What's the difference between credit score and FICO score?

Posted on: 05 Aug 2024

When you are applying for a loan or credit card, the company or bank will check your credit score to see if one is eligible to apply and if so, what interest rate to expect. One of the key determinants used when coming up with such lending decisions is the credit score. However, credit score and FICO score are sometimes used interchangeably, which creates confusion as to how these measures are determined and utilized. Although both are numerical indicators of creditworthiness, credit score, and FICO score are calculated differently and serve different purposes.

It is crucial to distinguish between general credit scores and FICO scores because knowledge of the differences will enable individuals to handle their credit profile effectively. There is information in this article about what credit scores and FICO scores are, how they are computed, what range of numbers they have, and how lenders use them when deciding on loan and credit card applications.

This article seeks to answer the following question: What is a Credit Score?

A credit score is another term that refers to the three-digit figure estimated according to the data provided in the credit report containing information on credit history, current credit obligations, and other aspects of your creditworthiness. Your credit score depends on aspects such as your past credit behavior, the amount of credit used, credit history, the number of credit accounts as well as new credit.

Credit-reporting companies such as Equifax, Experian, and TransUnion compile consumer credit reports and compute various forms of credit scores out of information contained in the consumer’s credit file managed by that agency. Some of the most popular general credit score models are;

FICO Scores
VantageScores
Equifax Credit Score

Experian Credit Score

Both of these scoring models have the same range and factor in similar credit information on the credit report; however, they might calculate the factors with differences. Every credit bureau will have a different credit report and credit score for you depending on what creditors have provided to that specific agency.

Frequently Asked Questions Related to Credit Scores What is a FICO Score?

FICO stands for the credit score model developed by the Fair Isaac Corporation which goes by the same name, FICO. FICO scores have emerged as the most popular credit risk scoring system that lenders apply when reviewing consumer loan requests or extending credit.

Each consumer has many FICO scores based on which of the three credit reporting agencies provides the information used to create the score. Some of the most common FICO score versions include

FICO Score 8 – This is the most frequently used FICO score.
FICO Auto Score – used to assess creditworthiness for auto loans
It includes the FICO Bankcard Score that is specific to credit card lending evaluations.

Although there are other common credit scoring models such as VantageScore, FICO remains the most widely used scoring model by most lending institutions. It is possible that each lender can have specific FICO score minimums for financing approval at certain terms or rates.

How Credit Scores Are Determined

As stated above, both the standard credit scores and FICO scores aggregate information that falls under five main categories when arriving at your three-digit credit score. However, the proportions of each category may be different in other scoring models of the same assessment tool. Here is a list of the major components that are taken into account by the credit scores:

Credit Account – Whether you have paid the credit accounts on time. Usually rated in the past 12 to 24 months and contributes to a large extent to scores.
Loan Balances or Credit Utilization – This is the total of credit card balances used and the overall total credit available. This means that it is always healthy to keep balances low.
Credit Age – The average age of the accounts in your credit report forms longevity. Prior accounts show previous experience in handling long-term credit.
New Credit – Having many credit card accounts over a short period is risky and may bring down the scores for a while.
Credit mix – Dependence on various forms of credit, including installment credits, credit cards, mortgages, and others also enhances your scores as it indicates that one can manage different types of accounts.

FICO scoring in particular considers data in these areas of your credit report individually and also in aggregate to arrive at your risk index called FICO score.

Credit Score and FICO Score Ranges

The credit ratings together with the FICO fall within a range of 300 to 850. But what does it mean to get a good or a bad grade? Here is a general overview of the movie:

800-850 = Excellent, Super-Prime Risk Taker
740-799 = Very Good, Prime Borrower
670-739 = Good Credit Score
580-669 = Fair Credit, Subprime Borrower
300-579 = Very Bad, high risk of default

Lower credit risk and better ability to obtain cheap loan rates are associated with higher numerical values. Standard FICO credit scores of 670 and above are considered good and most applicants will be able to secure their loans while applicants with scores below 580 are likely to be rejected or receive unfavorable credit terms. The identification of where one currently stands on the credit scoring scale assists one in qualifying for better products.

How Lenders Employ Credit Scores and FICO Scores

Credit reports and ratings are used by lenders to guide decisions about loans including mortgages, auto loans, credit cards, and personal loans. For evaluation, FICO scores remain the most often used metric by lenders. Although every lender has different loan approval policies, below is a general picture of common practices: Although every lender has different loan approval policies, below is a general picture of usual procedures:

Mortgages: Some programs let applicants with FICO scores of at least 620–640 obtain a reduced interest in conventional conforming mortgages. Though at a cost of extra down payments and mortgage insurance, government-backed FHA loans may accept a 580+ score or higher.

Usually with higher rates for scores over 700, prime car finance calls for a FICO score of 660 or above. Subprime credit scores less than 600 are charged considerably higher rates for their auto loans.

Credit Cards: The FICO scores of 670 and higher have the greatest acceptance rates for ordinary credit cards. Usually connected with better credit ratings starting from 700 and higher are the rewards cards. Those candidates who score less than 630 will find it difficult to be approved.

Good credit score candidates of 670 or above are given affordable rates on unsecured personal loans. Usually, credit ratings below 580 are accompanied by collateral or cosigners to enable grants of approval.

Having a higher credit or FICO score means that one will be able to get cheaper interest rates, more credit limits, and low loan product costs, therefore improving their financial situation. Maintaining your marks of 700 or higher secures either prime or preferred borrowing rates.

How Credit Score and FICO Score Can Be Enhanced

With the information that has been discussed with you regarding the distinction between general scores and FICO scores, what can one do to increase his/her scores? Here are smart tips for improving your creditworthiness over time toward fantastic scores:

Conduct annual credit reports and contest any errors to the bureaus. It gets corrected when you make mistakes, and that is how you see your scores going up.
It is important to pay all other accounts not just the credit accounts on time each month. Regardless of the type of credit information, payment history has the greatest impact on scores.
Do not use more than 30 percent of the credit limit of your credit card in a given month. High utilization drops scores.
To optimize credit risk management, new credit should only be sought occasionally. It can also be observed that the scores decrease if there are too many new accounts created.
Establish trade credit history with aged accounts. It is also important to retain old credit card accounts and keep them active with good credit standing.
Ensure you check your scores much earlier before any big financing request. Take your time in achieving score targets.

Trying to attain the highest scores or FICO scores requires effort but the lenders are grateful for your effort by providing you better loan terms and saving you big bucks in the long run.