Do banks use Experian or FICO?

Posted on: 31 Jul 2024

Banks and other credit institutions examine several elements of a consumer's credit profile during the application for a loan or a credit card to ascertain their creditworthiness. Among other things they consider is the applicant's credit score. Still, the banking sector employs multiple distinct types of credit scoring. But which one do most lenders take into account? FICO ratings, either Experian or otherwise

What Is A Credit Score

Usually, a three-digit number between 300 and 850, a credit score represents the whole trustworthiness of a customer. Based on credit report data, it is decided by the credit scoring algorithm from one of the three main credit bureaus: Experian, Equifax, or TransUnion.

The credit score range is positive; higher scores indicate less risk to the lenders and lower scores indicate increasing risk. When lenders evaluate a loan application and decide on conditions as well as the interest rate to charge the borrower, they use credit scores.

Main Distinctions Between Experian and FICO Scores

The primary credit score model is the FICO scoring system developed by Fair Isaac Corporation. However, each of the three credit bureaus also uses their specific scoring systems based on the FICO system, but with slight differences. Equifax utilizes the Experian Risk Model while Experian and TransUnion have their in-house credit scoring system.

Here are some key differences between Experian and FICO scores:

Score scale: Like FICO scores, Experian utilizes a range of 300-850. However, the methods of calculating scores are different within the models, and therefore, the scores of the same person under two different models will not be the same.
Payment history weighting: FICO gives more importance to the past payment behavior of the consumer while Experian scores give more importance to the amounts or balances outstanding.
Speed of updates: Another difference is how quickly new or changed credit information is integrated into the system. Experian scores report immediately, so things such as new credit inquiries or having a few missed payments, are likely to affect the Experian scores than the FICO scores.

Are the Scores Used by Banks Experian or FICO

The credit score that is most popular with lenders is the FICO score, or even more accurately, the FICO Score 8. When a consumer seeks credit such as a mortgage, auto loan, or credit card, the lender usually considers the applicant's FICO 8 score from the three credit agencies including Experian, Equifax, and TransUnion.

Thus, instead of using Experian or FICO scores only as a criterion when evaluating the creditworthiness of a borrower, most of the big banks and other similar institutions take all three FICO 8 scores into account as a more comprehensive view of credit history.

Why Banks Consider FICO Score More Important Than Experian Score

There are a few key reasons why FICO scores remain the industry standard preferred by banks and lenders, as opposed to Experian's credit scoring models:

Long-standing use: Lenders have used the FICO score to assess borrower risk for many years. The simplicity and the practicality of comparing current scores to previous scores are perhaps the biggest strengths.
Predictiveness: A massive amount of evidence supports that FICO scoring formulas hold the capacity to maintain high accuracy in predicting consumers who may default on future payments. Supporting these insights, Fair Isaac has been collecting data for decades to improve its algorithms’ consistency and efficacy as much as possible.
Availability: Although Experian does offer credit scores to lenders, FICO scores are generally more easily obtained by the three major credit reporting agencies. This makes it possible for lenders to quickly obtain tri-merge FICO reports.
Consistency: While the actual credit data that is included in credit reports can be slightly dissimilar across bureaus, FICO scores present a fair measure of standardization in how the underlying data is translated into a final three-digit FICO score. The fact that there is only one primary score that lenders can use to assess risk makes risk analysis more manageable.
Regulatory approval: Federal government-sponsored mortgage companies require credit scores to be used in the lending process. Using this trusted standard keeps financial institutions on the right side of credit score regulations.

How Consumers Can Make Sure to Get Their Experian and FICO Scores

Even though FICO dominates the lenders and credit decisions field, as a consumer, the good news is, that you can, check all your credit scores including the Experian scoring model. It is beneficial to keep track of both kinds of scores to understand one’s credit status in the long run.

Here are some ways to check Experian and FICO scores: Here are some ways to check Experian and FICO scores:

Free credit reports: According to the law, consumers are entitled to one free credit report from each bureau in a year through www. annualcreditreport. com. These include credit scores from Experian (and Equifax for its report).
Credit monitoring services: Other services like Experian. com or MyFICO offers online portals where one can see one’s latest scores based on the various models, as well as track changes.
Credit cards and banks: Currently most credit card companies and banks that provide loans have also started providing free trial to some credit scores to their account holders. These may refer to FICO scores and Experian scores among other credit scores.

Just know that when you apply for a new credit, the lender will not fail to look at your FICO Scores which are still the most widely-used credit risk scores among major financial institutions. However, the check of Experian credit score can also be useful to track the overall state of your credit during a specific period.