A credit score is a three-digit measure of your ability to manage your finances. A FICO score is one of several different types of credit scores that lenders use to measure a borrower’s risk.
Understanding the difference between a credit score and a FICO score can help you improve your score, which can help you get approved for a loan at a lower interest rate.
What is a credit score?
A credit score is a numerical representation of your financial health that gives lenders a quick glimpse into how responsible you are with credit and debt. Generally speaking, a higher credit score indicates that you borrow money and pay back what you owe on time. On the other hand, a lower credit score may indicate that you have trouble managing your debt.
So where do credit scores come from? Credit scores are generated by companies like Equifax, Experian, and TransUnion based on the information contained in your credit report. A credit report is a collection of information about your financial life, including:
- Your identity (i.e., your name, alias, date of birth, Social Security number, etc.)
- Existing credit accounts (such as loans, lines of credit, or credit cards)
- Public records, including judgments, liens, or bankruptcy filings
- An inquiry from a person or organization asking for a copy of your credit file
Credit reports are maintained by credit bureaus. Equifax, Experian, and TransUnion are the largest credit bureaus in the U.S. These companies compile credit reports based on information reported by creditors and information available in public records.
What is a FICO Credit Score?
FICO credit scores are generated by the Fair Isaac Corporation. These scores were originally developed for consumers in the late 1980s in response to industry demand for an industry-wide standard credit score for assessing risk.
FICO scores are three-digit numbers that range from 300 to 850, with 850 being the highest score. FICO scores are calculated based on the information contained in a consumer’s credit report. Five factors are considered in the calculation:
- Payment history : Payment history accounts for 35% of your FICO credit score. Making on-time payments improves your credit score, while late or missed payments can result in a loss of credit.
- Credit Utilization Ratio : Credit utilization ratio refers to the percentage of your credit available at a given time. This factor accounts for 30% of the FICO score calculation.
- Credit age : Credit age measures the average length of time a person has used credit. The longer the credit score, the better. This factor accounts for 15% of the FICO credit score calculation.
- Credit mix : FICO also considers the type of credit someone uses (i.e. installment loans vs. revolving credit). Credit mix accounts for 10% of the FICO credit score calculation.
- Credit Inquiries : Credit inquiries account for 10% of your FICO credit score. New inquiries are recorded on your credit report after a hard credit check. Checking your own credit report will not result in a hard credit check or affect your credit score.
FICO generates several versions of your credit score to accommodate different lending situations. There are more than 30 different possible FICO credit scores, depending on the information in your credit report used to calculate them.
FICO Scores vs. Credit Scores: Which is Better?
Whether a FICO credit score is better than other credit scores depends largely on how the score is calculated and how it is used. About 90% of the top lenders use FICO credit scores to make credit decisions.
FICO scores focus on payment history, credit utilization, years of credit, credit mix, and credit inquiries to give lenders an idea of how likely you are to repay what you borrow. Other credit scoring models may consider different factors to make the same decision.
For example, VantageScores uses the following factors:
- Highly influential : Credit utilization, balances, and available credit
- High Impact : Credit Portfolio and Experience
- Medium impact : Payment history
- Less influential factor : Credit history age
- Less impact : New accounts
Like FICO scores, VantageScores range from 300 to 850, while assigning different weights to payment history, credit utilization, and other activity.
So in terms of which score is better, if a lender wants to determine how likely someone is to repay their debts, they might choose to use the FICO score. But if they are more concerned about the amount of debt someone has and their credit utilization, they can use the VantageScore.
Is a FICO score the same as a credit score?
The FICO credit score is a type of credit score. The difference between the FICO score and other credit scoring models is that FICO developed the FICO score specifically for you. The FICO credit scoring system uses a proprietary model to generate a consumer credit score based on five factors: payment history, credit utilization, years of credit, credit mix, and credit inquiries.
Why do I have a different FICO score?
FICO offers several versions of credit scores for different purposes. For example, lenders use one FICO credit score when you apply for a car loan and another FICO credit score when you apply for a credit card. FICO updates its credit score models regularly. They can also differ depending on the credit bureau that calculates it. If a creditor reports a loan account to one credit bureau but not the other two, it affects the FICO credit score generated for each credit report.
Do lenders use FICO scores or other credit scores?
When you apply for a loan or line of credit, the lender will most likely check at least one of your credit scores. Most lenders rely on FICO credit scores, but lenders may use other credit scoring models when deciding whether to approve you for a loan or line of credit.
How to improve FICO score?
The simplest ways include paying bills on time, keeping credit card balances low, keeping old accounts open, using different types of credit cards, and limiting how often you apply for new loans or lines of credit.
Bottom Line
FICO credit scores and other credit scores serve as predictive tools for lenders to gauge your ability and commitment to repaying debts. Regardless of which credit scoring model they use, it’s important to think about how to get the best score possible.
For example, some of the easiest ways to improve your FICO score include paying your bills on time, keeping your credit card balances low, keeping old accounts open, using different types of credit, and limiting how often you apply for new loans or lines of credit. The more you improve your score, the easier it will be to get approved for a loan at the lowest interest rate.
