Discover Credit Scorecard (FICO Score 8) and Capital One CreditWise (VantageScore 3.0) have made scores used in lending decisions widely available.

According to VantageScore, seven of the top 10 financial institutions use the model and it has been recognized by federal regulators such as the Federal Housing Finance Agency (FHFA), the Federal Trade Commission (FTC) and the Consumer Financial Protection Bureau (CFPB), among others.

How are they calculated?

Like FICO scores, other models calculate scores based on the information in your credit report. Most scoring models also consider the same categories, though each algorithm weighs them differently.

VantageScore 4.0 considers six behavioral components, seen below. The percentages reflect that category’s weight when factored into an individual’s VantageScore:

● 41% payment history
● 20% utilization
● 20% age/mix of credit
● 11% new credit
● 6% balances
● 2% available credit

What do the numbers mean?

Lenders set their own credit scoring stands, which can vary. For example, a “good” credit score with one lender may be 670, but with another lender, it may be 680.

VantageScore 3.0 and VantageScore 4.0 range from 300 to 850. The company breaks down the credit tiers for VantageScore 4.0 as follows:

Superprime: 781 and higher
Prime: 661 to 780
Near prime: 601 to 660
Subprime: 300 to 600

How can you check your credit score?

You may have access to your free credit score through your banking app or a fintech service like My LendingTree to view your credit score.

It’s good practice to check your score with several institutions since each banking app or service may show a different credit scoring model, use data from different credit bureaus and update scores on various schedules. My LendingTree, for example, shows your VantageScore 3.0 using TransUnion data.

There are services you can pay for, too. Many credit monitoring subscriptions include credit scores, and each credit bureau allows you to purchase your FICO scores and reports through its subscription service.

How to improve your credit

Whether it’s a FICO score, VantageScore or another credit score, the scoring models weigh both positive and negative information on your credit report.

Positive behavior, like making your payments on time, will help raise your score, while negative behavior, like maxing out your credit cards, will hurt your score. Credit scoring models also weigh recent activity more heavily than older actions. Not only does negative information have less of an impact as time passes, but it will also fall off your credit report eventually.

All told, it’s difficult to measure how much a single event affects your credit score. Based on how the models described above, the best thing you can do to improve your credit score is focus on these two behaviors:

1. Pay your bills on time: Your payment history comprises 41% of your VantageScore 4.0 and 35% of your FICO score.

2. Keep revolving balances low: Your credit utilization, or how much you use your total available credit, is the second-largest contributor to both the FICO score (30%) and VantageScore 4.0 (20%). Try to keep your credit utilization as low as possible — it’s a good rule of thumb to use less than 30% of your total available credit.

You can find more detailed information and more tips for improving your credit score here.

 

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