Whenever you go for a loan with a bank or any other lending company, the chances of getting credit are one of the most important aspects that lenders consider. It is important because lenders would like to understand how faithful you are concerning the repayment of the given credit based on your credit history in borrowing and repaying credits. There are many methods that credit grantors apply when checking their borrowers, although FICO scores and general credit scores from your credit reports are the most popular.
The Difference between Credit Score and FICO Score
Specifically, a credit score is a number ranging from three digits that is computed from the data in the credit report to measure the credit risk at some point in time. Credit reports gather information like credit bill payment history, total balance across different credit products, length of credit history, credit inquiries, etc.,
FICO especially is the Fair Isaac Corporation – the organization that developed credit risk modeling and scoring systems for creditors. FICO scores therefore refer to the most common credit score model accepted across the market by both large and small lenders. While your credit report may contain a score calculated by the credit bureau from data from your credit report, lenders most often use the analysis of your FICO scores.
All three major credit bureaus, namely Experian, TransUnion, and Equifax compute different FICO scores for each individual based on the different reporting data. The FICO credit scoring formula, for example, takes a look at your credit report and gives you a numerical value of between 300 and 850. In general, the higher the FICO score, the lower the credit risk perceived by the credit bureau.
Why FICO Is Preferred Over General Credit Scores in Banks
While credit bureaus generate their credit scores from your report, FICO scores are more commonly used by industries for lending. About 90% of top lenders use FICO scores to evaluate applicants because About 90% of top lenders use FICO scores to evaluate applicants because:
- FICO is the most reliable credit risk calculation model supported by historical records.
- The sophisticated FICO model focuses on those predictors that are most relevant to repayment capacity.
- FICO scores help bring uniformity to credit decisions in the lending sector
- Federal authorities such as the Federal Housing Authority recognize FICO scores.
In the FICO model, your scores can differ based on the credit bureaus because one bureau may have information that the others do not have; this may be negative information or positive information. In most cases, lenders consider your average credit score from the three FICO credit scores that you possess.
How Lenders In Particular Utilize FICO Scores
Credit scores such as FICO and other scores are numerical values that offer lenders information on consumer credit risk. Lenders provide general guidelines for credit scores with specific ranges as per the tolerance for risks that a specific lender is willing to undertake. While specific criteria vary between lenders, FICO scores generally indicate the following: While specific criteria vary between lenders, FICO scores generally indicate the following:
750-800 = Superior creditworthy borrower 740-799 = Very good and may qualify for prime rating 670-739 = Average score, reasonable interest rates 580-669 = Subprime borrowing risk 580 or lower = High risk with limited approval chance
In addition to assessing where you fall on that general scale of perceived repayment capability, lenders examine how three major factors impact your scores: In addition to assessing where you fall on that general scale of perceived repayment capability, lenders examine how three major factors impact your scores:
- Payment History: Comprises approx. It contributes to 35 percent of your FICO score calculation. Determines the extent to which you pay different types of credit accounts promptly every month.
- Total Debt Burden: Comprises approximately 30 percent. Assesses the amount you currently use on the credit card, loans, etc. Also compares this with the total credit amount granted to you.
Credit History Length: Approximately 15%. Looks at the number of months that have passed in one year since the credit reports were taken, and the average age of the accounts. This assists in showing credit experience managing repayment in the long run.
Although business credit scoring employs a different approach, FICO scores are still employed as the benchmark for assessing consumer applications. While they may initially approve you, lenders might score FICO changes throughout a loan or credit line to regulate their risk in real time.
What if You Do Not Have Sufficient Credit History to Compute an Accurate Score?
Younger applicants those who are only starting to build their credit history or those who are re-building credit after financial problems usually begin with little or even no FICO score. Scoring models cannot predict future repayment reliability as there is insufficient history to make such predictions. Without a FICO score, lenders use alternate information to evaluate creditworthiness: Without a FICO score, lenders use alternate information to evaluate creditworthiness:
- The other factors that have been identified as influencing the use of mobile money include income level and stability.
- The kind of debt-to-income ratio that one would maintain with the particular loan.
- Other kinds of payments other than credit lines such as house rent, bills, etc
- Government records or prior bankruptcy
- Assets one would risk against a secured loan’s worth
It remains crucial to manage to finally develop a good FICO score to expand the rates and loan choices over time. However, FICO is viewed as just a part of information when banks scrutinize credit applications.
The Bottom Line
Credit reports and scores derived from your history are some of the tools used by lenders to determine the risk level of extending credit in exchange for timely payment over a certain period. Among all credit scoring systems, FICO remains the most popular system used in underwriting decisions and in determining the loan terms available to the borrower. If your ultimate goal is to get approved for prime rate credit products, then, knowing that the first step in this process is to consistently build your FICO score is important even if it is in its most basic form. However, several other factors also influence application decisions simultaneously
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