What is a FICO Score? FICO Score vs Credit Score

What Is A FICO Score

A FICO Score is a type of credit score supplied by one of the companies that sells information to lenders and other companies looking for a simple way to measure your credit situation and habits.

FICO Score vs Credit Score

A FICO Score is a 3-digit number created by the Fair Issac Corporation that measures your financial situation and credit habits. It is used by over 90% of lenders to determine your credit standing and is a factor in many decisions that affect your life, including granting you a mortgage and other loans, the interest rate you will pay on those loans, and even how much you pay for insurance.

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FICO is one of the brands that provide credit scores. It’s similar to how you can buy a Ford branded truck. There are lots of different kinds of trucks, Ford is just one of the truck brands you can buy.

How Many Different Credit Scores Are There?

Lots of people are surprised when they hear that they have more than one credit score and that the credit score they got from one source may not be the one their lender uses when they apply for a loan.

The fact is that there are over 1,000 different credit score calculation methods out there, most  of them advocated by some people as being “the best.” So, you can never assume that just because you’ve got a certain credit score number from one place your mortgage lender is using that number in their calculations.

And, while we’re on that subject, in addition to all the different credit scores offered by other companies, there are actually over 30 different FICO scores, each designed to help a specific type of lender make a decision about granting you a loan. Commonly used ones are FICO 8 and FICO 9 which are used in the lending industry, and a newer score, FICO 10, which looks at your credit trends.

What Is A FICO Credit Score?

For many years lenders and other companies that use credit reports have looked for a simple way to be able to get an easy-to-use and understand measurement of someone’s financial health. Credit scores have been developed to solve that problem.

A FICO credit score is a 3-digit number that tells lenders how well you tend to manage your credit and debt. The higher your FICO credit score, the better you look to a lender who is thinking of lending you money.

What Is A FICO Score Range?

Traditional FICO scores range from 300 to 850, with higher scores being better, though FICO also offers other industry-specific scores for companies like credit card companies and those who offer car loans. Those scores can range from 250 to 900.

How Is A FICO Score Calculated?

The Fair Issac Company, the creator of the FICO score, has a secret, proprietary formula that they use to calculate your score. Because it’s proprietary, we don’t know exactly how the number is calculated, but we do know the type of information that goes into those scores:

Payment History – 35%

The most important thing to a lender is whether you will make the payments you owe on your loan completely and on time. So, they look at your past history of paying your credit accounts, both whether you have made those payments and whether those payments are made on time. This is the biggest factor in your FICO credit score.

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Amounts Owed – 30%

The second most important factor in calculating your FICO score is what percentage of your available credit is actually being used. For example, if you have 3 credit cards, each with a credit limit $3,000, but you only have a $500 balance on each of them, your credit score will be higher than if you are right up against the credit limit on all your cards. Using almost all of your available credit is a sign that you are more likely to default on your loans (stop paying them) in case of tough times.

Length of Credit History – 15%

Generally, having a history of having and using credit for a longer period of time is better than having a bunch of brand new accounts, though this is not a requirement for a good credit score.

FICO scores look at:

• The age of your oldest account, the age of your newest account, and the average age of all your accounts.
• How long each account has been in force.
• How long since you used certain accounts.

Credit Mix – 10%

FICO looks for the different types of accounts you have, looking for a “good mix” of mortgage loans, credit cards, retail accounts, finance company accounts, and installment loans. This is not saying that you should run out and apply for all of these, but if all you have is credit card accounts, your FICO score will tend to be lower, because “normal” people tend to have a mix of several different types of credit.

New Credit, Credit Inquiries – 10%

Opening several different credit accounts in a short period of time can be a sign that someone is struggling financially, which will drive your FICO score down.

What Is A Good FICO Score?

Good question. Higher is usually better. 

The challenge is that different companies have different (most of the time not publicly communicated), ranges for what they determine to be excellent, good, etc.

The company that creates the FICO score states that scores between 670 and 730 show good credit.

Here are some rule-of-thumb ranges for each category of FICO Scores:

• 740 – 850 Excellent
• 670 – 739 Good
• 620 – 669 Fair
• 550 – 619 Poor
• 300 – 549 Bad

What Are The Advantages Of Higher FICO Credit Scores?

Simply stated, higher credit scores make your life easier and less expensive

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For example, having a FICO score in the excellent versus good range:

• Could save you $15,000 in interest on a 30-year mortgage loan
• Could save you $500 on a 5-year loan for a $25,000 auto
• Could save you 25% on your auto insurance rates
• Could reduce your credit card interest rate by 1.5 points or more.

Plus, keep in mind that credit scores are simply a way to measure your credit situation and habits. We all know that not being able to make payments on time increases stress, incurs fees, and generates calls from lenders and collection agencies. So, carefully cultivating and preserving your credit rating can make your life easier.

How To Check Your Credit Score

It’s gotten significantly easier and cheaper to check your credit score over the last several years. Many banks and credit cards provide customers with their credit scores for free, either on their statements or on websites. In addition, you can check with each of the credit bureaus once each year at no cost.

Why Aren’t My Credit Scores The Same When I Check With Different Companies?

Each company uses different models and data to calculate its version of your credit score. It’s a good idea to access your score from multiple different sources, then work to improve the lowest ones as that can only help you improve all your scores.

Do Lenders Check FICO Scores Or Other Credit Scores?

Each lender has its own preferred scoring system, so it’s impossible to answer that question definitively. But many lenders use the FICO scores. However, as mentioned above, even FICO offers multiple different versions of your score, depending on the type of loan you are seeking.

How Can I Improve My FICO Credit Score?

The best ways to improve your FICO credit score are to:

• Pay your bills on time
• Keep your balances low in comparison to your credit limit
• Limit how often you apply for credit or have hard credit checks on your account
• Use different types of credit
• Don’t close old accounts
• Monitor your credit regularly to ensure its accuracy

FICO vs Credit Score

Your FICO score is just one of the many different scores in the category of credit scores. It is, however, an important one, as it is used by many lenders, so it’s an important score to track and seek to improve.

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