The concept of FICO and Credit Scores – What is the difference
The FICO score is also known as credit score, but these two terms are not synonyms in a strict sense. Although it is almost similar you must understand some of the differences between your FICO score and your generic credit score.
What is a Credit Score?
Usually falling between 300 and 850, a credit score is three-digit and provides a whole picture of your credit situation. To evaluate the credit risk, banks and other loan grantors depend on your credit score and other information included in your credit report. Less risk is involved the higher the score.
From any of the three credit reference companies— Experian, Equifax, and Trans Union—credit scoring algorithms look at information in your credit report. Payment history, amounts outstanding, credit history duration, new credit, and credit type information make up this data. Both methods weigh these elements differently and derive a score based on them.
FICO is the kind of credit scoring used today; so, when people discuss credit scores, they usually mean FICO scores.
What is the FICO Score?
Designed by Fair Isaac Corporation, the credit score FICO is Fair Isaac Corporation is the corporation name from whence the initials FICO derive. There are several FICO scores; FICO Score 8 is the most often used FICO score by lenders nowadays.
Reviewing your credit data among one of the three credit bureaus using FICO ratings helps you evaluate credit risk. The poll indicates that 90% of the leading lenders base their loan decisions on the FICO ratings. The FICO ranges run from 300 to 850; the credit risk decreases with increasing number.
Credit scores and FICO are equal indicators of your degree of credit risk. The primary variation is the credit scoring model applied type. The term "credit score" is used too broadly; those three words do not indicate a certain type of credit scoring methodology. FICO stands for any credit score produced by the Fair Isaac Corporation's models.
Are FICO Scores the Same as Credit Scores?
FICO scores are of credit scores kind. Although many people are likely to use these terms in the same context they have different meanings to a certain extent.
Some people might use the term ‘credit score’ in general, but more often than not they are talking about the FICO credit score. And this is so because FICO is widely used as the primary credit scoring model among lenders. However, this is a misconception because many different credit scores can be calculated based on the model in question.
Here is a quick recap of how FICO scores and credit scores align:
- Credit score – A broad term used to refer to the three-digit number that provides an estimate of creditworthiness. Credit scoring models come in all sorts of forms.
- FICO score – Refers to a particular type of credit score that is determined with the help of the formulas devised by the Fair Isaac Corporation. FICO scores are the most popular credit scores in use today.
FICO stands for Fair Isaac Corporation and is the company that calculates your credit score, often referred to as your FICO score.
Other Credit Scoring Models
Despite the domination of FICO, the market is not limited to only this player in the field of credit scores. Here is a quick overview of some other credit scoring models you may encounter: Here is a quick overview of some other credit scoring models you may encounter:
VantageScore
VantageScore also operates on the same model as FICO and comes up with a number between 300 and 850, which is based on information in your credit report. : VantageScore is a scoring system that is jointly developed by the three credit bureaus to try to make scoring more uniform across the bureaus. However, FICO continues to be the most used model by most of the lenders.
Credit Bureau Scores
Besides selling your information to FICO and VantageScore, Equifax, Experian, and TransUnion also have their proprietary credit scores. These proprietary scores probably play a role in the specific product recommendations you get from each bureau. Credit bureau scores vary between 0 to 100 or 300 to 850. Higher is better.
Car, Home Loan, and Credit Card Ratings
There are industry-specific models for auto lending and mortgage lending. These are different from the FICO score but are modifications of the same as they are designed for a particular field of specialization with different risk prediction models. For instance, the FICO Auto Score has an index that starts from 250 and goes up to 900, and mortgage scores that go as high as 300-850.
To achieve this, different scores from different models will be used as a way of having a more accurate result.
The scoring model used above greatly determines the actual number that one gets. For example, the credit score you get from Equifax will not be the same as the one you get from FICO Experian. Indeed, it is advisable to check your scores from different sources since it does not hurt.
It is important to remember that when checking credit scores or FICO scores for free through different websites and applications, you may not be looking at the same score type that is used by lenders to assess your application. The score that you can obtain without any charge is often a ballpark education score.
To be sure of the current position of your credit, one must buy a full credit report from AnnualCreditReport. com and FICO scores from MyFICO. com. This will show your real FICO scores, the scores that are used in 90 percent of credit decisions.
In what manner do lenders employ credit scores and FICO scores?
Credit scores and FICO scores help lenders to assess the probability that a debtor will be overdue with his or her payment or simply fail to pay back the borrowed money. Higher scores on this scale mean lower credit risks, which in turn means a higher likelihood of getting a loan and a better one at that.
Every lender has a credit score: normally it ranges between 660-690 for mortgage/autos, along with underwriting guidelines unique to each. Although scores define the loan amount given, your overall credit history and debt-to-income ratio also come into play.
FICO vs. Credit Score: The following are the findings of the study:
While often interchanged in casual parlance, FICO and credit score have distinct meanings:
- Credit score – A broad term used to refer to any figure derived from the credit report data to establish creditworthiness. There are numerous scoring models available.
- FICO score – A particular type of credit rating given by the Fair Isaac Corporation (FICO) using its algorithms. FICO is the market leader in the lending industry.
- FICO refers to one of the most widely used credit score systems. Therefore, whenever you learn your credit score, you are likely to be looking at your FICO score.
Learning the differences between various types of credit and FICO scores enables an individual to manage the credit score effectively. Evaluating scores from multiple bureaus helps one to have better visibility of the credit status. Having a perfect credit history makes it easier for you to secure a loan and get the best rates and other favorable terms when you apply the next time.
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